ziff davis hearing

8/14/2019 Ziff Davis Hearing

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VERITETEXT/NEW YORK REPORTING COMPANY

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UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

--------------------------------x

In the Matter

of Case No.

08-10768

ZIFF DAVIS MEDIA, INC., et al.

Debtors.

--------------------------------x

March 10, 2008

United States Custom House

One Bowling Green

New York, New York 10004

First Day Hearing.

B E F O R E:

HON. BURTON R. LIFLAND,

U.S. Bankruptcy Judge


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1 A P P E A R A N C E S:

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WINSTON & STRAWN LLP

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Attorneys for the Debtors

5 200 Park Avenue


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BY: MARK K. THOMAS, ESQ.,

7 DANIEL J. McGUIRE, ESQ.,

CAREY D. SCHREIBER, ESQ.

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10 PAUL WEISS RIFKIND WHARTON & GARRISON LLP

11 Attorneys for Unofficial Group of

Senior Secured Noteholders

12 1285 Avenue of the Americas


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BY: ALAN W. KORNBERG, ESQ.,

14 SAMANTHA A. AMDURSKY, ESQ.

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16AKIN GUMP STRAUSS HAUER & FELD LLP

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Attorneys for Holders of New Notes

18 590 Madison Avenue


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BY: MICHAEL S. STAMER, ESQ.,

20 MARY REIDY MASELLA, ESQ.

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1 A P P E A R A N C E S (Continued):

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O'MELVENY & MYERS LLP

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Attorneys for Certain Subordinated

5 Noteholders

Seven Times Square

6 New York, New York 10036

7 BY: MICHAEL J. SAGE, ESQ.

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OTTERBOURG, STEINDLER, HOUSTON & ROSEN, P.C.

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Attorneys for R.R. Donnelley11 230 Park Avenue


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BY: GLENN B. RICE, ESQ.

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15 KELLEY DRYE & WARREN LLP

16 Attorneys for U.S. Bank as Indentured

Trustee

17 101 Park Avenue


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BY: JAMES S. CARR, ESQ.

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21 FAEGRE & BENSON LLP

22 Attorneys for U.S. Bank as Indentured

Trustee

23 90 South Seventh StreetMinneapolis, Minnesota 55402

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BY: MICHAEL B. FISCO, ESQ.

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1 A P P E A R A N C E S (Continued):

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3

DIANA G. ADAMS Acting United States Trustee

4 Region 2

5 UNITED STATES DEPARTMENT OF JUSTICE

OFFICE OF THE UNITED STATES TRUSTEE

6 33 Whitehall Street


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BY: BRIAN MASUMOTO, ESQ.,

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of Counsel

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1 P R O C E E D I N G S:

2 MR. THOMAS: Good morning, your Honor.

3 Mark Thomas and Dan McGuire from Winston and Strawn on

4 behalf of Ziff Davis Media, Inc. and its affiliated debtors

5 and debtors in possession.

6 Your Honor, in the courtroom is Mr. Jason

7 Young, who is the chief executive officer of Ziff Davis,

8 and also Mr. Mark Moyer who is the chief restructuring

9 officer.

10 THE COURT: Go ahead.

11 MR. THOMAS: Thank you, your Honor. If I

12 could, your Honor, I would just like to give you a brief

13 bit of background about the case. And it's not what was in

14 the voluminous background section of the first day

15 pleadings, but something that I think puts the case into

16 context.

17 This is a small company. It has a lot of

18 debt. But last year in 2007 it had about 75 million

19 dollars of total revenue. We have debt of in excess of 400

20 million dollars that was really put on the company in 2000

21 as part of a leveraged buyout of this company at the height

22 of the internet boom. And at that point in time Ziff Davis

23 had revenue of approximately 500 million dollars. So with

24 75 million dollars of revenue it's impossible to service

25 400 million dollars of debt.


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1 And the debt is really broken into two

2 tranches. In the aggregate we have about 245 million

3 dollars of senior secured debt, secured by virtually all

4 assets of the estate through an indenture, a first lien

5 security agreement, and a collateral trust. We also have,

6 your Honor, about 185 million dollars of junior unsecured

7 subordinated bond debt. And what has happened since we

8 went into default in the fall of 2007 by failing to pay

9 interest due on our senior debt that's secured and our

10 junior unsecured debt, we've attempt to negotiate with the

11 secured bond holders and the unsecured bondholders on a

12 financial restructure of this small company.

13 We are not here, your Honor, in this

14 courtroom because we need to operationally restructure this

15 business. We have no union contracts. We do not have a

16 bunch of upside down customer contracts. We don't have a

17 bunch of bad leases that have to be rejected. We are here

18 to restructure the balance sheet because we could not reach

19 an agreement with our unsecured bondholders.

20 THE COURT: He you have 3 thousand

21 creditors or so; is that correct?

22 MR. THOMAS: Yes, your Honor.

23 THE COURT: You have or have not done any

24 trade debt; is trade debt current?

25 MR. THOMAS: We are relatively current on


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1 our trade debt, your Honor, with a handful of major

2 exceptions. R.H. Donnelley is the printer of our magazine.

3 We owe them about 3 million dollars, but we've been in sort

4 of a modified contract with them for quite some time where

5 we pay them in advance, but that 3 million dollars is in

6 arrears.

7 And we are financially stressed, your

8 Honor, there is no doubt that a company that only has 75

9 million dollars of revenue, not earnings, is in financial

10 distress.

11 THE COURT: All of the papers you've filed

12 before me deal with bond debt, they don't deal at all with

13 trade debt, and I'm just wondering is there some

14 understanding as to potential distribution with respect to

15 trade debt or is this going to be one hundred percent

16 payout to trade?

17 MR. THOMAS: Your Honor, this is not going

18 to be one hundred percent payout to trade. The debtors

19 have reached a plan support agreement with --

20 THE COURT: Where does trade fit into that

21 plan support agreement?

22 MR. THOMAS: The trade will share in a pot

23 of cash so there is going to be a pot of cash set aside for

24 the trade creditors and they will get a dividend from that

25 pot of cash, and it's not a lot of money, your Honor.


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2 MR. THOMAS: Your Honor, the plan support

3 agreement after we fell into default, was negotiated with

4 an ad hoc committee of senior secured note debt holders who

5 control over 80 percent of the principal amount of that

6 class, which as I said earlier was about 245 million

7 dollars. And we have reached an agreement with that ad hoc

8 committee regarding a plan of reorganization and the use of

9 cash collateral.

10 In essence, your Honor, we what that plan

11 provides is the 245 million dollars of senior secured debt,

12 if your Honor approves the final cash collateral order at

13 the final hearing, will get paid down by 95 million dollars

14 of their collateral proceeds. And that 95 million dollars

15 is presently sitting in a segregated account at Merrill

16 Lynch and those proceeds resulted from the sale in July of

17 2007 of Ziff Davis Media's enterprise group.

18 And there presently is a potential dispute,

19 although we've agreed to defer, on whether those proceeds

20 are property of the estate and thus the senior lender's

21 cash collateral, or whether those proceeds are actually

22 property of the senior lenders and not even property of the

23 estate. But based upon our settlement agreement that's not

24 an issue we will be bringing before your Honor.

25 So after the application of cash, the


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1 senior secured note holders will be owed approximately 150

2 million dollars. And under the plan support agreement they

3 have agreed to support a reorganization plan whereby that

4 150 million dollars will be satisfied in essence by receipt

5 of a new secured note that could go up as high as 57

6 million dollars. And then the balance of their claim,

7 which could be 93 million dollars, would be converted to

8 new common stock of the reorganized doctor. And that 93,

9 approximately, million dollars of secured debt would

10 convert to about 88.8 percent of the new common stock of

11 the reorganized debtor.

12 And we have sufficient dollar amount and

13 number of holders of that senior secured debt to carry that

14 class in support of a plan. And as part of the agreement

15 on use of cash collateral, your Honor, in essence from the

16 segregated account that has collateral proceeds, the

17 debtors have reached an agreement whereby we would be

18 seeking use of 5 million dollars on an interim basis upon

19 receipt of a final order authorizing use of cash

20 collateral, your Honor. There is an agreement to allow

21 another 12 million dollars of cash collateral to be used,

22 so during the term of the case a total of 17 million

23 dollars of cash collateral.

24 THE COURT: Would that clean out that

25 account?


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1 MR. THOMAS: No, your Honor, because we

2 also negotiated that there would be left behind for the

3 estate an additional 7 and a half million dollars of cash

4 that would be left in that account to provide exit

5 financing upon emergence of a plan so we would not have to

6 subject ourselves to the vagueries of today's capital

7 markets. And Alvarez and Marsal and the company have

8 worked on a business planning and a budget and believe that

9 that money that's left behind will be more than adequate to

10 fund us after exit and going forward after exit. So there

11 is no request for debtor in possession financing, we are

12 just going to carve out of a big account that has cash

13 about 24.5 million dollars.

14 And, your Honor, I think I should make it

15 clear and correct the record, Mr. Moyer, who is in court,

16 the chief restructuring officer, submitted an affidavit in

17 support of the first day motion. It's docket number 3,

18 your Honor. We would like to proffer that as part of the

19 record of today's hearing; however, there were two numbers

20 that changed that aren't reflected in his affidavit, your

21 Honor.

22 The first number primarily relates to sort

23 of what we are calling the leave behind money. As I just

24 told you, we've agreed that 7 and a half million dollars of

25 the segregated fund will be left behind for exit financing.


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1 Mr. Moyer's affidavit says that 5 million dollars will be

2 left behind, but that was a negotiation that was occurring

3 up to the filing of the petition and that number changed,

4 so there's more money being left behind. That results in a

5 potential higher note at exit, and therefore the note would

6 potentially go up to 57.5 million dollars, and that was not

7 reflected in the affidavit.

8 So, your Honor, where we are at over the

9 last several months was trying to negotiate with our

10 constituents regarding a plan. And as is sometimes typical

11 in these situations the senior secured lenders on the one

12 hand and the junior unsecured bond holders on the other

13 hand had wildly different views of the value of this

14 enterprise. And I think suffice it to say that the secured

15 creditors who after a payment of 95 million dollars, if

16 authorized by your Honor's final order, will be owed 150

17 million dollars, they have contended that this company is

18 worth less than one hundred million dollars.

19 Your Honor, the unsecured bondholders,

20 however, who have 185 million dollars of unsecured debt

21 that is subordinated to and junior in priority to the 150

22 million dollars that would remain owed to the secured

23 creditors, have contended that this company is worth in

24 excess of 200 million dollars. And we have not been able

25 to bridge the gap outside of court on a balance sheet


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1 restructuring your Honor because we need your help. We

2 need a bit of adult supervision to come up with the value

3 of this company. And try as we might, we haven't been able

4 to bring those two parties close from that wide gulf.

5 And we are in a situation where we are not

6 that big of a company and we are struggling with not that

7 much revenue and not that much earnings. And the

8 professional fees that have been incurred in the last

9 several months outside of court have exceeded one million

10 dollars a month. It became apparent to the company that we

11 had to get into a place where there would be a final

12 definitive arbiter of value so we could fix the value and

13 then figure out how to carve out the value.

14 The debtors believe that the plan that has

15 been negotiated with the senior secured lenders imputes an

16 enterprise value of approximately 140 to 150 million

17 dollars. And the debtors and their valuation experts, your

18 Honor, believe that that is the fair, appropriate and

19 correct value of this enterprise as we find ourselves today

20 in default, in the market that we are in today with respect

21 to financial markets, capital markets, ability to obtain

22 financing and the multiples that are being paid for

23 businesses in today's market. If we can get the parties

24 together to compromise before a contested valuation

25 hearing, there's nothing that the company would prefer


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1 more.

2 Your Honor, I think my final comment is we

3 have an unusual situation -- well, it's not unusual, we

4 have a typical situation also. One of the holders of the

5 senior secured debts, which is the 245 million dollars, a

6 holder of approximately 10 percent of that debt MHR

7 Institutional Partners also holds approximately 50 percent

8 of the unsecured bond debt. They would be represented by

9 counsel, you may hear from that later today; but based on

10 that we have an interesting dynamic that has lead us to not

11 agree to certain of the provisions that MHR has requested

12 as a "secured creditor" with respect to the cash collateral

13 order.

14 When we get to that, your Honor, in the

15 agenda, we have accepted comments from the U.S. Trustee,

16 Mr. Sage who represents an ad hoc committee of unsecured

17 bondholders, and Mr. Stamer who represents MHR in its

18 capacity as secured creditors, but we haven't been able to

19 work out all of that language.

20 Your Honor, with that I would cease with my

21 opening remarks and we are prepared to go forward.

22 THE COURT: Does anyone also else want to

23 be heard?

24 It's your floor.

25 MR. THOMAS: Thank you, your Honor. My


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1 colleague, Mr. McGuire.

2 MR. MCGUIRE: Good morning, your Honor.

3 With your permission I'll go through the agenda letter that

4 that was filed with the matters thereon.


6 MR. MCGUIRE: I note that your Honor has

7 already entered the joint administration order. Thank you

8 very much, that relieves docket number 2 in the case. So

9 I'll go with romanette three, item (B)2, the motion to

10 prepare a list of creditors in lieu of submitting a matrix

11 and file a consolidated list. Your Honor, we intend to

12 seek your Honor's permission to retain BMC Group in this

13 case, and given the volume of creditors, we would like to

14 prepare and use the creditor list with BMC as opposed to

15 filing the matrix in this case. We would also like to file

16 a consolidated list of the top 30 creditors as opposed to

17 20 individual lists the top 20 creditors in each of the

18 cases. We think it's appropriate given the size of the

19 case and the number of creditors and we've received no

20 objection to this motion, your Honor.

21 THE COURT: Does anyone want to be heard?

22 The application is granted.

23 MR. MCGUIRE: Thank you, your Honor.

24 Next on the agenda is our motion for an

25 extension of the deadline to file schedules of 15 days. In


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1 a case of this size and complexity is just a little too

2 tight for us. We would ask for one 30 day extension to

3 give us 45 days to do that. We've received no objections

4 to that motion and would ask that your Honor approve it.




8 Next on the agenda, your Honor, is docket

9 number 6, which is our case management motion. Here we're

10 requesting the ability to maintain a core group and 2002

11 service list as is typical in these types of cases. We've

12 asked for procedures to allow electronic notice to parties

13 unless they can demonstrate that they do not have an

14 electronic mail address, and to schedule things on monthly

15 omnibus hearing dates, that the procedure whereby parties

16 file a motion 20 days in advance of the hearing, there will

17 be five day response deadline; if they file it ten days in

18 response, there will be a three day response deadline. And

19 the parties, of course, always maintain the right to ask

20 this court to shorten the deadline to let things be heard

21 on a shorter timeframe if they deem it appropriate.


23 Well, chambers does. In general, I haven't got a real

24 problem with respect to this administrative, this case

25 management order, but there are certain timing elements


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1 which, for the convenience of chambers and all the parties,

2 will be modified to extend certain of the dates to deal

3 with some of the items that we have to conform with

4 chamber's routine. So there will be some modifications,

5 and you can consult with me now with respect to them, or I

6 can tell you they are not going to be anything more than

7 ministerial as I indicated essentially with the changing of

8 times and the like.

9 MR. MCGUIRE: Your Honor, we'll just wait

10 and see the order as you've edited it with your changes and

11 we'll comply with it accordingly.

12 THE COURT: Very well.

13 MR. MCGUIRE: Next up on our addenda,

14 docket number 7, is our motion to retain BMC Group as our

15 claims and noticing agent. This a motion to retain them to

16 do the things that BMC does in a case like this.

17 THE COURT: Subject to comment and approval

18 by the clerk of the court, that application is in line to

19 be granted.


21 THE COURT: Check that out with the clerk's

22 office. Some of these functions were clerk's office

23 functions, and that's why we require that the clerk's

24 office approve it.

25 MR. MCGUIRE: We will do that. Thank you,


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1 your Honor.

2 Next up on our agenda is item 8, is our

3 motion to pay the insurance premiums that are outstanding.

4 We have insurance premiums that we attempted to pay at the

5 end of February and the checks weren't cashed quite

6 frankly, at it's for our workers' compensation and our

7 general liability policy. These total approximately 74

8 thousand dollars, and in order to maintain these policies

9 which are typical business policies that we need to

10 maintain in the ordinary course, we would ask for

11 permission to make these payments on these prepetition

12 amounts.

13 There will be further amounts postpetition,

14 but those will arise postpetition in the ordinary course

15 under the insurance contracts that we have.


17 MR. SAGE: Yes, your Honor.

18 THE COURT: Sure.

19 MR. SAGE: Michael Sage on behalf of the

20 sub debt.

21 I just note that in paragraph 19 of the

22 motion they seek authority to enter into new policies. The

23 old policies burn off of in September of this year, and I

24 think I commented that this is premature and this should be

25 dealt with, at the earliest, at the final hearing and not


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1 today, it just seems to me to be premature to give the

2 debtors the authority to enter into new insurance policies

3 in September when they don't need that authority now.

4 MR. MCGUIRE: Well, your Honor, we think

5 that relief is appropriate. And obviously if it was

6 outside the ordinary course we would come in for further

7 permission I suppose, but it won't come until September, so

8 we are happy to defer that if your Honor feels it's

9 appropriate.

10 THE COURT: Very well, I'll take it up at

11 the final hearing.

12 MR. MCGUIRE: Yes, your Honor.

13 THE COURT: What's involved dollar-wise?

14 I'm trying to gauge Mr. Sage's intervention as to whether

15 we are nickel and diming in this matter or whether we have

16 true issues.

17 MR. MCGUIRE: Well, it's over about half a

18 million dollars on an annual basis for all of our insurance

19 policies. The only ones that are outstanding that don't

20 run through September, we have about one hundred and some

21 thousand dollars we will be paying between now and then --

22 well with these amounts, 170 thousand dollars. But overall

23 the insurance policies are in excess of half a million

24 dollars.

25 MR. SAGE: That's now. It's not clear what


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1 they will enter into in the future. If it's just a renewal

2 of the existing policies, that would be one thing.

3 THE COURT: Well, he's giving you a number

4 for the renewal of existing policies.

5 MR. SAGE: If that's the limit then I

6 suppose it's less objectionable, but it seeks authority for

7 new policies in undescribed amounts.

8 MR. MCGUIRE: Quite frankly, your Honor,

9 I'm not too worried about pending up because it's within

10 the range of -- the policy renewal is within the ordinary

11 course of business.

12 THE COURT: I don't have any real problem.

13 As I said, I just wanted to gauge the quality and quantity

14 of the objection to see whether it's a question of are we

15 going to stop every five minutes to look at dots and cross

16 T's or whether we are getting into real substance. It

17 sounds to me like we are not really getting into real

18 substance at this point, but we will take it as we come to

19 it.

20 MR. MCGUIRE: Your Honor, the next item on

21 our agenda is docket number 9, and that's our motion to

22 maintain our current cash management system.

23 The debtors' cash management system

24 currently consists of 12 accounts with three different

25 financial institutions. Only nine of those accounts are


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1 active accounts. Six of them are with Merrill Lynch, two

2 of them are with Bank of New York, and one of them at US

3 Bank. Now Merrill Lynch and Bank of New York are not on

4 the U.S. Trustee's approved list of financial institutions,

5 however we believe that they are sound financial

6 institutions and the burden of moving all of our accounts

7 from these institutions to another would be an unnecessary

8 burden for the estate to bear in this case and that we

9 should be permitted to maintain our current cash management

10 system for these accounts at Merrill Lynch, US Bank, and

11 Bank of New York.

12 MR. MASUMOTO: Good morning, your Honor.

13 Brian Masumoto for the Office of the United States Trustee.

14 Your Honor, the request in this case does

15 not seem to satisfy the cause provision under Section 345

16 that merits a departure from the normal procedure.

17 As your Honor knows, virtually every debtor

18 who comes into bankruptcy has this issue. And with respect

19 to the accounts that are at issue that are not qualified,

20 frequently, your Honor, many of the affected banks simply

21 submit an application qualifying under the southern

22 district authorized depository requirements. So if they

23 wanted to keep their accounts at those particular

24 institutions, the requirement is that they satisfy the

25 depository requirements.


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1 THE COURT: Who are the not compliant banks

2 under this bunch?

3 MR. MASUMOTO: The Bank of New York and

4 Merrill Lynch are not listed as authorized.

5 THE COURT: Isn't the Bank of New York now

6 Chase?

7 MR. MASUMOTO: Not that I -- I think it's

8 just a retail aspect. As far as I know, according to our

9 list that we fairly routinely update, as of January Bank of

10 New York and Merrill Lynch were not authorized

11 depositories. But it's a simple matter for them to become

12 qualified.

13 THE COURT: Are they in some kind of

14 trouble?

15 MR. MASUMOTO: No, your Honor. I think

16 it's just our determination or discretion. They may very

17 well be qualified as authorized depositories in other

18 bankruptcy districts. They may have chosen for some reason

19 not to qualify in New York at this point. So we see no

20 reason not to require them to qualify if they wish to

21 maintain the funds at those institutions.

22 Certainly, again, the whole purpose of

23 Section 345 is not just a U.S. Trustee requirement, it's

24 Congress' intent --

25 THE COURT: Well, here's what I'm going to


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1 do. I'm going to allow you to continue with the cash

2 management system, give them an opportunity to satisfy the

3 U.S. Trustee. And if they don't and you can demonstrate

4 the appropriate cause under the statute and rules, I'll

5 consider it at that time, and that is at the final hearing.

6 MR. MCGUIRE: Okay. Thank you, your Honor.

7 MR. MASUMOTO: Thank you, your Honor.

8 MR. MCGUIRE: Your Honor, the next item on

9 our agenda is docket entry 10. This is our motion to pay

10 certain taxes in the ordinary course of business, certain

11 prepetition taxes.

12 These amounts in this case are very small,

13 we are talking in terms of sales and use taxes of probably

14 around 3 thousand dollars, no more than 5 thousand dollars.

15 And the state income taxes that need to be paid to maintain

16 our exemptions and our filing deadlines extensions of 3 to

17 5 thousand dollars, but most of the larger amounts will not

18 be paid for some time period, so we are only looking at

19 about 10 thousand dollars worth of payments here that we

20 are looking to make just to maintain our current status

21 with respect to the obligations.




25 The next item on the agenda is docket


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1 number 11, our motion to establish adequate assurance

2 procedures and to make adequate assurance payments to the

3 utilities in this case.

4 Your Honor, we have about 12 providers of

5 utilities through 19 accounts. We pay about 245 thousand

6 dollars a month in utilities, and what we would like to do

7 is to make a two week deposit to these people to aggregate

8 about 122 thousand dollars as proposed adequate assurance,

9 but then with all of the utilities, of course, having an

10 opportunity to come in prior to the final hearing and

11 object to the adequate protection that's provided, but the

12 order will provide that they can't in the interim shut us

13 down, and it provides us adequate protection until there's

14 a final hearing on that matter.


16 Subject to a final hearing, the application

17 is granted.


19 I'm going to turn it back over to Mr.

20 Thomas for the balance of the motions.

21 MR. THOMAS: Thank you, your Honor.

22 Your Honor, our next motion is docket

23 number 12; it's the debtors' motion for interim and final

24 orders authorizing use of cash collateral.

25 Your Honor, I spoke briefly on my opening


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1 remarks about this order. The interim order provides

2 authority to use up to 5 million dollars of cash collateral

3 which presently is residing in a segregated account at

4 Merrill Lynch pending a final hearing. At the final

5 hearing we will seek authority to use an additional 12

6 million dollars of the cash collateral which is sitting in

7 the Merrill Lynch segregated account. And at the final

8 hearing we will be seeking authority to hold back 7 and a

9 half million dollars of that cash collateral and pay

10 approximately 95 million dollars to the senior secured note

11 holders.

12 Your Honor, there are some changes. If you

13 wish, I would be happy to tender a black line copy of an

14 order that reflects changes that have been negotiated

15 between the debtors, the indenture and collateral trustee,

16 Mr. Sage and Mr. Stamer, counsel for MHR.

17 THE COURT: Sure.

18 (Handing)

19 MR. THOMAS: Your Honor, there are

20 basically a bunch of definitional changes and knits that I

21 don't think we have to waste our time going through that

22 the parties have agreed upon. I think the principal

23 concept is reflected in paragraph -- I'm sorry, page 7

24 paragraph romanette 8. And in essence, your Honor,

25 pursuant to our capital structure, our senior secured notes


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1 are held pursuant to an indenture that was in the face

2 principal amount of 205 million dollars; and that was

3 entered into in April of 2005. And then subsequently in

4 February of 2007 a note purchase agreement was entered into

5 in the principal amount of 20 million dollars where MHR

6 institutional partners purchased 20 million dollars in

7 notes.

8 So what we've done through this order is

9 made it clear that the MHR new notes are treated the same,

10 in essence, as the notes that were issued under the

11 indenture with respect to the validity priority extent,

12 liens, adequate protection and the like. There are a few

13 major differences, however, and I'm going to highlight

14 those right now, your Honor.

15 The first major difference is the debtor

16 has reserved its right to seek to equitable subordinate the

17 claims of MHR under the new notes. That right has been

18 reserved. We have agreed, and we have to make this change

19 to the order, your Honor, it isn't in there now, that if we

20 seek to equitably subordinate those claims we will bring

21 that action within the challenge period, which would apply

22 to a creditors committee, but that is a right that we are

23 not willing to provide at this point a release of that type

24 of claim and cause of action. And the principal issue is

25 the holder of that secured claim, which is about 10 percent


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1 of our secured debt, also holds 50 percent of our junior

2 unsecured subordinated debt. And we are going to reserve

3 the right to seek equitable subordination.

4 Another issue that was asked for that we

5 are not willing to agree to is that the holder of that 10

6 percent of our secured debt, MHR has asked that as adequate

7 protection we pay the attornies' fees incurred by its

8 counsel during these proceedings. And, your Honor, at

9 paragraph 8 of the cash collateral order on page 22, the

10 debtors have agreed, as part adequate protection, to pay

11 the fees and expense incurred by the collateral trustee,

12 which is US Bank and its counsel, and the fees and expenses

13 incurred by what we call the note holder group.

14 The note holder group is the ad hoc

15 committee of secured note holders represented by Paul,

16 Weiss, Rifkind, Wharton and Garrison as counsel,

17 represented by Houlihan, Lokey, Howard and Zukin as

18 financial advisors. That group, your Honor, is sufficient

19 in number and amount of holdings to control the class of

20 senior secured debt. And pursuant to the indenture and the

21 collateral trust, it also has the authority to direct the

22 collateral trustee with respect to all matters relating to

23 the collateral. And we've agreed, as part of adequate

24 protection, to pay the fees of those entities that control

25 that class, but we are not willing to agree to pay the


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1 attornies' fees of MHR's counsel as a 10 percent senior

2 secured note holder, when at the same time it holds 50

3 percent of the junior unsecured bonds. And as we learned

4 in the prebankruptcy period, the junior unsecured bonds

5 were taking a view of value that was vastly different than

6 the senior secured creditors, and that is just a position

7 that we are not willing to continue to pay those fees --

8 well, I'm sorry, to pay those fees; we've never been paying

9 them prior to the petition date.

10 The other thing that is a principal

11 difference between the treatment of the secured notes

12 issued under the indenture which have the face amount of

13 205 million dollars, and the notes issued to MHR under the

14 note purchase agreement with a face amount of 20 million

15 dollars is that the debtors are not willing to provide

16 certain absolute block rights where they can block the

17 entry into modifications to a cash collateral order.

18 We have agreed that whatever we provide to

19 the collateral trustee and whatever we provide to the note

20 holder group we will provide to MHR, and we will provide

21 them notice and an opportunity to object to modifications

22 to any orders, but we are not going to agree that we cannot

23 enter into modifications and seek court approval of

24 modifications if a 10 percent dissident secured holder who

25 is also a major unsecured holder wants to block us.


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1 Your Honor, we made some other changes that

2 have been requested by the U.S. Trustee. I think prior to

3 the commencement of court this morning we spoke to Mr. Sage

4 and we are going to change some words on page 20 in the

5 defined term excluded assets, so we will have to submit a

6 disk with a clean copy of the order at the conclusion of

7 the hearing, your Honor.

8 On paragraph 12, your Honor, with respect

9 to the carveout, the provision that lawyers always spend

10 more time negotiating than any other part of these

11 agreements, based on discussion with the U.S. Trustee just

12 before your Honor came on the bench, we have agreed and the

13 note holders have agreed to add to the carveout a provision

14 for a payment of fees to a subsequently appointed Chapter 7

15 trustee, if any, as the U.S. Trustee referred to it, as and

16 for burial expenses.

17 I believe the U.S. Trustee also asked us to

18 represent that the U.S. Trustee's fees would be paid in any

19 event in any situation in this case, whether the cash

20 collateral order was terminated or not that the quarterly

21 fees owed to the U.S. Trustee's office would be paid, and

22 we said yes.

23 In paragraph 18, your Honor, we've agreed

24 to delete some language at the request of MHR's counsel.

25 We can did that this morning so we haven't had a chance to


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1 change the order.

2 MR. SAGE: Where is that language?

3 MR. THOMAS: It's on page 29 paragraph 18,

4 the fourth line. The language is, "(other than the

5 collateral trustee)". We are going to strike that

6 language. And further on in that paragraph, your Honor,

7 paragraph 18, which is the claims and defenses challenge

8 period. The challenge period has been changed from the

9 order that was filed from a 30 day period to 60 days from

10 the date of selection of counsel by the creditors'

11 committee try. And again, before your Honor took the bench

12 the U.S. Trustee asked us to make a change and extend the

13 challenge period to 75 days in the event a committee was

14 not appointed. We will have to make that change, and we've

15 agreed do so.

16 Your Honor, we did clarify, at the request

17 of Mr. Sage, in several provisions of the cash collateral

18 order that certain provisions come into effect if the final

19 order approved by the court so provides. So we made that

20 language change to make it clear that a 506(c) waiver, a

21 lien on avoidance actions, payment of the 95 million

22 dollars that's presently in the segregated account, all of

23 that will only come into effect if the final order so

24 provides.

25 We've also provided that all notices and


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1 reports provided to the collateral trustee or the note

2 holder group shall be provide to do a creditors' committee;

3 that was also a request. And finally before your Honor

4 took the bench there was a request by counsel for MHR, that

5 we change the language in paragraph 28, which is the no

6 modification or stay of the order, that we provide notice

7 and an opportunity to object before there's any

8 modification, and we have agreed to do so.

9 Your Honor, we would request entry of an

10 interim cash collateral order; it's obviously critical for

11 the ongoing operations of this company. What I neglected

12 to mention when I said we are sort of a small over

13 leveraged company that has about 270 employees, and

14 9principally we don't make widgets, we are not a retailer,

15 we review computers, we review games, we have one magazine

16 that's continuing, it's The Print, and Print has been

17 suffering because the internet has been dominant. We have

18 a bunch of websites and have a bunch of people that write

19 and provide content on those websites. So I think our

20 assets are a bunch of people that come into and go to work

21 every day and, this is critical that we get this type of

22 relief this morning.

23 Thank you.

24 MR. KORNBERG: Alan Kornberg, Paul, Weiss,

25 Rifkind, Wharton and Garrison LLP for the note holder group


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1 that the debtors' counsel referred to as Mr. Thomas

2 mentioned. That group, which consists of seven members,

3 holds approximately 80 percent of the secured indebtedness.

4 And as Mr. Thomas explained both that secured debt and the

5 note held by MHR, the secured note, jointly share a first

6 lien position in all of the debtors' assets.

7 Your Honor, we are comfortable with the

8 form of the adequate protection and cash collateral

9 arrangements that Mr. Thomas described. They were

10 obviously the subject of extensive negotiation. Again,

11 just by way of background because I think you will hear

12 more about this, the way the prepetition documents work is

13 that the collateral trustee, which is represented in court

14 today, takes direction from the holders of 51 percent of

15 the secured debt obligations so that the group that we

16 represent is in a position to and has been in fact

17 directing the collateral trustee with respect to the

18 various matters affecting the collateral only. Obviously

19 each creditor can represent its interest as the holder of a

20 claim. But has as to the collateral, the actions and

21 inactions of the collateral trustee, that is subject to 51

22 percent direction, and our group does comprise, as I said,

23 approximately 80 percent of the secured debt.

24 So we are fine with the form of the order

25 subject to reviewing the actual language changes that the


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1 debtor has proposed.

2 MR. FISCO: Your Honor, Michael Fisco of

3 Faegre and Benson on behalf of US Bank National Association

4 as collateral trustee.

5 We also agree with the entry of the order

6 and the provisions and we think they are fair and

7 reasonable under the circumstances of this case.

8 MR. SAGE: Michael Sage, your Honor.

9 Several points on the order, but before I get there I want

10 to make an overriding point. As Mr. Thomas accurately

11 described the fact that we have had disagreements about the

12 value of the company, he said that he thought that the

13 value was in line with the secureds' view effectively, and

14 different than our view, and I would only ask that the

15 court give --

16 THE COURT: Did I mishear them? Let's

17 recap that argument. I thought I heard there's a one

18 hundred million dollar difference between two groups but

19 that the debtor came up with an opinion that valuation is

20 140 to 150 million.

21 MR. SAGE: Yes, your Honor.

22 THE COURT: Is that correct?

23 MR. SAGE: That's what he said.

24 THE COURT: Well, it doesn't sound like

25 that's an agreement with the secured debt.


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1 MR. SAGE: You have it right, your Honor.

2 It's certainly closer to the view that we have to the view

3 that we have. My only point was not to litigate that now,

4 it's not really possible, there's no record. I was only

5 making the comment that his view on value --

6 THE COURT: Why won't don't we save time

7 and litigate it right now? I'm perfectly happy. I think

8 we'll get right through and get to the heart of this thing

9 and get in and out one way or the other.

10 MR. SAGE: Well we would like to take

11 discovery.

12 THE COURT: I've just gotten through with a

13 very, very heavy intense area of valuation. It got

14 compressed over a fairly short period of time, and it took

15 a much shorter period of time to get it worked through.

16 And I'm prepared, having had some background now, to rush

17 into valuation.

18 You folks have been have been playing with

19 this for the better part of six months so you have a pretty

20 good idea and you know where you are coming from. I don't

21 think that I need great deal of education to be brought up

22 to speed.

23 MR. SAGE: We also welcome to the

24 opportunity to do that quickly as well.

25 THE COURT: Fine. Let's have a valuation


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1 hearing as soon as I get a copy of all your reports.

2 MR. THOMAS: Your Honor, we would welcome

3 that.

4 THE COURT: Then let's get rid of the

5 nonsense in this case, and that will cut back on all of the

6 out of court maneuvering, buying and selling of claims and

7 positions and get it kind of focused.

8 MR. THOMAS: Your Honor, we will, if need

9 be, give a valuation, a motion under 506. As the debtors,

10 we are a complete stake holder here, your Honor; the equity

11 is getting nothing, the equity realizes it. So we will try

12 to move forward as quickly as possible, and I think a

13 deadline for valuation hearing might bring some clarity to

14 other people's views on how they might compromise the

15 situation, but we welcome that, your Honor. Thank you.

16 MR. SAGE: Your Honor, with respect to

17 order itself we have negotiated with counsel beforehand but

18 did not reach settlement agreement with five different

19 points. I want to raise, if I may.

20 THE COURT: Sure.

21 MR. SAGE: The first point is in paragraph

22 E, Roman 10, which is on page 8 and 9 of the black line

23 that your Honor has. We had made a first point that was

24 accepted in the first sentence of Roman 10 that rather than

25 trying to describe the indenture for what it says that we


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1 just reference the indenture itself, say that the

2 subordination is as provided in the indenture.

3 The second and third sentence of Roman 10,

4 again, though, try to describe subordination and describe

5 who can rely on it, et cetera. And we just felt that the

6 indenture says what it says and there's really no reason to

7 summarize the indenture in this order because it doesn't

8 serve any purpose, it says what it says. So the change

9 that we would like is to strike out the second and third

10 sentences of Roman 10.

11 And we have a similar point in Roman 11

12 where it talks about what section 410 of the indenture

13 provides. It says what it says. We don't, again, need in

14 this order to regurgitate or restate without saying

15 everything what the indenture provides. Again it was the

16 comment we had in the first sentence of Roman 10 as well.

17 MR. THOMAS: We might as well take it one

18 at a time, your Honor.

19 On behalf of the debtors, and I'm not sure

20 if you are looking at the black line, but if you are

21 looking at the black line on page 9, romanette 11. I

22 thought we had made the changes that Mr. Sage had requested

23 because it basically just says section 410 of the

24 subordinated notes and indenture provides for, among other

25 things, the application of certain net proceeds of asset


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1 sale to the senior secured debt, and we deleted all of the

2 language that I thought was objectionable. I think that is

3 a pretty plain vanilla citation basically to a section of

4 the indenture.

5 With respect to romanette 10, I don't have

6 a problem striking the last two sentences. I leave it to

7 Mr. Kornberg.

8 MR. KORNBERG: Well, your Honor, we can

9 waive your time however people want to try and do that.

10 This is just paraphrase what the indenture says. I don't

11 care if it's in or out because --

12 THE COURT: Well then let's chalk up one to

13 Mr. Sage.

14 MR. KORNBERG: Absolutely. But these

15 debentures are deeply, deeply subordinated to pay from

16 cash, so if he wants to take it out of this agreement it's

17 not going to change that.

18 MR. SAGE: Is it is what it is.

19 THE COURT: And I agree with the debtor

20 with respect to the next paragraph, I believe that the

21 statement, among other things, is put in there that leaves

22 it broad enough. You lose on that one, Mr. Sage.

23 MR. SAGE: Okay.

24 In paragraph six, your Honor, I have asked

25 Mr. Thomas to explain this to me a few times, and maybe I


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1 don't understand it, maybe it's my failing, but this seems

2 to say to me, this is in reference to the spending of the

3 money that funds the case. And it says the that the

4 debtors shall be obligated to compensate the trustee in an

5 amount equal to the amount by which the value of the

6 remaining net proceeds and cash collateral diminishes

7 during the term of the order.

8 And what I don't understand, and I need to

9 have it explained again, and I would like the court to

10 understand and make sure that we are all on the same page

11 is whether this means that if they spent let's say 10

12 million dollars to run the case, does that result in an

13 increased claim by the secureds in an amount of 10 million

14 dollars?

15 I read this as that being possible, but I

16 don't believe that's the intent. So I guess, you know, it

17 goes to whether this is like DIP lending, or whether this

18 is just money that's going to fund the case; I don't

19 understand it still.

20 MR. THOMAS: Your Honor, I will try again,

21 but I don't think I'll succeed because I've tried to

22 explain this. Paragraph 6 provides defined term adequate

23 protection obligations. Okay. And it includes an amount

24 equal to the amount by which the value of the remaining net

25 proceeds, that's our segregated cash, diminishes during the


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1 term of this order by our use. So if we spend 17 million

2 dollars of cash collateral, which we will be requesting at

3 the final hearing, your Honor, that 17 million dollars is

4 sitting in a segregated account today and would otherwise

5 be available to pay down the claims of the senior secured

6 note holders.

7 We've asked and they have agreed that that

8 money can stay behind, not pay down their claim, and be

9 consumed by us in the operation of the business. And the

10 consumption of that money will give rise to an adequate

11 protection obligation in paragraph 6.

12 And then if we go, your Honor, to page 19,

13 paragraph 5, at adequate protection liens, what that

14 sentence makes clear, the first sentence, is adequate

15 protection to secure the "adequate protection obligations"

16 which is our consumption of 17 million dollars, the

17 collateral trustee is granted a perfected replacement

18 security interest in and lien on, and that's defined as the

19 adequate protection lien "all postpetition collateral." So

20 what happens is when we spend that 17 million dollars, the

21 collateral trustee gets a 17 million dollar lien on

22 postpetition collateral.

23 And, your Honor, that makes perfect sense

24 to me, because the alternative would be instead of

25 tendering 95 million dollars in a segregate account and


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1 keeping 17 that we consume, we would tender all the money,

2 the secured noteholders would pay down their debt and then

3 maybe give us a 17 million dollar DIP loan. And that DIP

4 loan would then be secured by postpetition assets. So you

5 get to the same place, but it's cash collateral. We are

6 not paying down the debt, so they are entitled to a claim

7 for their collateral that we are keeping and we are going

8 to spend to operate the business, and that claim should be

9 secured by postpetition assets as adequate protection. And

10 the same result would happen if we gave them all the money

11 and they loaned it back. So I have not been able to see

12 the issue here.

13 THE COURT: Well, very frankly, now that

14 you explain it, when I read that paragraph I came to the

15 same conclusion. I just wondered if it requires further

16 explanation, which I just received, as to how it works.

17 But I did understand or comprehend from the language that's

18 in the paragraph that this was a lien that arises as a

19 result of the diminution of those funds, which is what Mr.

20 Sage is seeking clarification on. I think this record

21 suffices.


23 MR. SAGE: Your Honor, my next comment is

24 in paragraph 8. Paragraph 8, and this was discussed with

25 reference to MHR, who is not one of the beneficiaries. The


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1 debtors seek the authority to pay the trustee and the

2 noteholder groups' legal fees.

3 Two comments. One, I don't understand how

4 this works with 1129(a)(4) which requires the court to

5 approve the payment of all professional fees before

6 confirming a plan. But even putting that aside, because I

7 know that courts often do this with secured lenders, but

8 even putting that aside, I would think there would be some

9 notice period or some provision of advanced notice similar

10 to what is contemplated with respect to the ordinary course

11 professionals who are hired and the other ones in the later

12 motion that we will hear this morning.

13 And my point is I would think that before

14 they just pay themselves out of the collateral that they

15 would actually submit invoices to the U.S. Trustee and the

16 committee and the supporters, or some sub group that can

17 take a look at the proposed fees, comment, object if

18 necessary. And that's, again, putting aside whether it's

19 even appropriate at all without court approval under

20 1129(a)(4) of the Code.

21 MR. THOMAS: Well I'm looking at Mr.

22 Kornberg, your Honor. Let the record reflect we will be

23 paying their fees. Our fees will be subjected to intense

24 scrutiny, and I'm sure that the fees that are incurred by

25 Mr. Kornberg's firm will be fair and reasonable. If there


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1 has to be a notice, we don't have an objection.

2 MR. KORNBERG: Your Honor, I think this is,

3 and we are happy to give an official committee copies of

4 our statements. We are not being retained as professionals

5 by the estate. I don't think we need to go through a more

6 elaborate process, but we are happy to give a committee

7 copies of our invoices, and I'm sure if there are any

8 disputes concerning the reasonableness of those fees your

9 Honor will hear about them.

10 THE COURT: That's the key term,

11 reasonableness. And there has to be some transparency with

12 respect to the receipt of those fees so that the

13 reasonableness factor can be exposed to comment by all.

14 MR. KORNBERG: And, your Honor, as I said,

15 we're happy to share our monthly bills with the committee

16 counsel when they are appointed, and of course with the

17 debtor. And if there is an issue as to reasonableness I'm

18 sure your Honor will be involved in resolving that.

19 MR. SAGE: I only have one more comment,

20 your Honor, and it applies to two sections at the same

21 time, and that's 14 A and B on page 26 of the black line.

22 That section says if there's an asset sale that the

23 proceeds get applied to the secured debt.

24 And while I understand that might be what

25 happens, I don't understand why this should be resolved


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1 today. I would think that if there's an asset sale out of

2 the ordinary course, which both of these paragraphs

3 envision, that the application of proceeds would get

4 resolved here today or at the plan confirmation time as

5 opposed to pre-wired today.

6 MR. THOMAS: Your Honor, my only comment on

7 that was for this interim order it specifically provides

8 that these are sales "out of the ordinary course" which are

9 going to require your Honor's approval anyway under 363.

10 We are not contemplating any sales. If we were to do a

11 sale outside the ordinary course we would have to come

12 before your Honor to get approval. And I would suspect

13 that part of that approval would be the disposition of the

14 proceeds generated.

15 I thought this was a provision that would

16 be just fine in the interim order, and if need be we can

17 discuss it with the committee when we enter into a final

18 order.

19 THE COURT: I think that's appropriate.

20 It's clear that out of the ordinary course sales would be

21 subject to comment, scrutiny and appropriateness at the

22 time they take place.


24 THE COURT: Thank you for your comments,

25 Mr. Sage, they were very, very eloquent.


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1 MR. SAGE: Thank you, your Honor.

2 MR. MASUMOTO: Good morning, your Honor.

3 Brian Masumoto of the U.S. Trustee's Office.

4 Your Honor, as we were going through this,

5 I noticed a provision that we had raised with the debtor's

6 counsel last week but prior to the hearing I neglected to

7 mention. On the red line copy, which is part of paragraph

8 12 on page 25, there's a provision in the carveout section

9 that indicates that obligations provided for under the

10 carveout shall be added and made a part of the prepetition

11 secured senior debt obligations.

12 I just wanted to some clarification. One

13 is whether or not any portion of the prepetition amount

14 will be subject to any postpetition interest. The

15 provision of adding carveout amounts to a prepetition debt

16 is not one that I normally see or notice. So I did want

17 some clarification as to the intent and the effect of this

18 provision. If there's interest payment on postpetition

19 interest being paid, then this would be increasing the

20 amount of those postpetition payments.

21 MR. THOMAS: Your Honor, the debtors are

22 happy that there is not a provision for payment of

23 postpetition interest as any part of this cash collateral

24 adequate protection order. So there are no payments of

25 postpetition interest on account of the prepetition secured


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1 debt.

2 With respect to the addition, again, this

3 is cash collateral that presently is sitting in a

4 segregated account and could be used to pay down the

5 secured debt and then readvanced as a debtor in possession

6 loan. Instead it's being held back. We will consume it,

7 and part of the consumption will be payment of

8 professionals fees. Whatever is consumed is still the

9 collateral of the senior secured note holders, and it's not

10 being used to pay down their debt, so it should be part of

11 their claim in the event that they don't recover their

12 claim. So I think this provision is appropriate in these

13 circumstances. The money is fungible, we either have to

14 pay down their debt or, if we use it all, it's part of

15 their claim.

16 THE COURT: This all really comes into play

17 at the time of the final hearing on cash collateral. I

18 don't have a problem with leaving it in the way it is now.

19 MR. STAMER: Good morning, your Honor.

20 THE COURT: Good morning, Mr. Stamer.

21 MR. STAMER: For the record, Michael Stamer

22 and Mary Masella from Akin Gump Strauss Hauer and Feld here

23 on behalf of MHR Capital Partners 100 L.P. and four

24 affiliated funds.

25 Your Honor, we represent five affiliated


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1 funds that hold basically all of the new notes as they have

2 been described. The new notes are approximately 23 million

3 dollars of principal and accrued obligations. It is true

4 that the either this MHR fund or other MHR funds, frankly I

5 don't know which for sure, hold --

6 THE COURT: What do the acronym of the MHR

7 stand for?

8 MR. STAMER: I believe it's the initials of

9 the principal founder of the fund, Mark H. Rachesky. It is

10 true that they in fact own other indebtedness in this

11 capital structure, I believe they do own 48 or 50 percent

12 of the unsecured notes, but I'm not here for that. I don't

13 represent them in that capacity, that's not what we are

14 talking about.

15 The senior notes, again there are basically

16 two tranches of secured --

17 THE COURT: Everybody is looking at you

18 with either two heads or two hats no matter what you say.

19 MR. STAMER: Is it my tie, your Honor?

20 There are two tranches of secured notes, secured

21 obligations, the floating rate notes as they call it, and

22 the new notes that I'm representing MHR in connection with.

23 The new notes are first priority --

24 THE COURT: Does anybody somebody else

25 represent MHR in connection with the other interests?


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1 MR. STAMER: I frankly don't know the

2 answer to that question. I believe MHR is involved on an

3 ad hoc committee, but again, your Honor, that's not my

4 issue.

5 THE COURT: I'm just trying to find out who

6 represents them.

7 MR. STAMER: Understood, your Honor.

8 MR. SAGE: They are part of the ad hoc

9 committee, your Honor.

10 MR. STAMER: The secured notes are first

11 lien, first priority secured obligations, they are secured

12 by substantially all of the debtors' assets, and they are

13 pari passu with the floating rate notes. As secured notes

14 they are entitled to adequate protection.

15 What is being created here through this

16 adequate protection stipulation is basically two tiers of

17 adequate protection which, based on where we are in the

18 case and the record before your Honor, there is no

19 justification for. It is true that we made some progress

20 with Mr. Thomas in connection with accepting some comments

21 to the adequate protection stipulation. There are three

22 principal areas that we did not, three principal concerns

23 we have, and it is on this basis that we object to the

24 entry of the interim order.

25 Clearly, your Honor, the burden is on the


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1 debtors to establish that we, as secured creditors, are in

2 fact adequately protected. They have failed to satisfy

3 that burden. The three differences are as follows, your

4 Honor:

5 First, as alluded to by Mr. Thomas, not

6 withstanding that the ad hoc committee is in fact being

7 paid for their legal and financial advisory fees as part of

8 their adequate protection package, the new notes,

9 notwithstanding the size, and I fully acknowledge that it's

10 23 million dollars, they are a separate note issue with

11 their own rights under their underlying documents. And

12 clearly, your Honor, the ad hoc committee, neither the ad

13 hoc committee nor the collateral trustee is looking out for

14 the new note holders best interest. Quite to the contrary,

15 your Honor, the fact that you have two tears developed here

16 in the adequate protection is proof positive that they are

17 not looking out for the best interest of the new note

18 holders.

19 THE COURT: Let me ask you Mr. Stamer.

20 MR. STAMER: Sure, your Honor.

21 THE COURT: I'm distilling your arguments.

22 This is just a pitch for fees. Yes?

23 MR. STAMER: It is not, your Honor. There

24 are two other issues.

25 THE COURT: You don't want fees?


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1 MR. STAMER: Your Honor, it is an argument

2 that relates to adequate protection. And Mr. Sage is

3 right, that you see all the time that secured creditors are

4 in effect paid fees for adequate protection, but this is a

5 separate pari passu note issue with clearly its own

6 independent issues.

7 THE COURT: This is all about fees, Mr

8 Stamer.

9 MR. STAMER: This argument is about fees,

10 your Honor.

11 THE COURT: Thank you.

12 MR. STAMER: You're welcome.

13 The second difference we have, your Honor,

14 relates to information. And the information is, although

15 we are entitled to receive the budget and certain reports

16 as it relates to the budget, the ad hoc committee is able

17 to ask for back up information to better understand the

18 budget and the actual compared to the budget and we are

19 not. Again, as we've said, there is a limitation on

20 reasonableness so that reasonable requests by the ad hoc

21 committee will in fact be granted by the company or not.

22 We just are not even given that ability to ask that, your

23 Honor.

24 The third, your Honor, and from our

25 perspective the most important, deals with paragraph 18 of


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1 the adequate protection order. And, your Honor, virtually

2 all Chapter 11 cases where in fact you have the debtors

3 utilizing the cash collateral of a secured creditor, there

4 are fairly standard provisions. And the provisions go

5 something like this: Neither the company nor anyone else

6 can utilize our cash collateral for purpose of suing us,

7 provide, however, cash collateral can be used for a limited

8 time to allow people to investigate claims, and if in fact

9 they find claims they need to be asserted within a certain

10 period of time, here it's a 75 day window under certain

11 circumstances.

12 And our concern, your Honor, is over our

13 objection what the cash collateral orders proposes is to

14 not only reserve the debtors' right to utilize cash

15 collateral to sue us, but it's effectively a carveout from

16 the very provision that is a very significant part

17 component of adequate protection being provided to the

18 other similarly situated secured creditors.

19 Your Honor, based on where we are in the

20 case, based upon our entitlement to adequate protection,

21 the same as anyone else's entitlement, the same as the

22 other secured creditors' entitlement to adequate

23 protection, your Honor, we object to the entry of the order

24 in this form.

25 Thank you, Judge.


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1 MR. THOMAS: Your Honor, I'm not going to

2 start with the fees, I'm going to start with the adequate

3 protection. Basically, as set forth in our motion, we

4 believe there is adequate protection being provided to all

5 of the secured note holders based upon use of cash

6 collateral which enables this debtor to operate as a going

7 concern. This debtor does not have tangible assets,

8 accounts receivable, inventory, owned real estate,

9 machinery, equipment, any tangible assets that come close

10 to the 245 million dollars of secured debt.

11 This debtors' value is operating as a going

12 concern, generating revenue, and generating positive cash

13 flow and earnings before interest, taxes, depreciation and

14 amortization. So we are providing adequate protection by

15 operating as opposed to liquidating.

16 The other issue is Mr. Stamer's client,

17 Mark Rachesky of MHR, as the holder of 50 percent of the

18 junior unsecured bonds contended prior to this bankruptcy

19 proceeding that this company was worth more than 300

20 million dollars. So his client contends there is a massive

21 equity cushion here that would provide adequate protection.

22 He's not in court, but that's why we are in court because

23 we couldn't get that number down to his number or anywhere

24 close. And if he was in court and if he was consistent

25 with what he's told us prior to our filing, he would agree


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1 that there is a massive equity cushion here that provides

2 an adequate protection. And we aren't paying interest on

3 the notes on the secured debt and we are happy with that.

4 With respect to the fees, all professionals

5 should get fees, but not Mr. Stamer in this circumstance.

6 He is a 10 percent dissident secured note holder in a group

7 that in number and amount is sufficient to control the

8 collateral trustee who makes the determinations regarding

9 the use of collateral, which use of collateral would

10 include paying the fees. So that group and the collateral

11 trustee does not want their collateral proceeds used to

12 paid fees of the dissident secured lender.

13 Moreover, that dissident secured lender is

14 50 percent of our unsecured bond debt, may end up sitting

15 on the creditors' committee, we will know come Friday when

16 the organizational meeting occurs. But I think the

17 indenture provides a provision why the fees shouldn't get

18 paid. And if your Honor would authorize this, who knows

19 what other minority potential secured creditors would show

20 up when they are, in essence, bound by a class that can

21 deliver their vote and deliver the ability to use cash

22 collateral, I just don't think it's appropriate here.

23 With respect to the backup information,

24 we're made it clear, whatever information we provide to the

25 collateral trustee and to the add hoc note holders group we


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1 will provide to Mr. Stamer. We are not willing to give

2 them sort of a mechanism as a secured creditor to a cash

3 collateral order to obtain informal discovery as an

4 unsecured note holder. And actually, your Honor, we have a

5 data room that they have had access to, but we think enough

6 is enough. We don't think any of the changes should be

7 made.

8 THE COURT: Does anyone what else want to

9 be heard?

10 MR. STAMER: Your Honor, just two very

11 quick clarifying comments. First with respect to the fees,

12 and I'm sorry to go back to the fees, we are not looking

13 for the payment of fees for anything other than it relates

14 to the secured piece. Again, our engagement is limited to

15 the secured piece --

16 THE COURT: I don't want to cut you short,

17 Mr. Stamer, but it seems to me, based upon this colloquy,

18 and you haven't shown me otherwise, your position is a

19 conflicting one, or your client's position is a conflicting

20 one, and it's a straddling one for us in several areas in

21 this case.

22 I am not going to prejudge whether you are

23 entitled to be, or your client is entitled to be on a

24 creditors' committee or not, that's for the U.S. Trustee

25 initially to discuss. But the economic and other


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1 interests, legal interests of your client straddle all

2 areas in this case. I frankly do not see that it is

3 appropriate to treat your client as separate and distinct

4 with respect to its interest, or his interest in, or their

5 interest in the secured creditor tranche, that's ably being

6 taken care to this date so far, by counsel to this ad hoc

7 committee. If your client is willing to pay your fees

8 separately, that's fine.

9 Right now I see you in somewhat of a

10 conflict of interest, and I don't think that the estate has

11 or should be supporting your parochial position in this

12 case at this time.

13 MR. STAMER: Thank you, your Honor.

14 THE COURT: You're welcome.

15 Anything else?

16 MR. THOMAS: Nothing else, your Honor, on

17 cash collateral.

18 THE COURT: Are we going to go further or

19 are we going to talk a little bit about a dooms day

20 scenario of the final hearing on cash collateral. Is it my

21 understanding that all parties here intend to push the

22 issue of valuation at or prior to that date, or that date

23 is now kind of set for a distribution date to senior

24 secured creditors, or is that distribution possibly to be

25 put on hold while we do the valuation dates?


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1 MR. THOMAS: Your Honor, on behalf of the

2 debtors, we spoke to your clerk and tentatively penciled

3 in, I believe, March 27th as a continued hearing date on

4 many of the interim orders that we are getting today.

5 With respect to the valuation hearing and

6 the provision --

7 THE COURT: No, with respect to the final

8 hearing on cash collateral, which essentially comes out to

9 be maybe the same thing.

10 MR. THOMAS: Your Honor, I don't really --

11 we don't truly believe that the distribution of the

12 segregated cash is akin to the valuation hearing, because

13 everyone has always been talking about the valuation of the

14 entity on a debt free basis without the segregated cash.

15 The segregated cash is something that a committee has the

16 opportunity to investigate, and if they find that the

17 senior secured note holders and the collateral trustee did

18 not hold a perfected security interest in or a lien upon

19 that.

20 THE COURT: Well, your proposed order

21 provides for distribution of that fund at the date of the

22 final cash collateral order.

23 MR. THOMAS: Yes, it does, your Honor.

24 MR. KORNBERG: Your Honor, if I may. The

25 cash in the segregated account are proceeds of the


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1 collateral --

2 THE COURT: I want to know if I have a lot

3 of work to do in the next couple of weeks, or you folks are

4 going to go through your traditional dance and we will then

5 come to some appropriate way of dealing with this and

6 within an appropriate amount of time before it happens.

7 MR. KORNBERG: Your Honor, I think this

8 is --

9 THE COURT: The way you've painted all of

10 this in your papers and in, as I look at it, it contains

11 drop dead features with respect to this.

12 MR. KORNBERG: We are on a fast track to

13 confirmation. Obviously there have been months of

14 negotiations, which Mr. Thomas described, with various

15 creditors. It would seem to me that, and I believe the

16 plan is to promptly file a plan and disclosure statement, a

17 valuation should and could be addressed in that context.

18 We think that would be appropriate, and that will be, I

19 think, up in short order, although not as quickly as the

20 final cash collateral order, the hearing date.

21 MR. THOMAS: Yes. Your Honor, and we

22 believe that the -- your Honor, when you say you have a lot

23 of work do, we would prefer to have everyone focused and

24 the work to be done on the valuation issue. We are going

25 to file a plan and disclosure statement in very short


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1 order, probably in the next week or two. It will set forth

2 our view of value and how, in essence, the secured debt is

3 being converted to equity.

4 The cash collateral issue I do not believe

5 is integral or even a part of the valuation dispute that

6 the parties have been discussing.

7 THE COURT: But distribution is

8 contemplated to take place immediately following cash

9 collateral.

10 MR. THOMAS: Yes, your Honor.

11 MR. SAGE: Your Honor, a quick remark if I

12 may. Two things; one, the change that we made to the

13 order, a consistent change that we made that was described

14 earlier by Mr. Thomas was that that distribution will only

15 occur if the order authorized it. And we didn't want to

16 prejudge that issue today because it's possible that the

17 court will decide that paying 95 million dollars on a

18 secured claim pre confirmation is not appropriate; maybe

19 the court will decide it is appropriate, but regardless,

20 that wasn't for today. A committee hasn't been appointed

21 yet and we thought that issue could be decide at the final

22 hearing on March 27th I guess it is.

23 THE COURT: Una, is it March 27th or 26th?

24 THE CLERK: The 26th is Calpine fees.

25 MR. SAGE: I do agree with Mr. Thomas in


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1 that it is not an integrally related issue to valuation,

2 but it may not be --

3 THE COURT: Very well. Is there anything

4 else?

5 MR. THOMAS: Nothing, your Honor, on cash

6 collateral. We would request authority to submit, after we

7 clean up the order to reflect some of the changes that were

8 discussed before your Honor took the bench, and we would

9 ask your Honor to enter the interim cash collateral.

10 THE COURT: Very well.


12 THE COURT: As modified the request is

13 granted.


15 MR. STAMER: Your Honor, could we just

16 request that we see the copy before it's submitted, the

17 revised order?

18 MR. THOMAS: We will do that, your Honor.

19 Your Honor, the next matter on our agenda

20 is docket number 13, which is the motion of the debtors for

21 an order authorizing the payment of prepetition wages.

22 Your Honor, it is your standard employee

23 wage motion. It covers wages, deductions, withholding,

24 payroll taxes, expense reimbursement. It covers two things

25 that the U.S. Trustee has raised an eyebrow over, well,


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1 actually one. It covers a non management sales incentive

2 program, which is the program that's been in effect for

3 years, ordinary course, not adopted in conjunction with

4 bankruptcy.

5 What the U.S. Trustee has asked is pursuant

6 to Rule 6003, the new rule, that whatever order we submit

7 be an interim order, and we've agreed to that. It

8 provides, though, for what is called the management

9 incentive plan. The management incentive plan is another

10 plan that has been in place for years, ordinary course, and

11 it provides for incentive payments to senior management

12 based upon actual metrics of performance as opposed to just

13 sitting around and, you know, staying on the job.

14 And in the ordinary course, the 2007

15 management incentive bonuses are determined and paid in

16 March of the subsequent year. So really that claim becomes

17 fixed, liquidated and allowed in March of '08 on account of

18 2007 actual performance after the books and records of 2007

19 are closed.

20 What we've told the United States Trustee

21 is that in connection with the interim order we would agree

22 that no management incentive plan payments would be made to

23 three insiders who otherwise would be covered by this

24 program, and we would put that off until final hearing

25 until a committee is appointed so we could explain the true


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1 nature of this program. And the three insiders that would

2 ordinarily be covered by the management incentive program

3 are the CEO, the chief executive officer, the chief

4 financial officer, and the general counsel who is also the

5 secretary.

6 So what we would like is an interim order

7 entered granting the employee wage motion set for final

8 hearing with the other matters that will be continued, and

9 we will make clear, I think, on the record that there will

10 be no management incentive payments made to the insiders

11 pending further order of the court.


13 Under those circumstances the application

14 is approved.


16 THE COURT: I note that the 2007, the

17 numbers for payment for March of 2008 are already

18 liquidated and fixed; is that correct?

19 MR. THOMAS: Your Honor, they are actually

20 still being liquidated because the 2007 books haven't been

21 finally closed, but it's anticipated that in the next week

22 or so they will be actually fixed. The motion does say

23 that it will not be --

24 THE COURT: It's an approximation that has

25 a limitation on it of some 600 thousand.


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