1

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

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

2 1 2 3 4 5 6
BY: Attorneys for the Debtors 200 Park Avenue New York, New York 10166 MARK K. THOMAS, ESQ., DANIEL J. McGUIRE, ESQ., CAREY D. SCHREIBER, ESQ. A P P E A R A N C E S:

WINSTON & STRAWN LLP

7 8 9 10 11 12 13
BY:

PAUL WEISS RIFKIND WHARTON & GARRISON LLP Attorneys for Unofficial Group of Senior Secured Noteholders 1285 Avenue of the Americas New York, New York 10019 ALAN W. KORNBERG, ESQ., SAMANTHA A. AMDURSKY, ESQ.

14 15 16 17 18 19
BY:

AKIN GUMP STRAUSS HAUER & FELD LLP Attorneys for Holders of New Notes 590 Madison Avenue New York, New York 10022 MICHAEL S. STAMER, ESQ., MARY REIDY MASELLA, ESQ.

20 21 22 23 24 25

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

3 1 2 3 4 5 6 7 8 9 10 11 12
BY: GLENN B. RICE, ESQ. Attorneys for R.R. Donnelley 230 Park Avenue New York, New York 10169 Attorneys for Certain Subordinated Noteholders Seven Times Square New York, New York 10036 BY: MICHAEL J. SAGE, ESQ. A P P E A R A N C E S (Continued):

O'MELVENY & MYERS LLP

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

13 14 15 16 17 18

KELLEY DRYE & WARREN LLP Attorneys for U.S. Bank as Indentured Trustee 101 Park Avenue New York, New York 10178 BY: JAMES S. CARR, ESQ.

19 20 21 22 23 24

FAEGRE & BENSON LLP Attorneys for U.S. Bank as Indentured Trustee 90 South Seventh Street Minneapolis, Minnesota 55402 BY: MICHAEL B. FISCO, ESQ.

25
VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

4 1 2 3
DIANA G. ADAMS Acting United States Trustee A P P E A R A N C E S (Continued):

4 5 6 7

Region 2 UNITED STATES DEPARTMENT OF JUSTICE OFFICE OF THE UNITED STATES TRUSTEE 33 Whitehall Street New York, New York 10004

BY:

BRIAN MASUMOTO, ESQ.,

8
of Counsel

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
debt. P R O C E E D I N G S: MR. THOMAS: Good morning, your Honor.

Mark Thomas and Dan McGuire from Winston and Strawn on behalf of Ziff Davis Media, Inc. and its affiliated debtors and debtors in possession. Your Honor, in the courtroom is Mr. Jason Young, who is the chief executive officer of Ziff Davis, and also Mr. Mark Moyer who is the chief restructuring officer. THE COURT: MR. THOMAS: Go ahead. Thank you, your Honor. If I

could, your Honor, I would just like to give you a brief bit of background about the case. And it's not what was in

the voluminous background section of the first day pleadings, but something that I think puts the case into context. This is a small company. It has a lot of

But last year in 2007 it had about 75 million We have debt of in excess of 400

dollars of total revenue.

million dollars that was really put on the company in 2000 as part of a leveraged buyout of this company at the height of the internet boom. And at that point in time Ziff Davis So with

had revenue of approximately 500 million dollars.

75 million dollars of revenue it's impossible to service 400 million dollars of debt.

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
tranches. And the debt is really broken into two In the aggregate we have about 245 million

dollars of senior secured debt, secured by virtually all assets of the estate through an indenture, a first lien security agreement, and a collateral trust. We also have,

your Honor, about 185 million dollars of junior unsecured subordinated bond debt. And what has happened since we

went into default in the fall of 2007 by failing to pay interest due on our senior debt that's secured and our junior unsecured debt, we've attempt to negotiate with the secured bond holders and the unsecured bondholders on a financial restructure of this small company. We are not here, your Honor, in this courtroom because we need to operationally restructure this business. We have no union contracts. We do not have a We don't have a We are here

bunch of upside down customer contracts.

bunch of bad leases that have to be rejected.

to restructure the balance sheet because we could not reach an agreement with our unsecured bondholders. THE COURT: He you have 3 thousand

creditors or so; is that correct? MR. THOMAS: THE COURT: Yes, your Honor. You have or have not done any

trade debt; is trade debt current? MR. THOMAS: We are relatively current on

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
our trade debt, your Honor, with a handful of major exceptions. R.H. Donnelley is the printer of our magazine.

We owe them about 3 million dollars, but we've been in sort of a modified contract with them for quite some time where we pay them in advance, but that 3 million dollars is in arrears. And we are financially stressed, your Honor, there is no doubt that a company that only has 75 million dollars of revenue, not earnings, is in financial distress. THE COURT: All of the papers you've filed

before me deal with bond debt, they don't deal at all with trade debt, and I'm just wondering is there some understanding as to potential distribution with respect to trade debt or is this going to be one hundred percent payout to trade? MR. THOMAS: Your Honor, this is not going The debtors

to be one hundred percent payout to trade.

have reached a plan support agreement with -THE COURT: plan support agreement? MR. THOMAS: The trade will share in a pot Where does trade fit into that

of cash so there is going to be a pot of cash set aside for the trade creditors and they will get a dividend from that pot of cash, and it's not a lot of money, your Honor.

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
THE COURT: MR. THOMAS: Go ahead. Your Honor, the plan support

agreement after we fell into default, was negotiated with an ad hoc committee of senior secured note debt holders who control over 80 percent of the principal amount of that class, which as I said earlier was about 245 million dollars. And we have reached an agreement with that ad hoc

committee regarding a plan of reorganization and the use of cash collateral. In essence, your Honor, we what that plan provides is the 245 million dollars of senior secured debt, if your Honor approves the final cash collateral order at the final hearing, will get paid down by 95 million dollars of their collateral proceeds. And that 95 million dollars

is presently sitting in a segregated account at Merrill Lynch and those proceeds resulted from the sale in July of 2007 of Ziff Davis Media's enterprise group. And there presently is a potential dispute, although we've agreed to defer, on whether those proceeds are property of the estate and thus the senior lender's cash collateral, or whether those proceeds are actually property of the senior lenders and not even property of the estate. But based upon our settlement agreement that's not

an issue we will be bringing before your Honor. So after the application of cash, the

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
account? senior secured note holders will be owed approximately 150 million dollars. And under the plan support agreement they

have agreed to support a reorganization plan whereby that 150 million dollars will be satisfied in essence by receipt of a new secured note that could go up as high as 57 million dollars. And then the balance of their claim,

which could be 93 million dollars, would be converted to new common stock of the reorganized doctor. And that 93,

approximately, million dollars of secured debt would convert to about 88.8 percent of the new common stock of the reorganized debtor. And we have sufficient dollar amount and number of holders of that senior secured debt to carry that class in support of a plan. And as part of the agreement

on use of cash collateral, your Honor, in essence from the segregated account that has collateral proceeds, the debtors have reached an agreement whereby we would be seeking use of 5 million dollars on an interim basis upon receipt of a final order authorizing use of cash collateral, your Honor. There is an agreement to allow

another 12 million dollars of cash collateral to be used, so during the term of the case a total of 17 million dollars of cash collateral. THE COURT: Would that clean out that

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
MR. THOMAS: No, your Honor, because we

also negotiated that there would be left behind for the estate an additional 7 and a half million dollars of cash that would be left in that account to provide exit financing upon emergence of a plan so we would not have to subject ourselves to the vagueries of today's capital markets. And Alvarez and Marsal and the company have

worked on a business planning and a budget and believe that that money that's left behind will be more than adequate to fund us after exit and going forward after exit. So there

is no request for debtor in possession financing, we are just going to carve out of a big account that has cash about 24.5 million dollars. And, your Honor, I think I should make it clear and correct the record, Mr. Moyer, who is in court, the chief restructuring officer, submitted an affidavit in support of the first day motion. your Honor. It's docket number 3,

We would like to proffer that as part of the

record of today's hearing; however, there were two numbers that changed that aren't reflected in his affidavit, your Honor. The first number primarily relates to sort of what we are calling the leave behind money. As I just

told you, we've agreed that 7 and a half million dollars of the segregated fund will be left behind for exit financing.

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Mr. Moyer's affidavit says that 5 million dollars will be left behind, but that was a negotiation that was occurring up to the filing of the petition and that number changed, so there's more money being left behind. That results in a

potential higher note at exit, and therefore the note would potentially go up to 57.5 million dollars, and that was not reflected in the affidavit. So, your Honor, where we are at over the last several months was trying to negotiate with our constituents regarding a plan. And as is sometimes typical

in these situations the senior secured lenders on the one hand and the junior unsecured bond holders on the other hand had wildly different views of the value of this enterprise. And I think suffice it to say that the secured

creditors who after a payment of 95 million dollars, if authorized by your Honor's final order, will be owed 150 million dollars, they have contended that this company is worth less than one hundred million dollars. Your Honor, the unsecured bondholders, however, who have 185 million dollars of unsecured debt that is subordinated to and junior in priority to the 150 million dollars that would remain owed to the secured creditors, have contended that this company is worth in excess of 200 million dollars. And we have not been able

to bridge the gap outside of court on a balance sheet

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
restructuring your Honor because we need your help. We

need a bit of adult supervision to come up with the value of this company. And try as we might, we haven't been able

to bring those two parties close from that wide gulf. And we are in a situation where we are not that big of a company and we are struggling with not that much revenue and not that much earnings. And the

professional fees that have been incurred in the last several months outside of court have exceeded one million dollars a month. It became apparent to the company that we

had to get into a place where there would be a final definitive arbiter of value so we could fix the value and then figure out how to carve out the value. The debtors believe that the plan that has been negotiated with the senior secured lenders imputes an enterprise value of approximately 140 to 150 million dollars. And the debtors and their valuation experts, your

Honor, believe that that is the fair, appropriate and correct value of this enterprise as we find ourselves today in default, in the market that we are in today with respect to financial markets, capital markets, ability to obtain financing and the multiples that are being paid for businesses in today's market. If we can get the parties

together to compromise before a contested valuation hearing, there's nothing that the company would prefer

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
be heard? It's your floor. MR. THOMAS: Thank you, your Honor. My more. Your Honor, I think my final comment is we have an unusual situation -- well, it's not unusual, we have a typical situation also. One of the holders of the

senior secured debts, which is the 245 million dollars, a holder of approximately 10 percent of that debt MHR Institutional Partners also holds approximately 50 percent of the unsecured bond debt. They would be represented by

counsel, you may hear from that later today; but based on that we have an interesting dynamic that has lead us to not agree to certain of the provisions that MHR has requested as a "secured creditor" with respect to the cash collateral order. When we get to that, your Honor, in the agenda, we have accepted comments from the U.S. Trustee, Mr. Sage who represents an ad hoc committee of unsecured bondholders, and Mr. Stamer who represents MHR in its capacity as secured creditors, but we haven't been able to work out all of that language. Your Honor, with that I would cease with my opening remarks and we are prepared to go forward. THE COURT: Does anyone also else want to

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
colleague, Mr. McGuire. MR. MCGUIRE: Good morning, your Honor.

With your permission I'll go through the agenda letter that that was filed with the matters thereon. THE COURT: MR. MCGUIRE: Go ahead. I note that your Honor has Thank you So

already entered the joint administration order.

very much, that relieves docket number 2 in the case. I'll go with romanette three, item (B)2, the motion to

prepare a list of creditors in lieu of submitting a matrix and file a consolidated list. Your Honor, we intend to

seek your Honor's permission to retain BMC Group in this case, and given the volume of creditors, we would like to prepare and use the creditor list with BMC as opposed to filing the matrix in this case. We would also like to file

a consolidated list of the top 30 creditors as opposed to 20 individual lists the top 20 creditors in each of the cases. We think it's appropriate given the size of the

case and the number of creditors and we've received no objection to this motion, your Honor. THE COURT: Does anyone want to be heard?

The application is granted. MR. MCGUIRE: Thank you, your Honor.

Next on the agenda is our motion for an extension of the deadline to file schedules of 15 days. In

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
a case of this size and complexity is just a little too tight for us. We would ask for one 30 day extension to We've received no objections

give us 45 days to do that.

to that motion and would ask that your Honor approve it. THE COURT: Does anyone want to be heard?

The application is granted. MR. MCGUIRE: Thank you, your Honor.

Next on the agenda, your Honor, is docket number 6, which is our case management motion. Here we're

requesting the ability to maintain a core group and 2002 service list as is typical in these types of cases. We've

asked for procedures to allow electronic notice to parties unless they can demonstrate that they do not have an electronic mail address, and to schedule things on monthly omnibus hearing dates, that the procedure whereby parties file a motion 20 days in advance of the hearing, there will be five day response deadline; if they file it ten days in response, there will be a three day response deadline. the parties, of course, always maintain the right to ask this court to shorten the deadline to let things be heard on a shorter timeframe if they deem it appropriate. THE COURT: Well, chambers does. Does anyone want to be heard? And

In general, I haven't got a real

problem with respect to this administrative, this case management order, but there are certain timing elements

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
office. which, for the convenience of chambers and all the parties, will be modified to extend certain of the dates to deal with some of the items that we have to conform with chamber's routine. So there will be some modifications,

and you can consult with me now with respect to them, or I can tell you they are not going to be anything more than ministerial as I indicated essentially with the changing of times and the like. MR. MCGUIRE: Your Honor, we'll just wait

and see the order as you've edited it with your changes and we'll comply with it accordingly. THE COURT: MR. MCGUIRE: Very well. Next up on our addenda,

docket number 7, is our motion to retain BMC Group as our claims and noticing agent. This a motion to retain them to

do the things that BMC does in a case like this. THE COURT: Subject to comment and approval

by the clerk of the court, that application is in line to be granted. MR. MCGUIRE: THE COURT: Thank you, your Honor. Check that out with the clerk's

Some of these functions were clerk's office

functions, and that's why we require that the clerk's office approve it. MR. MCGUIRE: We will do that. Thank you,

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
sub debt. I just note that in paragraph 19 of the motion they seek authority to enter into new policies. The your Honor. Next up on our agenda is item 8, is our motion to pay the insurance premiums that are outstanding. We have insurance premiums that we attempted to pay at the end of February and the checks weren't cashed quite frankly, at it's for our workers' compensation and our general liability policy. These total approximately 74

thousand dollars, and in order to maintain these policies which are typical business policies that we need to maintain in the ordinary course, we would ask for permission to make these payments on these prepetition amounts. There will be further amounts postpetition, but those will arise postpetition in the ordinary course under the insurance contracts that we have. THE COURT: MR. SAGE: THE COURT: MR. SAGE: Does anyone want to be heard? Yes, your Honor. Sure. Michael Sage on behalf of the

old policies burn off of in September of this year, and I think I commented that this is premature and this should be dealt with, at the earliest, at the final hearing and not

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
today, it just seems to me to be premature to give the debtors the authority to enter into new insurance policies in September when they don't need that authority now. MR. MCGUIRE: that relief is appropriate. Well, your Honor, we think And obviously if it was

outside the ordinary course we would come in for further permission I suppose, but it won't come until September, so we are happy to defer that if your Honor feels it's appropriate. THE COURT: the final hearing. MR. MCGUIRE: THE COURT: Yes, your Honor. What's involved dollar-wise? Very well, I'll take it up at

I'm trying to gauge Mr. Sage's intervention as to whether we are nickel and diming in this matter or whether we have true issues. MR. MCGUIRE: Well, it's over about half a

million dollars on an annual basis for all of our insurance policies. The only ones that are outstanding that don't

run through September, we have about one hundred and some thousand dollars we will be paying between now and then -well with these amounts, 170 thousand dollars. But overall

the insurance policies are in excess of half a million dollars. MR. SAGE: That's now. It's not clear what

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
they will enter into in the future. If it's just a renewal

of the existing policies, that would be one thing. THE COURT: Well, he's giving you a number

for the renewal of existing policies. MR. SAGE: If that's the limit then I

suppose it's less objectionable, but it seeks authority for new policies in undescribed amounts. MR. MCGUIRE: Quite frankly, your Honor,

I'm not too worried about pending up because it's within the range of -- the policy renewal is within the ordinary course of business. THE COURT: I don't have any real problem.

As I said, I just wanted to gauge the quality and quantity of the objection to see whether it's a question of are we going to stop every five minutes to look at dots and cross T's or whether we are getting into real substance. It

sounds to me like we are not really getting into real substance at this point, but we will take it as we come to it. MR. MCGUIRE: Your Honor, the next item on

our agenda is docket number 9, and that's our motion to maintain our current cash management system. The debtors' cash management system currently consists of 12 accounts with three different financial institutions. Only nine of those accounts are

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
active accounts. Six of them are with Merrill Lynch, two

of them are with Bank of New York, and one of them at US Bank. Now Merrill Lynch and Bank of New York are not on

the U.S. Trustee's approved list of financial institutions, however we believe that they are sound financial institutions and the burden of moving all of our accounts from these institutions to another would be an unnecessary burden for the estate to bear in this case and that we should be permitted to maintain our current cash management system for these accounts at Merrill Lynch, US Bank, and Bank of New York. MR. MASUMOTO: Good morning, your Honor.

Brian Masumoto for the Office of the United States Trustee. Your Honor, the request in this case does not seem to satisfy the cause provision under Section 345 that merits a departure from the normal procedure. As your Honor knows, virtually every debtor who comes into bankruptcy has this issue. And with respect

to the accounts that are at issue that are not qualified, frequently, your Honor, many of the affected banks simply submit an application qualifying under the southern district authorized depository requirements. So if they

wanted to keep their accounts at those particular institutions, the requirement is that they satisfy the depository requirements.

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
trouble? MR. MASUMOTO: No, your Honor. I think Chase? MR. MASUMOTO: just a retail aspect. Not that I -- I think it's THE COURT: under this bunch? MR. MASUMOTO: The Bank of New York and Who are the not compliant banks

Merrill Lynch are not listed as authorized. THE COURT: Isn't the Bank of New York now

As far as I know, according to our

list that we fairly routinely update, as of January Bank of New York and Merrill Lynch were not authorized depositories. qualified. THE COURT: Are they in some kind of But it's a simple matter for them to become

it's just our determination or discretion.

They may very

well be qualified as authorized depositories in other bankruptcy districts. They may have chosen for some reason So we see no

not to qualify in New York at this point.

reason not to require them to qualify if they wish to maintain the funds at those institutions. Certainly, again, the whole purpose of Section 345 is not just a U.S. Trustee requirement, it's Congress' intent -THE COURT: Well, here's what I'm going to

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
do. I'm going to allow you to continue with the cash

management system, give them an opportunity to satisfy the U.S. Trustee. And if they don't and you can demonstrate

the appropriate cause under the statute and rules, I'll consider it at that time, and that is at the final hearing. MR. MCGUIRE: MR. MASUMOTO: MR. MCGUIRE: our agenda is docket entry 10. Okay. Thank you, your Honor.

Thank you, your Honor. Your Honor, the next item on This is our motion to pay

certain taxes in the ordinary course of business, certain prepetition taxes. These amounts in this case are very small, we are talking in terms of sales and use taxes of probably around 3 thousand dollars, no more than 5 thousand dollars. And the state income taxes that need to be paid to maintain our exemptions and our filing deadlines extensions of 3 to 5 thousand dollars, but most of the larger amounts will not be paid for some time period, so we are only looking at about 10 thousand dollars worth of payments here that we are looking to make just to maintain our current status with respect to the obligations. THE COURT: Does anyone want to be heard?

The application is granted. MR. MCGUIRE: Thank you, your Honor.

The next item on the agenda is docket

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
is granted. MR. MCGUIRE: Thank you, your Honor. number 11, our motion to establish adequate assurance procedures and to make adequate assurance payments to the utilities in this case. Your Honor, we have about 12 providers of utilities through 19 accounts. We pay about 245 thousand

dollars a month in utilities, and what we would like to do is to make a two week deposit to these people to aggregate about 122 thousand dollars as proposed adequate assurance, but then with all of the utilities, of course, having an opportunity to come in prior to the final hearing and object to the adequate protection that's provided, but the order will provide that they can't in the interim shut us down, and it provides us adequate protection until there's a final hearing on that matter. THE COURT: Does anyone want to be heard?

Subject to a final hearing, the application

I'm going to turn it back over to Mr. Thomas for the balance of the motions. MR. THOMAS: Thank you, your Honor.

Your Honor, our next motion is docket number 12; it's the debtors' motion for interim and final orders authorizing use of cash collateral. Your Honor, I spoke briefly on my opening

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
remarks about this order. The interim order provides

authority to use up to 5 million dollars of cash collateral which presently is residing in a segregated account at Merrill Lynch pending a final hearing. At the final

hearing we will seek authority to use an additional 12 million dollars of the cash collateral which is sitting in the Merrill Lynch segregated account. And at the final

hearing we will be seeking authority to hold back 7 and a half million dollars of that cash collateral and pay approximately 95 million dollars to the senior secured note holders. Your Honor, there are some changes. If you

wish, I would be happy to tender a black line copy of an order that reflects changes that have been negotiated between the debtors, the indenture and collateral trustee, Mr. Sage and Mr. Stamer, counsel for MHR. THE COURT: (Handing) MR. THOMAS: Your Honor, there are Sure.

basically a bunch of definitional changes and knits that I don't think we have to waste our time going through that the parties have agreed upon. I think the principal

concept is reflected in paragraph -- I'm sorry, page 7 paragraph romanette 8. And in essence, your Honor,

pursuant to our capital structure, our senior secured notes

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
are held pursuant to an indenture that was in the face principal amount of 205 million dollars; and that was entered into in April of 2005. And then subsequently in

February of 2007 a note purchase agreement was entered into in the principal amount of 20 million dollars where MHR institutional partners purchased 20 million dollars in notes. So what we've done through this order is made it clear that the MHR new notes are treated the same, in essence, as the notes that were issued under the indenture with respect to the validity priority extent, liens, adequate protection and the like. There are a few

major differences, however, and I'm going to highlight those right now, your Honor. The first major difference is the debtor has reserved its right to seek to equitable subordinate the claims of MHR under the new notes. reserved. That right has been

We have agreed, and we have to make this change

to the order, your Honor, it isn't in there now, that if we seek to equitably subordinate those claims we will bring that action within the challenge period, which would apply to a creditors committee, but that is a right that we are not willing to provide at this point a release of that type of claim and cause of action. And the principal issue is

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

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

26 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
of our secured debt, also holds 50 percent of our junior unsecured subordinated debt. And we are going to reserve

the right to seek equitable subordination. Another issue that was asked for that we are not willing to agree to is that the holder of that 10 percent of our secured debt, MHR has asked that as adequate protection we pay the attornies' fees incurred by its counsel during these proceedings. And, your Honor, at

paragraph 8 of the cash collateral order on page 22, the debtors have agreed, as part adequate protection, to pay the fees and expense incurred by the collateral trustee, which is US Bank and its counsel, and the fees and expenses incurred by what we call the note holder group. The note holder group is the ad hoc committee of secured note holders represented by Paul, Weiss, Rifkind, Wharton and Garrison as counsel, represented by Houlihan, Lokey, Howard and Zukin as financial advisors. That group, your Honor, is sufficient

in number and amount of holdings to control the class of senior secured debt. And pursuant to the indenture and the

collateral trust, it also has the authority to direct the collateral trustee with respect to all matters relating to the collateral. And we've agreed, as part of adequate

protection, to pay the fees of those entities that control that class, but we are not willing to agree to pay the

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
attornies' fees of MHR's counsel as a 10 percent senior secured note holder, when at the same time it holds 50 percent of the junior unsecured bonds. And as we learned

in the prebankruptcy period, the junior unsecured bonds were taking a view of value that was vastly different than the senior secured creditors, and that is just a position that we are not willing to continue to pay those fees -well, I'm sorry, to pay those fees; we've never been paying them prior to the petition date. The other thing that is a principal difference between the treatment of the secured notes issued under the indenture which have the face amount of 205 million dollars, and the notes issued to MHR under the note purchase agreement with a face amount of 20 million dollars is that the debtors are not willing to provide certain absolute block rights where they can block the entry into modifications to a cash collateral order. We have agreed that whatever we provide to the collateral trustee and whatever we provide to the note holder group we will provide to MHR, and we will provide them notice and an opportunity to object to modifications to any orders, but we are not going to agree that we cannot enter into modifications and seek court approval of modifications if a 10 percent dissident secured holder who is also a major unsecured holder wants to block us.

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Your Honor, we made some other changes that have been requested by the U.S. Trustee. I think prior to

the commencement of court this morning we spoke to Mr. Sage and we are going to change some words on page 20 in the defined term excluded assets, so we will have to submit a disk with a clean copy of the order at the conclusion of the hearing, your Honor. On paragraph 12, your Honor, with respect to the carveout, the provision that lawyers always spend more time negotiating than any other part of these agreements, based on discussion with the U.S. Trustee just before your Honor came on the bench, we have agreed and the note holders have agreed to add to the carveout a provision for a payment of fees to a subsequently appointed Chapter 7 trustee, if any, as the U.S. Trustee referred to it, as and for burial expenses. I believe the U.S. Trustee also asked us to represent that the U.S. Trustee's fees would be paid in any event in any situation in this case, whether the cash collateral order was terminated or not that the quarterly fees owed to the U.S. Trustee's office would be paid, and we said yes. In paragraph 18, your Honor, we've agreed to delete some language at the request of MHR's counsel. We can did that this morning so we haven't had a chance to

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
the fourth line. change the order. MR. SAGE: MR. THOMAS: Where is that language? It's on page 29 paragraph 18,

The language is, "(other than the We are going to strike that

collateral trustee)". language.

And further on in that paragraph, your Honor,

paragraph 18, which is the claims and defenses challenge period. The challenge period has been changed from the

order that was filed from a 30 day period to 60 days from the date of selection of counsel by the creditors' committee try. And again, before your Honor took the bench

the U.S. Trustee asked us to make a change and extend the challenge period to 75 days in the event a committee was not appointed. agreed do so. Your Honor, we did clarify, at the request of Mr. Sage, in several provisions of the cash collateral order that certain provisions come into effect if the final order approved by the court so provides. So we made that We will have to make that change, and we've

language change to make it clear that a 506(c) waiver, a lien on avoidance actions, payment of the 95 million dollars that's presently in the segregated account, all of that will only come into effect if the final order so provides. We've also provided that all notices and

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
reports provided to the collateral trustee or the note holder group shall be provide to do a creditors' committee; that was also a request. And finally before your Honor

took the bench there was a request by counsel for MHR, that we change the language in paragraph 28, which is the no modification or stay of the order, that we provide notice and an opportunity to object before there's any modification, and we have agreed to do so. Your Honor, we would request entry of an interim cash collateral order; it's obviously critical for the ongoing operations of this company. What I neglected

to mention when I said we are sort of a small over leveraged company that has about 270 employees, and 9principally we don't make widgets, we are not a retailer, we review computers, we review games, we have one magazine that's continuing, it's The Print, and Print has been suffering because the internet has been dominant. We have

a bunch of websites and have a bunch of people that write and provide content on those websites. So I think our

assets are a bunch of people that come into and go to work every day and, this is critical that we get this type of relief this morning. Thank you. MR. KORNBERG: Alan Kornberg, Paul, Weiss,

Rifkind, Wharton and Garrison LLP for the note holder group

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
that the debtors' counsel referred to as Mr. Thomas mentioned. That group, which consists of seven members,

holds approximately 80 percent of the secured indebtedness. And as Mr. Thomas explained both that secured debt and the note held by MHR, the secured note, jointly share a first lien position in all of the debtors' assets. Your Honor, we are comfortable with the form of the adequate protection and cash collateral arrangements that Mr. Thomas described. They were Again,

obviously the subject of extensive negotiation.

just by way of background because I think you will hear more about this, the way the prepetition documents work is that the collateral trustee, which is represented in court today, takes direction from the holders of 51 percent of the secured debt obligations so that the group that we represent is in a position to and has been in fact directing the collateral trustee with respect to the various matters affecting the collateral only. Obviously

each creditor can represent its interest as the holder of a claim. But has as to the collateral, the actions and

inactions of the collateral trustee, that is subject to 51 percent direction, and our group does comprise, as I said, approximately 80 percent of the secured debt. So we are fine with the form of the order subject to reviewing the actual language changes that the

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

32 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
debtor has proposed. MR. FISCO: Your Honor, Michael Fisco of

Faegre and Benson on behalf of US Bank National Association as collateral trustee. We also agree with the entry of the order and the provisions and we think they are fair and reasonable under the circumstances of this case. MR. SAGE: Michael Sage, your Honor.

Several points on the order, but before I get there I want to make an overriding point. As Mr. Thomas accurately

described the fact that we have had disagreements about the value of the company, he said that he thought that the value was in line with the secureds' view effectively, and different than our view, and I would only ask that the court give -THE COURT: recap that argument. Did I mishear them? Let's

I thought I heard there's a one

hundred million dollar difference between two groups but that the debtor came up with an opinion that valuation is 140 to 150 million. MR. SAGE: THE COURT: MR. SAGE: THE COURT: Yes, your Honor. Is that correct? That's what he said. Well, it doesn't sound like

that's an agreement with the secured debt.

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
discovery. THE COURT: I've just gotten through with a It got MR. SAGE: You have it right, your Honor.

It's certainly closer to the view that we have to the view that we have. My only point was not to litigate that now, I was only

it's not really possible, there's no record. making the comment that his view on value -THE COURT: and litigate it right now?

Why won't don't we save time I'm perfectly happy. I think

we'll get right through and get to the heart of this thing and get in and out one way or the other. MR. SAGE: Well we would like to take

very, very heavy intense area of valuation.

compressed over a fairly short period of time, and it took a much shorter period of time to get it worked through. And I'm prepared, having had some background now, to rush into valuation. You folks have been have been playing with this for the better part of six months so you have a pretty good idea and you know where you are coming from. I don't

think that I need great deal of education to be brought up to speed. MR. SAGE: We also welcome to the

opportunity to do that quickly as well. THE COURT: Fine. Let's have a valuation

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
that. THE COURT: Then let's get rid of the hearing as soon as I get a copy of all your reports. MR. THOMAS: Your Honor, we would welcome

nonsense in this case, and that will cut back on all of the out of court maneuvering, buying and selling of claims and positions and get it kind of focused. MR. THOMAS: Your Honor, we will, if need As the debtors,

be, give a valuation, a motion under 506.

we are a complete stake holder here, your Honor; the equity is getting nothing, the equity realizes it. So we will try

to move forward as quickly as possible, and I think a deadline for valuation hearing might bring some clarity to other people's views on how they might compromise the situation, but we welcome that, your Honor. MR. SAGE: Thank you.

Your Honor, with respect to

order itself we have negotiated with counsel beforehand but did not reach settlement agreement with five different points. I want to raise, if I may. THE COURT: MR. SAGE: Sure. The first point is in paragraph

E, Roman 10, which is on page 8 and 9 of the black line that your Honor has. We had made a first point that was

accepted in the first sentence of Roman 10 that rather than trying to describe the indenture for what it says that we

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
just reference the indenture itself, say that the subordination is as provided in the indenture. The second and third sentence of Roman 10, again, though, try to describe subordination and describe who can rely on it, et cetera. And we just felt that the

indenture says what it says and there's really no reason to summarize the indenture in this order because it doesn't serve any purpose, it says what it says. So the change

that we would like is to strike out the second and third sentences of Roman 10. And we have a similar point in Roman 11 where it talks about what section 410 of the indenture provides. It says what it says. We don't, again, need in

this order to regurgitate or restate without saying everything what the indenture provides. Again it was the

comment we had in the first sentence of Roman 10 as well. MR. THOMAS: at a time, your Honor. On behalf of the debtors, and I'm not sure if you are looking at the black line, but if you are looking at the black line on page 9, romanette 11. I We might as well take it one

thought we had made the changes that Mr. Sage had requested because it basically just says section 410 of the subordinated notes and indenture provides for, among other things, the application of certain net proceeds of asset

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

36 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Mr. Sage. MR. KORNBERG: Absolutely. But these sale to the senior secured debt, and we deleted all of the language that I thought was objectionable. I think that is

a pretty plain vanilla citation basically to a section of the indenture. With respect to romanette 10, I don't have a problem striking the last two sentences. Mr. Kornberg. MR. KORNBERG: Well, your Honor, we can I leave it to

waive your time however people want to try and do that. This is just paraphrase what the indenture says. care if it's in or out because -THE COURT: Well then let's chalk up one to I don't

debentures are deeply, deeply subordinated to pay from cash, so if he wants to take it out of this agreement it's not going to change that. MR. SAGE: THE COURT: Is it is what it is. And I agree with the debtor

with respect to the next paragraph, I believe that the statement, among other things, is put in there that leaves it broad enough. You lose on that one, Mr. Sage. MR. SAGE: Okay.

In paragraph six, your Honor, I have asked Mr. Thomas to explain this to me a few times, and maybe I

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
don't understand it, maybe it's my failing, but this seems to say to me, this is in reference to the spending of the money that funds the case. And it says the that the

debtors shall be obligated to compensate the trustee in an amount equal to the amount by which the value of the remaining net proceeds and cash collateral diminishes during the term of the order. And what I don't understand, and I need to have it explained again, and I would like the court to understand and make sure that we are all on the same page is whether this means that if they spent let's say 10 million dollars to run the case, does that result in an increased claim by the secureds in an amount of 10 million dollars? I read this as that being possible, but I don't believe that's the intent. So I guess, you know, it

goes to whether this is like DIP lending, or whether this is just money that's going to fund the case; I don't understand it still. MR. THOMAS: Your Honor, I will try again,

but I don't think I'll succeed because I've tried to explain this. Paragraph 6 provides defined term adequate Okay. And it includes an amount

protection obligations.

equal to the amount by which the value of the remaining net proceeds, that's our segregated cash, diminishes during the

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

38 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
term of this order by our use. So if we spend 17 million

dollars of cash collateral, which we will be requesting at the final hearing, your Honor, that 17 million dollars is sitting in a segregated account today and would otherwise be available to pay down the claims of the senior secured note holders. We've asked and they have agreed that that money can stay behind, not pay down their claim, and be consumed by us in the operation of the business. And the

consumption of that money will give rise to an adequate protection obligation in paragraph 6. And then if we go, your Honor, to page 19, paragraph 5, at adequate protection liens, what that sentence makes clear, the first sentence, is adequate protection to secure the "adequate protection obligations" which is our consumption of 17 million dollars, the collateral trustee is granted a perfected replacement security interest in and lien on, and that's defined as the adequate protection lien "all postpetition collateral." So

what happens is when we spend that 17 million dollars, the collateral trustee gets a 17 million dollar lien on postpetition collateral. And, your Honor, that makes perfect sense to me, because the alternative would be instead of tendering 95 million dollars in a segregate account and

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
in paragraph 8. keeping 17 that we consume, we would tender all the money, the secured noteholders would pay down their debt and then maybe give us a 17 million dollar DIP loan. And that DIP So you We are

loan would then be secured by postpetition assets. get to the same place, but it's cash collateral.

not paying down the debt, so they are entitled to a claim for their collateral that we are keeping and we are going to spend to operate the business, and that claim should be secured by postpetition assets as adequate protection. And

the same result would happen if we gave them all the money and they loaned it back. the issue here. THE COURT: Well, very frankly, now that So I have not been able to see

you explain it, when I read that paragraph I came to the same conclusion. I just wondered if it requires further

explanation, which I just received, as to how it works. But I did understand or comprehend from the language that's in the paragraph that this was a lien that arises as a result of the diminution of those funds, which is what Mr. Sage is seeking clarification on. suffices. MR. THOMAS: MR. SAGE: Thank you, your Honor. Your Honor, my next comment is I think this record

Paragraph 8, and this was discussed with The

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

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
debtors seek the authority to pay the trustee and the noteholder groups' legal fees. Two comments. One, I don't understand how

this works with 1129(a)(4) which requires the court to approve the payment of all professional fees before confirming a plan. But even putting that aside, because I

know that courts often do this with secured lenders, but even putting that aside, I would think there would be some notice period or some provision of advanced notice similar to what is contemplated with respect to the ordinary course professionals who are hired and the other ones in the later motion that we will hear this morning. And my point is I would think that before they just pay themselves out of the collateral that they would actually submit invoices to the U.S. Trustee and the committee and the supporters, or some sub group that can take a look at the proposed fees, comment, object if necessary. And that's, again, putting aside whether it's

even appropriate at all without court approval under 1129(a)(4) of the Code. MR. THOMAS: Kornberg, your Honor. paying their fees. Well I'm looking at Mr.

Let the record reflect we will be

Our fees will be subjected to intense

scrutiny, and I'm sure that the fees that are incurred by Mr. Kornberg's firm will be fair and reasonable. If there

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

41 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
reasonableness. has to be a notice, we don't have an objection. MR. KORNBERG: Your Honor, I think this is,

and we are happy to give an official committee copies of our statements. by the estate. We are not being retained as professionals I don't think we need to go through a more

elaborate process, but we are happy to give a committee copies of our invoices, and I'm sure if there are any disputes concerning the reasonableness of those fees your Honor will hear about them. THE COURT: That's the key term,

And there has to be some transparency with

respect to the receipt of those fees so that the reasonableness factor can be exposed to comment by all. MR. KORNBERG: And, your Honor, as I said,

we're happy to share our monthly bills with the committee counsel when they are appointed, and of course with the debtor. And if there is an issue as to reasonableness I'm

sure your Honor will be involved in resolving that. MR. SAGE: I only have one more comment,

your Honor, and it applies to two sections at the same time, and that's 14 A and B on page 26 of the black line. That section says if there's an asset sale that the proceeds get applied to the secured debt. And while I understand that might be what happens, I don't understand why this should be resolved

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

42 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
today. I would think that if there's an asset sale out of

the ordinary course, which both of these paragraphs envision, that the application of proceeds would get resolved here today or at the plan confirmation time as opposed to pre-wired today. MR. THOMAS: Your Honor, my only comment on

that was for this interim order it specifically provides that these are sales "out of the ordinary course" which are going to require your Honor's approval anyway under 363. We are not contemplating any sales. If we were to do a

sale outside the ordinary course we would have to come before your Honor to get approval. And I would suspect

that part of that approval would be the disposition of the proceeds generated. I thought this was a provision that would be just fine in the interim order, and if need be we can discuss it with the committee when we enter into a final order. THE COURT: I think that's appropriate.

It's clear that out of the ordinary course sales would be subject to comment, scrutiny and appropriateness at the time they take place. MR. THOMAS: THE COURT: Thank you, your Honor. Thank you for your comments,

Mr. Sage, they were very, very eloquent.

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

43 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
MR. SAGE: Thank you, your Honor. Good morning, your Honor.

MR. MASUMOTO:

Brian Masumoto of the U.S. Trustee's Office. Your Honor, as we were going through this, I noticed a provision that we had raised with the debtor's counsel last week but prior to the hearing I neglected to mention. On the red line copy, which is part of paragraph

12 on page 25, there's a provision in the carveout section that indicates that obligations provided for under the carveout shall be added and made a part of the prepetition secured senior debt obligations. I just wanted to some clarification. One

is whether or not any portion of the prepetition amount will be subject to any postpetition interest. The

provision of adding carveout amounts to a prepetition debt is not one that I normally see or notice. So I did want

some clarification as to the intent and the effect of this provision. If there's interest payment on postpetition

interest being paid, then this would be increasing the amount of those postpetition payments. MR. THOMAS: Your Honor, the debtors are

happy that there is not a provision for payment of postpetition interest as any part of this cash collateral adequate protection order. So there are no payments of

postpetition interest on account of the prepetition secured

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
debt. With respect to the addition, again, this is cash collateral that presently is sitting in a segregated account and could be used to pay down the secured debt and then readvanced as a debtor in possession loan. Instead it's being held back. We will consume it,

and part of the consumption will be payment of professionals fees. Whatever is consumed is still the

collateral of the senior secured note holders, and it's not being used to pay down their debt, so it should be part of their claim in the event that they don't recover their claim. So I think this provision is appropriate in these The money is fungible, we either have to

circumstances.

pay down their debt or, if we use it all, it's part of their claim. THE COURT: This all really comes into play I

at the time of the final hearing on cash collateral.

don't have a problem with leaving it in the way it is now. MR. STAMER: THE COURT: MR. STAMER: Good morning, your Honor. Good morning, Mr. Stamer. For the record, Michael Stamer

and Mary Masella from Akin Gump Strauss Hauer and Feld here on behalf of MHR Capital Partners 100 L.P. and four affiliated funds. Your Honor, we represent five affiliated

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

45 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
stand for? MR. STAMER: I believe it's the initials of It is funds that hold basically all of the new notes as they have been described. The new notes are approximately 23 million It is true

dollars of principal and accrued obligations.

that the either this MHR fund or other MHR funds, frankly I don't know which for sure, hold -THE COURT: What do the acronym of the MHR

the principal founder of the fund, Mark H. Rachesky. true that they in fact own other indebtedness in this

capital structure, I believe they do own 48 or 50 percent of the unsecured notes, but I'm not here for that. I don't

represent them in that capacity, that's not what we are talking about. The senior notes, again there are basically two tranches of secured -THE COURT: Everybody is looking at you

with either two heads or two hats no matter what you say. MR. STAMER: Is it my tie, your Honor?

There are two tranches of secured notes, secured obligations, the floating rate notes as they call it, and the new notes that I'm representing MHR in connection with. The new notes are first priority -THE COURT: Does anybody somebody else

represent MHR in connection with the other interests?

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

46 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
represents them. MR. STAMER: MR. SAGE: committee, your Honor. MR. STAMER: The secured notes are first Understood, your Honor. They are part of the ad hoc MR. STAMER: answer to that question. I frankly don't know the

I believe MHR is involved on an

ad hoc committee, but again, your Honor, that's not my issue. THE COURT: I'm just trying to find out who

lien, first priority secured obligations, they are secured by substantially all of the debtors' assets, and they are pari passu with the floating rate notes. they are entitled to adequate protection. What is being created here through this adequate protection stipulation is basically two tiers of adequate protection which, based on where we are in the case and the record before your Honor, there is no justification for. It is true that we made some progress As secured notes

with Mr. Thomas in connection with accepting some comments to the adequate protection stipulation. There are three

principal areas that we did not, three principal concerns we have, and it is on this basis that we object to the entry of the interim order. Clearly, your Honor, the burden is on the

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

47 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
debtors to establish that we, as secured creditors, are in fact adequately protected. that burden. Honor: First, as alluded to by Mr. Thomas, not withstanding that the ad hoc committee is in fact being paid for their legal and financial advisory fees as part of their adequate protection package, the new notes, notwithstanding the size, and I fully acknowledge that it's 23 million dollars, they are a separate note issue with their own rights under their underlying documents. And They have failed to satisfy

The three differences are as follows, your

clearly, your Honor, the ad hoc committee, neither the ad hoc committee nor the collateral trustee is looking out for the new note holders best interest. Quite to the contrary,

your Honor, the fact that you have two tears developed here in the adequate protection is proof positive that they are not looking out for the best interest of the new note holders. THE COURT: MR. STAMER: THE COURT: Let me ask you Mr. Stamer. Sure, your Honor. I'm distilling your arguments. Yes? There

This is just a pitch for fees. MR. STAMER: are two other issues. THE COURT:

It is not, your Honor.

You don't want fees?

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

48 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
your Honor. THE COURT: MR. STAMER: Thank you. You're welcome. Stamer. MR. STAMER: This argument is about fees, MR. STAMER: Your Honor, it is an argument And Mr. Sage is

that relates to adequate protection.

right, that you see all the time that secured creditors are in effect paid fees for adequate protection, but this is a separate pari passu note issue with clearly its own independent issues. THE COURT: This is all about fees, Mr

The second difference we have, your Honor, relates to information. And the information is, although

we are entitled to receive the budget and certain reports as it relates to the budget, the ad hoc committee is able to ask for back up information to better understand the budget and the actual compared to the budget and we are not. Again, as we've said, there is a limitation on

reasonableness so that reasonable requests by the ad hoc committee will in fact be granted by the company or not. We just are not even given that ability to ask that, your Honor. The third, your Honor, and from our perspective the most important, deals with paragraph 18 of

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

49 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
the adequate protection order. And, your Honor, virtually

all Chapter 11 cases where in fact you have the debtors utilizing the cash collateral of a secured creditor, there are fairly standard provisions. something like this: And the provisions go

Neither the company nor anyone else

can utilize our cash collateral for purpose of suing us, provide, however, cash collateral can be used for a limited time to allow people to investigate claims, and if in fact they find claims they need to be asserted within a certain period of time, here it's a 75 day window under certain circumstances. And our concern, your Honor, is over our objection what the cash collateral orders proposes is to not only reserve the debtors' right to utilize cash collateral to sue us, but it's effectively a carveout from the very provision that is a very significant part component of adequate protection being provided to the other similarly situated secured creditors. Your Honor, based on where we are in the case, based upon our entitlement to adequate protection, the same as anyone else's entitlement, the same as the other secured creditors' entitlement to adequate protection, your Honor, we object to the entry of the order in this form. Thank you, Judge.

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
MR. THOMAS: Your Honor, I'm not going to

start with the fees, I'm going to start with the adequate protection. Basically, as set forth in our motion, we

believe there is adequate protection being provided to all of the secured note holders based upon use of cash collateral which enables this debtor to operate as a going concern. This debtor does not have tangible assets,

accounts receivable, inventory, owned real estate, machinery, equipment, any tangible assets that come close to the 245 million dollars of secured debt. This debtors' value is operating as a going concern, generating revenue, and generating positive cash flow and earnings before interest, taxes, depreciation and amortization. So we are providing adequate protection by

operating as opposed to liquidating. The other issue is Mr. Stamer's client, Mark Rachesky of MHR, as the holder of 50 percent of the junior unsecured bonds contended prior to this bankruptcy proceeding that this company was worth more than 300 million dollars. So his client contends there is a massive

equity cushion here that would provide adequate protection. He's not in court, but that's why we are in court because we couldn't get that number down to his number or anywhere close. And if he was in court and if he was consistent

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

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

51 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
that there is a massive equity cushion here that provides an adequate protection. And we aren't paying interest on

the notes on the secured debt and we are happy with that. With respect to the fees, all professionals should get fees, but not Mr. Stamer in this circumstance. He is a 10 percent dissident secured note holder in a group that in number and amount is sufficient to control the collateral trustee who makes the determinations regarding the use of collateral, which use of collateral would include paying the fees. So that group and the collateral

trustee does not want their collateral proceeds used to paid fees of the dissident secured lender. Moreover, that dissident secured lender is 50 percent of our unsecured bond debt, may end up sitting on the creditors' committee, we will know come Friday when the organizational meeting occurs. But I think the

indenture provides a provision why the fees shouldn't get paid. And if your Honor would authorize this, who knows

what other minority potential secured creditors would show up when they are, in essence, bound by a class that can deliver their vote and deliver the ability to use cash collateral, I just don't think it's appropriate here. With respect to the backup information, we're made it clear, whatever information we provide to the collateral trustee and to the add hoc note holders group we

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

52 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
be heard? MR. STAMER: quick clarifying comments. Your Honor, just two very First with respect to the fees, will provide to Mr. Stamer. We are not willing to give

them sort of a mechanism as a secured creditor to a cash collateral order to obtain informal discovery as an unsecured note holder. And actually, your Honor, we have a

data room that they have had access to, but we think enough is enough. made. THE COURT: Does anyone what else want to We don't think any of the changes should be

and I'm sorry to go back to the fees, we are not looking for the payment of fees for anything other than it relates to the secured piece. the secured piece -THE COURT: I don't want to cut you short, Again, our engagement is limited to

Mr. Stamer, but it seems to me, based upon this colloquy, and you haven't shown me otherwise, your position is a conflicting one, or your client's position is a conflicting one, and it's a straddling one for us in several areas in this case. I am not going to prejudge whether you are entitled to be, or your client is entitled to be on a creditors' committee or not, that's for the U.S. Trustee initially to discuss. But the economic and other

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
cash collateral. THE COURT: Are we going to go further or interests, legal interests of your client straddle all areas in this case. I frankly do not see that it is

appropriate to treat your client as separate and distinct with respect to its interest, or his interest in, or their interest in the secured creditor tranche, that's ably being taken care to this date so far, by counsel to this ad hoc committee. If your client is willing to pay your fees

separately, that's fine. Right now I see you in somewhat of a conflict of interest, and I don't think that the estate has or should be supporting your parochial position in this case at this time. MR. STAMER: THE COURT: Thank you, your Honor. You're welcome.

Anything else? MR. THOMAS: Nothing else, your Honor, on

are we going to talk a little bit about a dooms day scenario of the final hearing on cash collateral. Is it my

understanding that all parties here intend to push the issue of valuation at or prior to that date, or that date is now kind of set for a distribution date to senior secured creditors, or is that distribution possibly to be put on hold while we do the valuation dates?

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

54 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
the provision -THE COURT: No, with respect to the final MR. THOMAS: Your Honor, on behalf of the

debtors, we spoke to your clerk and tentatively penciled in, I believe, March 27th as a continued hearing date on many of the interim orders that we are getting today. With respect to the valuation hearing and

hearing on cash collateral, which essentially comes out to be maybe the same thing. MR. THOMAS: Your Honor, I don't really --

we don't truly believe that the distribution of the segregated cash is akin to the valuation hearing, because everyone has always been talking about the valuation of the entity on a debt free basis without the segregated cash. The segregated cash is something that a committee has the opportunity to investigate, and if they find that the senior secured note holders and the collateral trustee did not hold a perfected security interest in or a lien upon that. THE COURT: Well, your proposed order

provides for distribution of that fund at the date of the final cash collateral order. MR. THOMAS: MR. KORNBERG: Yes, it does, your Honor. Your Honor, if I may. The

cash in the segregated account are proceeds of the

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

55 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
confirmation. is -THE COURT: The way you've painted all of collateral -THE COURT: I want to know if I have a lot

of work to do in the next couple of weeks, or you folks are going to go through your traditional dance and we will then come to some appropriate way of dealing with this and within an appropriate amount of time before it happens. MR. KORNBERG: Your Honor, I think this

this in your papers and in, as I look at it, it contains drop dead features with respect to this. MR. KORNBERG: We are on a fast track to

Obviously there have been months of

negotiations, which Mr. Thomas described, with various creditors. It would seem to me that, and I believe the

plan is to promptly file a plan and disclosure statement, a valuation should and could be addressed in that context. We think that would be appropriate, and that will be, I think, up in short order, although not as quickly as the final cash collateral order, the hearing date. MR. THOMAS: Yes. Your Honor, and we

believe that the -- your Honor, when you say you have a lot of work do, we would prefer to have everyone focused and the work to be done on the valuation issue. We are going

to file a plan and disclosure statement in very short

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

56 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
212-267-6868
may. order, probably in the next week or two. It will set forth

our view of value and how, in essence, the secured debt is being converted to equity. The cash collateral issue I do not believe is integral or even a part of the valuation dispute that the parties have been discussing. THE COURT: But distribution is

contemplated to take place immediately following cash collateral. MR. THOMAS: MR. SAGE: Yes, your Honor. Your Honor, a quick remark if I

Two things; one, the change that we made to the

order, a consistent change that we made that was described earlier by Mr. Thomas was that that distribution will only occur if the order authorized it. And we didn't want to

prejudge that issue today because it's possible that the court will decide that paying 95 million dollars on a secured claim pre confirmation is not appropriate; maybe the court will decide it is appropriate, but regardless, that wasn't for today. A committee hasn't been appointed

yet and we thought that issue could be decide at the final hearing on March 27th I guess it is. THE COURT: THE CLERK: MR. SAGE: Una, is it March 27th or 26th? The 26th is Calpine fees. I do agree with Mr. Thomas in

VERITETEXT/NEW YORK REPORTING COMPANY 516-608-2400

57 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
wage motion. granted. MR. THOMAS: MR. STAMER: Thank you, your Honor. Your Honor, could we just collateral. else? MR. THOMAS: Nothing, your Honor, on cash that it is not an integrally related issue to valuation, but it may not be -THE COURT: Very well. Is there anything

We would request authority to submit, after we

clean up the order to reflect some of the changes that were discussed before your Honor took the bench, and we would ask your Honor to enter the interim cash collateral. THE COURT: MR. THOMAS: THE COURT: Very well. Thank you, your Honor. As modified the request is

request that we see the copy before it's submitted, the revised order? MR. THOMAS: We will do that, your Honor.

Your Honor, the next matter on our agenda is docket number 13, which is the motion of the debtors for an order authorizing the payment of prepetition wages. Your Honor, it is your standard employee It covers wages, deductions, withholding, It covers two things

payroll taxes, expense reimbursement.

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

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

58 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
actually one. It covers a non management sales incentive

program, which is the program that's been in effect for years, ordinary course, not adopted in conjunction with bankruptcy. What the U.S. Trustee has asked is pursuant to Rule 6003, the new rule, that whatever order we submit be an interim order, and we've agreed to that. It

provides, though, for what is called the management incentive plan. The management incentive plan is another

plan that has been in place for years, ordinary course, and it provides for incentive payments to senior management based upon actual metrics of performance as opposed to just sitting around and, you know, staying on the job. And in the ordinary course, the 2007 management incentive bonuses are determined and paid in March of the subsequent year. So really that claim becomes

fixed, liquidated and allowed in March of '08 on account of 2007 actual performance after the books and records of 2007 are closed. What we've told the United States Trustee is that in connection with the interim order we would agree that no management incentive plan payments would be made to three insiders who otherwise would be covered by this program, and we would put that off until final hearing until a committee is appointed so we could explain the true

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

59 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
is approved. MR. THOMAS: THE COURT: Thank you, your Honor. I note that the 2007, the nature of this program. And the three insiders that would

ordinarily be covered by the management incentive program are the CEO, the chief executive officer, the chief financial officer, and the general counsel who is also the secretary. So what we would like is an interim order entered granting the employee wage motion set for final hearing with the other matters that will be continued, and we will make clear, I think, on the record that there will be no management incentive payments made to the insiders pending further order of the court. THE COURT: Does anyone want to be heard?

Under those circumstances the application

numbers for payment for March of 2008 are already liquidated and fixed; is that correct? MR. THOMAS: Your Honor, they are actually

still being liquidated because the 2007 books haven't been finally closed, but it's anticipated that in the next week or so they will be actually fixed. that it will not be -THE COURT: It's an approximation that has The motion does say

a limitation on it of some 600 thousand.

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
this time? MR. THOMAS: It was paid for quite a long MR. THOMAS: We will abide by that. THE COURT: MR. THOMAS: Very well. Your Honor, the next motion is That is correct, your Honor.

docket number 18, the motion of the debtors for an order authorizing the debtors to reject an unexpired lease of real property. Your Honor, these premises were vacated by the debtors in 2002, and the landlord has taken possession. I actual spoke to Mr. Oliver Larson who is counsel for the landlord, he called me on Friday. He understands from the

order that what we are seeking is, in effect, an order authorizing rejection effective as of the petition date. We will provide notice to the landlord, and they have 15 days to object to rejection, although frankly under the facts I see no grounds to object. THE COURT: Has rent been paid during all

time after the premises were vacated in 2002, but it hasn't been paid probably for close to a year now. THE COURT: substantial claim. MR. THOMAS: It will be, yes, as capped by So that will be a very

the Bankruptcy Code it will still be a substantial claim.

VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400

61 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400
by this order. MR. THOMAS: Thank you. Honor. MR. MASUMOTO: MR. KORNBERG: THE COURT: Thank you, your Honor. Thank you, your Honor. your Honor. MR. THOMAS: Thank you for your time, your Honor. THE COURT: Anything else?

The application is granted. MR. THOMAS: MR. MCGUIRE: Thank you, your Honor. We have nothing else, your

The only other things up are the retention

applications, and we are requesting a hearing date for those, and presumably we can set those on the 27th with the other matters that we will be bringing on that day. THE COURT: MR. MCGUIRE: Very well. That will be all. Thank you,

Subset the orders as modified

62 1 2 3
STATE OF NEW YORK } } ss.: C E R T I F I C A T E

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

COUNTY OF WESTCHESTER

}

I, Denise Nowak, a Shorthand Reporter and Notary Public within and for the State of New York, do hereby certify: That I reported the proceedings in the within entitled matter, and that the within transcript is a true record of such proceedings. I further certify that I am not related, by blood or marriage, to any of the parties in this matter and that I am in no way interested in the outcome of this matter. IN WITNESS WHEREOF, I have hereunto set my hand this ________ day of _________________, 2008.

Denise Nowak ___________________________
Digitally signed by Denise Nowak DN: cn=Denise Nowak, c=US Reason: I am the author of this document Date: 2008.03.26 16:12:35 -04'00'

DENISE NOWAK

21 22 23 24 25
VERITETEXT/NEW YORK REPORTING COMPANY 212-267-6868 516-608-2400