================================================================= ADELPHIA BANKRUPTCY NEWS Issue Number 6 ----------------------------------------------------------------- Copyright 2002 (ISSN XXXX-XXXX) May 31, 2002 ----------------------------------------------------------------- Bankruptcy Creditors' Service, Inc. 609-392-0900 FAX 609-392-0040 ----------------------------------------------------------------- ADELPHIA BANKRUPTCY NEWS is published by Bankruptcy Creditors' Service, Inc., 24 Perdicaris Place, Trenton, New Jersey 08618, on an ad hoc basis (generally every 10 to 20 days) as significant activity occurs in the Debtors' cases. New issues are prepared by Danilo R. Munoz, Jr., Vince Brandt and Peter A. Chapman, Editors. Subscription rate is US$45 per issue. Any re-mailing of ADELPHIA BANKRUPTCY NEWS is prohibited. ================================================================= IN THIS ISSUE ------------- [00042] DEBTORS' MOTION FOR OPEN-ENDED LEASE DECISION DEADLINE [00043] DEBTORS' MOTION TO PAY PREPETITION CRITICAL VENDOR CLAIMS [00044] DEBTORS' MOTION TO SELL ACCOUNTS TO BELLSOUTH FOR $750K [00045] DEBTORS' MOTION TO OBTAIN $135,000,000 OF DIP FINANCING [00046] DEBTORS' APPLICATION TO EMPLOY JEFFERIES AS ADVISOR [00047] COMMITTEE'S APPLICATION TO HIRE EYCF AS FINANCIAL ADVISOR [00048] TSI'S MOTION TO COMPEL DEBTORS' DECISION ON CONTRACT [00049] COMMITTEE'S APPLICATION TO RETAIN KRAMER LEVIN AS COUNSEL [00050] LUCENT'S MOTION TO COMPEL DEBTORS' DECISION ON CONTRACT [00051] DEBTORS' MOTION TO REJECT 58 UNEXPIRED LEASES KEY DATE CALENDAR ----------------- 03/27/02 Voluntary Petition Date 04/16/02 Deadline to provide Utilities with adequate assurance 06/10/02 Deadline for filing Schedules of Assets and Liabilities 06/10/02 Deadline for filing Statement of Financial Affairs 06/10/02 Deadline for filing Lists of Leases and Contracts 06/25/02 Deadline to remove actions pursuant to F.R.B.P. 9027 07/25/02 Expiration of Debtor's Exclusive Plan Proposal Period 09/23/02 Expiration of Debtor's Exclusive Solicitation Period 03/26/04 Deadline for Debtor's Commencement of Avoidance Actions 03/26/04 Expiration of ACC-Backed DIP Financing Facility Deadline to make decisions about lease dispositions Bar Date for filing Proofs of Claim First Meeting of Creditors pursuant to 11 USC Sec. 341 ----------------------------------------------------------------- [00042] DEBTORS' MOTION FOR OPEN-ENDED LEASE DECISION DEADLINE ----------------------------------------------------------------- The Debtors sought and obtained an extension of the date by which they must decide to assume, assume and assign, or reject their nonresidential real property leases. The Debtors don't have to make those decisions until the date on which an order is entered confirming a chapter 11 plan in these cases. This extension is without prejudice to the right of any lessor to come to Court and request that the deadline be shortened with respect to a particular Unexpired Lease. According to Judy G.Z. Liu, Esq., at Weil Gotshal & Manges LLP in New York, the Debtors are parties to hundreds of unexpired nonresidential real property leases. Since the Commencement Date, the Debtors' and their professionals have been working diligently to stabilize their operations and address a vast number of administrative and business issues that understandably arise as a result of the chapter 11 process, while at the same time operating their businesses on an ordinary course basis. The Unexpired Leases relate to office space, spaces to house switching equipment, collocation agreements, telecommunications equipment and network assets, and telecommunications huts, where the Debtors keep regeneration and telecommunications equipment for their network. Until the Debtors have had a full opportunity to determine whether their multitude of leases will continue to contribute to their reorganization, Ms. Liu submits that the Debtors must necessarily treat the Unexpired Leases as potentially valuable assets of the Debtors' estates that may be integral to the continued operation of their businesses. The Debtors' offices and equipment storage facilities are a crucial part of their continued operations. Without office space, and premises from which to operate their telecommunications equipment, the Debtors would be unable to conduct their business or provide their customers with their telecommunications service. Given the multitude of Unexpired Leases that require review, Ms. Liu contends that the Debtors are simply unable to make reasoned decisions as to whether to assume or reject all the Unexpired Leases within the 60-day period specified in Section 365(d)(4) of the Bankruptcy Code. The Debtors do not want to forfeit their right to assume any Unexpired Lease as a result of the "deemed rejected" provision of Section 365(d)(4), or be compelled to assume all such Unexpired Leases within that same period in order to avoid rejections, with the resultant imposition of potentially substantial administrative expenses on their estates. Adelphia makes its clear that: A. In compliance with Section 365(d)(3), the Debtors fully intend to remain current with respect to all outstanding postpetition obligations under the Unexpired Leases. B. Although the Debtors' lessors may be inconvenienced by any extension that this Court may grant, an extension of a debtor's time to assume or reject its unexpired leases of nonresidential real property is appropriate when such extension has "for all practical purposes, only an administrative rather than a substantive effect" and merely shifts "the burden of coming forward - not the burden of persuasion - to the property owners." Ms. Liu asserts that the Unexpired Leases, which are still undergoing a review, are without doubt potentially the Debtors' most critical assets and are integral to the Debtors' reorganization. The Debtors cannot successfully operate their businesses without the continued use of the properties underlying the Unexpired Leases. The Debtors' businesses are largely dependent on providing their telecommunications services to their customers. The loss of the leased premises to house the Debtors telecommunications equipment or the office space would severely impair continued operations. Moreover, the Debtors' careful evaluation of their Unexpired Leases and their determination as to which facilities to continue using is important to a successful reorganization of their businesses. Ms. Liu points out that the Debtors have hundreds of Unexpired Leases. Although the Debtors are currently diligently evaluating the Unexpired Leases -- indeed, they have already filed a motion to reject 58 of the Unexpired Leases -- the large number of Unexpired Leases the Debtors must review make it essential that the Debtors have adequate time to carefully evaluate the value of each of the Unexpired Leases to the Debtors estate. Such careful evaluation will require more than the sixty-day period provided for in Section 365(d)(4) of the Bankruptcy Code. For the Debtors' determination to assume or reject each Unexpired Lease to be a reasoned and informed one, Ms. Liu believes that it must be made in the context of a long-term business plan that will form the basis for a workable plan of reorganization. At this juncture, the Debtors have not yet finalized the arrangements with respect to the proposed debtor in possession financing. Moreover, the Debtors are still in the process of finalizing and implementing a revised business plan. The business plan currently contemplates the consolidation, downsizing, or closing of certain of the Debtors' markets and as such, will have a significant impact on the Debtors' decision to assume or reject the Unexpired Leases. With neither the debtor-in-possession financing nor the business plan fully in place, it cannot be disputed that the Debtors have not had a sufficient opportunity to formulate a reorganization plan. As such, the Debtors cannot possibly determine whether or not to assume or reject the Unexpired Leases within the sixty-day period specified in section 365(d)(4) of the Bankruptcy Code. ----------------------------------------------------------------- [00043] DEBTORS' MOTION TO PAY PREPETITION CRITICAL VENDOR CLAIMS ----------------------------------------------------------------- According to Harvey R. Miller, Esq., at Weil Gotshal & Manges LLP in New York, as leading providers of facilities-based integrated communication services to end-users and other communication service providers throughout the United States, the Debtors rely heavily upon certain vendors whose expertise in performing billing services for the Debtors ensures a consistent revenue stream for their operations. Accordingly, in order to maintain and facilitate essential postpetition billing support on acceptable terms so that the Debtors may continue to operate their business without interruption, the Debtors seek authorization to satisfy the prepetition claims of two critical billing service vendors: * Electronic and Unit Record Datacenter, Inc. and * Creative Support Solutions, LLP. These vendors' services are essential to the Debtors' reorganization efforts, Mr. Miller says. Adelphia fears that failure to satisfy the prepetition claims of these Critical Vendors will result in the potential postpetition termination of their contracts, and render the Debtors unable to obtain timely payment from end-users and other service providers for the communication services provided by the Debtors -- which is the most critical component of their business operations. Such delay would have a significant adverse impact on the Debtors' postpetition liquidity position. The aggregate amount of the prepetition claims owed by the Debtors to these Critical Vendors is approximately $299,770.86. Electronic and Unit Record Datacenter Mr. Miller informs the Court that Electronic and Unit Record Datacenter is the Debtors' primary vendor for the preparation and delivery of invoices to the Debtors' retail customer base. This service includes end-user billing in the form of outsourced message processing, bill calculation, bill rendering, and mailing services. Essentially, Electronic and Unit Record Datacenter prepares the invoices that reflect the amounts due from the Debtors' customers for their monthly telephone service and use. For such billing services, Electronic and Unit Record Datacenter normally charges the Debtors a monthly amount based upon the number of customers and accounts it processes. Mr. Miller adds that Electronic and Unit Record Datacenter performs facilities billing services, which involves the preparation of invoices representing the amounts owed by other telecommunications service providers for the leasing of network space, and the exchange of traffic. The amount to be billed to the user of such facilities is calculated on a connection basis, which means determining the number of circuits used between the two end points along the Debtors' facility. For this service, Electronic and Unit Record Datacenter usually bills the Debtors based upon the following calculus: the number of circuits leased multiplied by a specific rate, plus the number of connections used multiplied by a specific rate. As of the Commencement Date, Mr. Miller states that the Debtors owed Electronic and Unit Record Datacenter $213,009.36 for services rendered. Absent payment of such amount, Electronic and Unit Record Datacenter is not willing to provide postpetition services to the Debtors. Under the terms of the agreement dated November 30, 1994 between Hyperion Telecommunications, Inc., a predecessor of the Debtors, and Electronic and Unit Record Datacenter, either party may terminate the Agreement by providing at least 90 days written notice prior to the end of any term. The present one-year term of the Agreement expires on November 30, 2002. Thus, absent the relief requested herein, Electronic and Unit Record Datacenter may provide a notice of termination on or about September 1, 2002, and the EUR Agreement would end by its terms on November 30, 2002. In this regard, EUR has agreed to forego such a right of termination through the confirmation of a plan of reorganization, provided that the relief requested herein is granted and the prepetition claims are paid. Mr. Miller contends that the payment of Electronic and Unit Record Datacenter's prepetition claims is critical to the Debtors' reorganization for two reasons. First, Electronic and Unit Record Datacenter renders its billing services for invoices amounting to $25,000,000-30,000,000 per month, which constitutes more than 60% of the Debtors' ongoing revenue stream. Second, it is estimated that it would take the Debtors up to 180 days or longer to secure a supplier of comparable services, replicate the EUR processes, and transition the data resident on the Electronic and Unit Record Datacenter platform to the new supplier. Such a delay would severely hamper the Debtors' reorganization efforts by jeopardizing the billing and collection of tens of millions of dollars of revenue. Creative Solutions As the Debtors' Carrier Access Billing management service, Mr. Miller submits that Creative Solutions performs a critical regulatory function by ensuring that the billing of switched access services and reciprocal compensation are reasonable and accurate. To identify potential problems, Creative Solutions analyzes and charts minutes of use trending, reviews the billing and pricing structures, and handles customer inquiries. Moreover, Creative Solutions ensures that all traffic is managed within the rules and regulations established by tariff, contracts, or industry regulations. On average, Mr. Miller avers that Creative Solutions bills the Debtors between $30,000 and $40,000 per month, which is based upon the number of invoices that Creative Solutions reviews and mails to customers on a monthly basis. The Debtors currently owe Creative Solutions $86,761 for prepetition amounts, which represents approximately two months of service on behalf of the Debtors. Absent payment of such amount, Creative Solutions is not willing to provide postpetition services to the Debtors. Under the terms of the agreement dated October 13, 1999 between the Debtors and Creative Solutions, Mr. Miller says that either party may terminate the Agreement by providing at least 60 days written notice prior to the end of any term. The present one-year term of the Agreement expires on October 13, 2002. Accordingly, absent the relief requested herein, Creative Solutions may provide a notice of termination on or about August 13, 2002, and the Agreement would end by its terms on October 13, 2002. In this regard, Creative Solutions has agreed to forego such a right of termination through the confirmation of a plan of reorganization, provided that the relief requested herein is granted and the prepetition claims are paid. Mr. Miller claims that the services provided by Creative Solutions are critical to the Debtors' reorganization efforts because the access and reciprocal compensation billing, which Creative Solutions manages and regulates, comprises approximately $15,000,000 of revenue per month. The Debtors estimate that it could take up to 3-6 months to find a replacement vendor with the same level of company-specific experience as Creative Solutions. In addition, as a result of the Debtors' already overburdened workforce and strained financial situation, these services cannot possibly be done in-house by the Debtors, and the Debtors do not believe that alternate vendors will present either a less costly or more efficient option for the management of the Debtors' billing system. The Need Mr. Miller maintains that the Critical Vendors provide essential billing services, the loss of which would lead to a severe disruption of a significant portion of the revenue streams of the Debtors' businesses. Without payment of the Critical Vendors' claims, the Critical Vendors are unwilling to continue providing essential billing services to the Debtors. Based on their substantial experience with the Critical Vendors, the Debtors believe that their contracts with them are at competitive rates and terms, and that continuation of business on the same or better terms would help stabilize the Debtors' business. The aggregate amount of the Critical Vendors' claims, estimated not to exceed $299,770.86, is insubstantial in comparison with the value that the Debtors' estates will receive from the continuation of billing services by the Critical Vendors, and the approximately $1,440,000,000 in prepetition claims against the Debtors as of the Commencement Date. The Benefit Mr. Miller believes that authorizing payment of the Critical Vendor Claims would maintain the ongoing and essential relationships between the Debtors and these Critical Vendors and protect the quality and uninterrupted service that is necessary for the Debtors' reorganization. Based upon their substantial experience with the Critical Vendors, the Debtors believe that the services supplied by the Critical Vendors are at competitive rates and terms, and continuation of business on the same or better terms would help preserve the Debtors' businesses and enhance their reorganization effort. The Quid Pro Quo Finally, as a condition to any prepetition payments to the Critical Vendors, Mr. Miller accords that each critical vendor has agreed to provide the Debtors with services on terms that are consistent with the Critical Vendor Agreement, as applicable. In this regard, and as consideration for critical vendor status, the Debtors and each of the Critical Vendors have recently entered into letter agreements obligating the Critical Vendors to continue performing and to forego the termination rights under their respective agreements with the Debtors. The continuation of these business relationships will inure to the benefit of the Debtors' estates and improve the Debtors' long-term, postpetition liquidity. ----------------------------------------------------------------- [00044] DEBTORS' MOTION TO SELL ACCOUNTS TO BELLSOUTH FOR $750K ----------------------------------------------------------------- The Debtors seek entry of an order approving the sale of the BST Accounts to BellSouth Telecommunications Inc. pursuant to the Purchase Agreement, and authorization to consummate the transactions contemplated therein. Judy G.Z. Liu, Esq., at Weil Gotshal & Manges LLP in New York, New York, relates that since the Commencement Date, the Debtors and their management have continued to refine the Debtors' business plan to identify markets that no longer contribute to the Debtors' reorganization efforts. In this regard, the Debtors and their management have concluded that it is in the best interest of the Debtors, their estates and their creditors, to discontinue operations in nine states, including Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, and Tennessee (the "BST States"). The Debtors provide local and long distance telephone services to customers in the BST States, directly, through their own facilities, and through the resale of such services. In order to discontinue operations in the BST States, the Sellers must either require its customers to seek an alternate provider on their own or transfer the accounts of their customers to another competitive local exchange carrier (CLEC) or an incumbent local exchange. The proposed sale to BellSouth Telecommunications, Inc. of certain of the accounts of the resale customer of the Sellers in the BST States is the culmination of a comprehensive marketing effort by the Sellers that commenced in November 2001 when the Sellers determined, in the exercise of their business judgment, to divest themselves of these non-core assets and operations. According to Ms. Liu, on November 2001, several companies expressed interest in acquiring the Sellers' resale customer base, including LecStar Corporation, Unified Solutions which submitted an offer on behalf of IDS Telecom, Access Communications, and eLEC Communications. Based upon the total consideration offered, the Sellers decided to pursue the eLEC offer. On December 14, 2001, Ms. Liu informs the Court that a letter of intent was executed between the Debtors and eLEC and the other parties that had submitted offers were notified that an agreement had been reached with another entity. The necessary filings to obtain approval of the transfer of the customers accounts had been submitted to the Federal Communications Commission and applicable state regulatory agencies in the BST States. The due diligence process continued with eLEC until January 28, 2002. Thereafter, due to certain financing difficulties, eLEC proposed an alternative transaction structure whereby it would agree to manage the migration of the resale customer base to another product line. The Sellers did not wish to pursue this alternate transaction and negotiations with eLEC were terminated on January 29, 2002. Following the termination of the eLEC negotiations, Ms. Liu avers that the Sellers again contacted the parties identified above and notified such parties that their resale customer base was again available for acquisition. During this time period, Unefied produced a new interested party: Network Telephone. While Network Telephone initially expressed interest, a bid was never submitted and negotiations with Network Telephone ceased soon thereafter. On February 13, 2002, Ms. Liu accords that a second letter of intent was executed between ABS and IDS and the due diligence process continued until March 20, 2002. At that time, the parties differed on the required regulatory notification process and negotiations thereafter ceased on March 26, 2002. On March 21, 2002, Time Warner Telecom was contacted regarding any potential interest in obtaining resale customers in Florida. The offer ultimately presented by Time Warner was merely a sales referral agreement and was not accepted by the Sellers. At this time, the Sellers decided to contact BellSouth in order to assess BellSouth's interest in acquiring the resale customer base. Following the commencement of the Debtors' chapter 11 cases on March 27, 2002, the Debtors continued negotiations with BellSouth and entered into that certain Service Transition Agreement, dated May 16, 2002, by and among Adelphia Business Solutions Operations, Inc., Adelphia Business Solutions of Kentucky, Inc., Adelphia Business Solutions of Jacksonville, Inc., Adelphia Business Solutions of Nashville, L.P., Adelphia Business Solutions of Louisiana, LLC, Adelphia Business Solutions of South Carolina, Inc., and Adelphia Solutions Investments, LLC, as sellers, and BellSouth, as buyer. Ms. Liu explains that the Sale Transaction contemplates the transfer of the BST Accounts free and clear of all liens, claims and encumbrances (with any such liens, claims and encumbrances to attach to the net proceeds of the sale), in exchange for an initial payment of approximately $100,000 and a final payment of up to $650,000, for a maximum total purchase price of up to approximately $750,000. Ms. Liu contends that the Sale Transaction represents the culmination of a sale process conducted over the course of approximately 6 months through the diligent efforts of the Sellers to sell the BST Accounts. Based upon their experience and business judgment, the Debtors submit that the Sales Transaction represents the highest and best offer that the Sellers can obtain for the BST Accounts. Hence, the Debtors submit that the Sale Transaction should be approved by the Court as a private sale to BellSouth without further marketing and the attendant delay that would result from the pursuit of additional marketing activities. The principal terms of the Sale Transaction as set forth in the Purchase Agreement are as follows: * Acquired Assets: The BST Accounts. * Consideration: The purchase price shall be an amount equal to: a. the sum of $10.00 multiplied by the total number of BST Accounts (approximately 10,000 lines) transferred to BellSouth and b. the sum of $65.00 multiplied by the total number of lines that are "active" for each Resale Customer, on the 90th day following the Closing. As used herein, "active" shall mean that the Resale Customer: a. is continuing to receive its local telephone service from BellSouth, b. has not notified BellSouth of its desire to disconnect such local service, and c. has not been issued a final notice of disconnection by BellSouth for reasons of non-payment. * Approval of the Bankruptcy Court: The Purchase Agreement provides that Sellers will make their best efforts to obtain an order approving the Sale Transaction by May 30, 2002, and requires that this Court enter, on or before June 14, 2002, an order approving the sale of the BST Accounts, free and clear of all Liens that can be asserted by any person in connection with the Debtors' chapter 11 cases, and providing BellSouth protection pursuant to Section 363(m) of the Bankruptcy Code, and otherwise in form and substance reasonably acceptable to each of the parties. * Indemnification: Sellers shall indemnify BellSouth and hold BellSouth harmless from and against: a. the aggregate dollar amount of any and all debts, liabilities, damages, losses, costs, expenses or claims owing by, suffered, incurred or accrued against BellSouth relating to events occurring prior to the Conversion Date arising out of or directly or indirectly related to the Acquired Assets; provided, however, that such agreement to indemnify BellSouth shall not be applicable to or affect in any way any other obligations or amounts owing between the parties pursuant to any other agreements, tariffs, at law or otherwise; b. any and all damages, expenses and losses suffered, paid or incurred, or to be suffered, paid or incurred in the future, by BellSouth arising out of any and all materially inaccurate representations or material breaches of any covenant or warranty on the part of Seller herein contained; and c. any and all reasonable costs and expenses of BellSouth related to the foregoing including reasonable attorney's fees in connection with the prosecution, defense or appeal of any suit or action in connection herewith. The Debtors submit that sufficient business justifications exist which merit approval of the proposed Sale Transaction. Several months prior to the commencement of their chapter 11 cases, the Debtors concluded that transition of the BST Accounts was appropriate and consistent with their desire to return to core operations. Ms. Liu assures the Court that the sale of the BST Accounts is the result of arm's length, good faith negotiations with several potential purchasers over a period of 6 months, and is well within the Debtors' sound business judgment. After approaching many different potential suitors, the Debtors concluded that the Purchase Agreement and the consummation of the transactions contemplated therein are in the best interests of the Debtors, their creditors and their estates. The Debtors believe that the proceeds received from the sale of the BST Accounts to BellSouth in a private transaction will represent the fair market value for such accounts. In short, the Sale Transaction is an exercise of the Debtors' sound business judgment and will result in a significant benefit to the Debtors' estates and their creditors. The Debtors submit that the Sale Transaction is the highest and best offer that the Debtors currently have received for the BST Accounts. Accordingly, the Debtors submit that the benefits to be derived from the Purchase Agreement warrant this Court's approval of the Purchase Agreement and authorization to consummate the transactions contemplated therein. As demonstrated above, the sale transaction for the BST Accounts is a valid exercise of the Debtors' business judgment and thus is permissible under Section 363(b) of the Bankruptcy Code. Significantly, the Debtors have already fully marketed the BST Accounts to obtain what the Debtors believe to be, in their business judgment, the highest and best offer. Ms. Liu believes that the proposed sale of the BST Accounts pursuant to the Purchase Agreement will enable the Debtors to obtain the best offer for the BST Accounts, whereas another sale process would only duplicate the previous efforts made by the Debtors to sell the BST Accounts, and would entail delay and attendant expense with no likelihood of additional benefit to the Debtors' estates. The sale transaction pursuant to the Purchase Agreement represents the exercise of the Debtors' sound business judgment and is in the best interest of their estates and creditors. Accordingly, the Sale Transaction will transfer the BST Accounts to BellSouth free and clear of all liens, claims and encumbrances and any other interests held by the Debtors or their respective estates and creditors, but only to the extent that the claims of such creditors relate to claims against the Debtors. ----------------------------------------------------------------- [00045] DEBTORS' MOTION TO OBTAIN $135,000,000 OF DIP FINANCING ----------------------------------------------------------------- See prior entries at [00032] and [00012]. 12.25% Noteholders Object The Informal Committee of Senior Secured Noteholders, consisting of holders of the 12.25% Senior Secured Notes due 2004, objects to the Debtors' DIP Financing Motion because millions of dollars of indebtedness will inequitably and unfairly shift the risk of this reorganization solely to the holders of the Secured Notes. Ira S. Dizengoff, Esq., at Akin Gump Strauss Hauer & Feld LLP in New York, observes that based upon the Debtors' projections, the Collateral Subsidiaries will not use any of the DIP loan proceeds. Yet, despite this, the proposed DIP Facility will saddle the Collateral Subsidiaries with joint and several liability and grant a first priority lien on the Underlying Assets for the entire amount of what the other ABIZ Debtors borrow. The Collateral Subsidiaries, whose stock is pledged for the benefit of the Secured Noteholders, had earnings for the year ended December 31, 2001 of $21,600,000, while the other ABIZ Debtors lost $68,000,000. For the second quarter 2002, the Collateral Subsidiaries are projected to generate $5,900,000 in positive cash flow whereas the Non-Collateral Subsidiary Debtors are projected to have negative cash flow of $38,500,000. Thus, the Non-Collateral Subsidiary Debtors will be unable to repay the Postpetition Obligations on a timely basis thereby causing such borrowings to be repaid from the assets or cash flow of the Collateral Subsidiaries. As such, the indebtedness of the DIP Facility materially impairs the value of the Secured Noteholders' Collateral. While the DIP Financing scheme offers an adequate protection package to the Secured Noteholders and accords a superpriority to any debtor-subsidiary that repays Postpetition Obligations of another Debtor, Mr. Dizengoff believes it isn't enough. The Noteholders argue that the DIP Financing Motion must be denied because of: A. the inherent uncertainties regarding the viability of the proposed DIP Lenders and B. their failure to fund the DIP Facility despite proper borrowing requests by the Debtors. Finally, even if the proposed DIP Facility is necessary, it suffers from fatal defects, which should preclude approval. Mr. Dizengoff notes that the Proposed DIP Facility obligates each of the Debtors on a joint and several basis and grants a first priority lien on substantially all of the Debtors' assets, including the Underlying Assets. Such obligations and liens, which may aggregate $135,000,000, impair the lien of the Secured Noteholders on the Collateral thereby requiring the Debtors to prove that the Secured Noteholders are adequately protected. Mr. Dizengoff states that the Court must deny the relief requested in the Motion because the Debtors are unable to provide the requisite adequate protection to the Secured Noteholders to protect the value of the Collateral. The Secured Notes are secured by liens on the Collateral. Accordingly, the Secured Noteholders are entitled to have the value of the Collateral adequately protected for any diminution in value caused by the commencement and continuation of the Debtors' cases, the imposition of the automatic stay and the grant of first priority liens in favor of the DIP Lenders on the Underlying Assets. However, the Debtors cannot satisfy their burden because: A. The incurring of no less than $27,000,000 of debt at the Collateral Subsidiary level causes a decrease in the value of the Collateral. The Debtors' projections indicate that the Collateral Subsidiaries will not use any of the proceeds from the DIP Facility, however, the Collateral Subsidiaries are liable for all Postpetition Obligations. Thus, obligating the Collateral Subsidiaries for any of the Postpetition Obligations necessarily causes a dollar for dollar decrease in the value of the Collateral. In the event the assets of the Collateral Subsidiaries are sold, the proceeds would be used to repay the DIP Facility. Thus, the indebtedness under the DIP Facility causes a direct decrease in the value of the Collateral. B. By virtue of the automatic stay, the Secured Noteholders have been denied the benefit of their bargain. But for the automatic stay, the Secured Noteholders could have foreclosed on the Collateral on the Commencement Date and realized its value shortly thereafter. The continuation of the stay prevents the Secured Noteholders from realizing this value. Finally, the proposed use of the Underlying Assets and the corresponding impairment and use of the Collateral during this reorganization, causes a decline in the value of the Collateral. The Interim DIP Order attempts to grant adequate protection to the Secured Noteholders by way of cash payments on a monthly basis of the reasonable fees and expenses of the legal and financial advisors retained by the Secured Noteholder Committee and a superpriority claim only to the extent of any diminution in value of the Collateral, as contemplated by Section 507(b) of the Bankruptcy Code solely with respect to the Collateral Subsidiaries, junior to the claims under Section 364(c)(1) of the Bankruptcy Code held by the DIP Lenders. In addition, the proposed DIP Facility grants each paying Debtor a superpriority claim, junior to the DIP Lenders, against the other Debtors as a result of the repayment of Postpetition Obligations it has not used. Mr. Dizengoff notes that the Proposed Adequate Protection, however, is inadequate to compensate for the impairment caused by the DIP Facility. The value of the Non-Collateral Subsidiary Debtors is likely inadequate to repay the Postpetition Obligations in full. As a result, Mr. Dizengoff fears that in order to repay the DIP Facility, the Collateral Subsidiaries, who will have not used any of the proceeds of the DIP Facility, will be required to be sold. As such, the Underlying Assets will be liquidated to repay the Postpetition Obligations. Thus, the Collateral will suffer a dollar for dollar decrease in value. Accordingly, the entire risk of this reorganization will be shifted to the Secured Noteholders who will be required to repay borrowings they did not utilize. The Secured Noteholders do not want this risk and would not bear this risk unless compelled to do so. In fact, the indenture governing the Secured Notes prohibits this exact type of proposed financing. Approving the DIP Facility will directly deprive the Secured Noteholders of the benefit of their bargain. Further, Mr. Dizengoff points out that the proposed grant of a superpriority claim to each Debtor vis-a-vis other Debtors that repays the borrowing Debtor's Postpetition Obligations is similarly not adequate protection. The proposed Final DIP Order states that the amount of the superpriority claim is measured by the "relative benefits" received by the Collateral Subsidiaries. In this case, however, there is no relative benefit to the Collateral Subsidiaries. The Collateral Subsidiaries are self- funding entities that do not need any measurable financing to continue their operations. The Non-Collateral Subsidiary Debtors, however, are financially inept having negative earnings of $68,000,000 in the past year alone, have projected negative cash flow of $38,000,000 for the second quarter 2002, require hundreds of millions of dollars in capital expenditures to be viable and will not have the ability to repay Postpetition Obligations on a timely basis. Indeed, the value of the Non-Collateral Subsidiary Debtors will be insufficient to prevent the continued impairment of value of the Collateral Subsidiaries and the superpriority administrative claim to be granted to the Collateral Subsidiaries will not provide the Secured Noteholders with the "indubitable equivalent" of their security interests as required by the Bankruptcy Code. As a result of the commencement of these cases, the imposition of the automatic stay, the joint and several liability imposed on the respective Debtors under the DIP Facility; the granting of first priority liens to the DIP Lenders which, negate prime and subordinate the liens of the Secured Noteholders on the Collateral, and the limited value that can be allocated to the Non-Collateral Subsidiary Debtors, the Secured Noteholders' liens on the Collateral are diminishing in value in excess of the Proposed Adequate Protection. Thus, because the Debtors lack the ability to adequately protect the Secured Noteholders, the Motion must be denied. Whether or not this Court is inclined to approve the DIP Facility despite the utter lack of proper protection to the Secured Noteholders, the Secured Noteholders are entitled to additional protection as follows: A. the Proposed Adequate Protection including current payment of the cost and expenses, including attorney fees, of the Indenture Trustee, B. monthly cash payments equal to 12 ¬% per annum on the outstanding aggregate balance of the Secured Notes, C. liens on the Underlying Assets and the assets of the Non- Collateral Subsidiary Debtors on equal seniority with the DIP Lenders, D. weekly "flash" reports detailing, among other things, all transactions among the Debtors, E. market-by-market financial reports, F. a prohibition on the DIP Facility imposing joint and several liability on the Collateral Subsidiaries, and G. a freeze on intercompany lending unless the Debtors can prove the solvency of the borrower. Mr. Dizengoff asserts that the Motion cannot be approved because of the uncertain financial wherewithal of the proposed DIP Lenders and their refusal to fund proper borrowing requests under the Interim DIP Order. According to published reports, ADLAC faces possible delisting by NASDAQ, is the subject of a SEC investigation for accounting irregularities and two grand jury investigations and is in danger of defaulting on in excess of approximately $1,400,000,000 of public debt. As ADLAC does not have sufficient liquidity to cure these potential defaults, ADLAC may be forced to seek bankruptcy protection. In fact, Moody's Investors Service and Standard & Poor's have downgraded ADLAC's public debt and Moody's, whose downgrades affect $19 billion of debt and other securities, warned that a bankruptcy filing by ALDAC may prove "unavoidable." In addition, John J. Rigas and Timothy Rigas recently resigned their positions as Chief Executive Officer and Chief Financial Officer of ADLAC, respectively. These recent events undermine: A. ADLAC's and the Rigas' ability or intent to fund the DIP Facility; B. whether ADLAC continues to have board authorization to enter into the DIP Facility and C. whether the Rigas family still intends to provide funding under the DIP Facility. Indeed, notwithstanding the Debtors' repeated requests to borrow the full $27,000,000 authorized under the Interim DIP Order, as of the date of this Objection, Mr. Dizengoff avers that ADLAC has only provided the Debtors with $15,000,000 and refused to fund the remaining $12,000,000. These uncertainties and ADLAC's blatant disregard of the Interim DIP Order warrant a denial of the relief requested in the Motion. Indenture Trustee Adds Its Words of Wisdom The Bank of New York, as Indenture Trustee, to be succeeded by Wells Fargo Bank Minnesota N.A., under the 12.25% Senior Secured Notes objects to the Debtors' DIP Motion. Leo T. Crowley, Esq., at Pillsbury Winthrop LLP in New York, New York, believes that the Indenture Trustee, on behalf of the bondholders, is entitled to adequate protection of its interests in the Pledged Subsidiaries to the extent that the value of the collateral may or will be diminished during the course of the case while the Indenture Trustee is prevented from foreclosing on such collateral. While the Indenture Trustee has the burden of proving the validity and the extent of its interest, the Debtors bear the burden of proving that the Indenture Trustee's interest in the property is "adequately protected." Mr. Crowley points out that the Pledged Subsidiaries are borrowers under the DIP Financing and as a result, cash may be taken from the Pledged Subsidiaries to repay obligations under the DIP Financing. Such repayments may not reduce the liens on the Pledged Subsidiaries' assets with respect to amounts paid on the revolving portion of the DIP Financing. However, there is no corresponding requirement that any of the repayments be specifically related to funds advanced to a particular subsidiary. Thus, the Pledged Subsidiaries may be encumbering assets and using their cash to service debt on the DIP Financing regardless of whether and to what extent the Pledged Subsidiaries received DIP Financing proceeds. The Indenture Trustee takes no comfort from the Interim DIP Order which provides that to the extent a Borrower makes aggregate payments to the Agent or Lenders in excess of the aggregate amount of all loans and advances received by such Borrower, a Borrower (e.g., a Pledged Subsidiary) may have a claim under Bankruptcy Code Section 364(c)(1) against other Borrowers, in such amounts as may be determined by the Court taking into account the relative benefits received by each such person. Mr. Crowley submits that this order presupposes that the affiliates will be administratively solvent and able to satisfy this obligation, and the Debtors have not proven this to be the case. In addition, this paragraph speaks subjectively of the Court assessing the "relative benefit" to a Borrower; but the only relevant benefit should be actual proceeds received. According to Mr. Crowley, the DIP Financing proposed to make the Pledged Subsidiaries obligated to repay obligations under the DIP Financing irrespective of the benefit received from the DIP Proceeds. Furthermore, intercompany advances will erode the value of the Pledge Subsidiaries in the same way as the DIP advances and thus should be treated in the same manner. In addition, without the same treatment, the Indenture Trustee will be forced to attempt to trace funds advanced from one Borrower to another. Mr. Crowley avers that the Senior Secured Indenture obligates the Debtors to pay the Indenture Trustee's reasonable compensation for its acceptance of the Indenture and services thereunder. In addition, the Debtors are required to indemnify the Indenture Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under the Indenture. Under the Pledge and Security Agreement, the Debtors pledged to the Collateral Agent for the benefit of the Indenture Trustee and the holders of the 12-1/4% Senior Secured Notes a continuing first priority security interest in the Pledged Stock. In addition, the Pledge and Security Agreement secures the prompt and complete performance when due of "all Obligations of the Company under the Indenture, the Notes, including without limitation, interest and any other Obligations accruing after the date of any filing by the Company of any petition in bankruptcy. . . ." Thus, pursuant to the provisions of the Pledge and Security Agreement as well as the 12-1/4% Senior Secured Indenture, any money collected or any realization upon, all or any part of the Pledged Stock and any cash held is to be paid first to the Indenture Trustee for payment of its fees and expenses and second to the holders of the 12-1/4% Senior Secured Notes for amounts due and unpaid on the Notes. The proposed DIP Financing grants the holders of the 12-1/4% Senior Secured Notes, as adequate protection for any diminution in the value of the 12-1/4% Pledged Stock, monthly cash payments of the reasonable fees and expenses of the legal and financial advisors retained by an informal committee of holders of 12-1/4% Senior Secured Notes. In accordance with the Indenture Trustee's first priority lien, Mr. Crowley argues that any adequate protection granted to the holders of the 12-1/4% Senior Secured Notes must include payment of the Indenture Trustee's fees and expenses because the Indenture Trustee's rights are senior to those of the holders of the 12-1/4% Senior Secured Notes. Creditors' Committee Objects Mitchell A. Seider, Esq., at Kramer Levin Naftalis & Frankel LLP in New York, New York, points out that, as the Court has recognized, the proposed postpetition lenders are indisputable insiders of the Debtors. The controlling shareholders of Adelphia Communications Corporation and Highland 2000 LP are also the controlling shareholders of the Debtors. Additionally, the Rigas family holds various director/officer positions at Adelphia Communications and the Debtors. The proposal for postpetition financing that is before the Court contains many provisions that are blatant attempts by Adelphia Communications and the Rigas family as insiders to derail what are potentially enormous causes of action against them, and to gain inordinate control over the Debtors' businesses. Mr. Seider contends that the Debtors have failed to prove the necessity of allowing these insiders such inordinate control over their reorganization and businesses. In recent weeks, the Debtors have substantially revised their business plan for postpetition operations, reducing their estimated financing needs by roughly half. The Debtors' revised estimated financing needs appear to be less than the $75,000,000 DIP Facility proposals set forth by Foothill Capital prior to the Debtors' chapter 11 filings, and is in line with the proposal made by another third party lender, Cerberus Partners, L.P. The Debtors have failed to demonstrate to the Court that they have used full efforts in reviving financing discussions with these lenders as well as fully exploring opportunities under their reduced financing needs with other third party lenders. Furthermore, the Debtors have offered no proof that the security interests granted to the Postpetition Lenders are necessary or appropriate in light of their insider status. If the Court determines that the Adelphia Communications postpetition financing should be approved, Mr. Seider believes that numerous aspects of the Postpetition DIP Proposal must be stricken or amended before it can comply with the Bankruptcy Code. As this Court noted at the interim DIP hearings, the DIP financing proposal allows the Postpetition Lenders a number of protections that are untenable when considering the Postpetition Lenders' insider status. Mr. Seider points out that the Postpetition DIP Proposal would grant Adelphia Communications and the Rigas family almost complete control of the Debtors' potentially substantial causes of action against Adelphia Communications and the Rigas family. Among other claims, the Debtors may have claims against the Postpetition Lenders arising from the sale of several assets during 2000 and 2001. In addition, the Debtors may have very substantial claims against the Postpetition Lenders as a result of the Debtors' "spin-off" from Adelphia Communications that closed less than 90 days before the Debtors' Chapter 11 filings. Through the Postpetition DIP Proposal, Mr. Seider notes that the Postpetition Lenders seek to stifle potential actions against Adelphia Communications and the Rigas family by taking liens on all causes of action and the proceeds thereof -- including any claims against themselves. These liens would perversely allow the Postpetition Lenders to reimburse themselves from the proceeds of these causes of actions against themselves through their DIP financing lien should they be found to be liable to the Debtors' estates. Contrary to the express views of this Court, Mr. Seider claims that the Postpetition DIP Proposal also severely limits the ability of Committee counsel to investigate and prosecute these causes of action by allowing that only the Debtors may use the carve-out for court-ordered professional fees to prosecute these causes of action against the ADLAE Lenders and their affiliates. Furthermore, the ADLAE DIP Proposal sets a deadline for the investigation and filing of these complex causes of action against the ADLAE Lenders a mere 120 days from final approval of the postpetition financing. Mr. Seider adds that the proposed postpetition financing would also give the Postpetition Lenders inordinate control over the Debtors' reorganization process. Through overly restrictive events of default (which include the termination of exclusivity and settlements with creditors over the aggregate of $1 million) and severe remedy provisions, the Postpetition Lenders will have far too much control over the Debtors' ability to conduct their businesses and the investigation of claims against the Postpetition Lenders and their affiliates. The proposed postpetition financing also allows the Postpetition Lenders to recoup excessive fees and rates from the Debtors. The interest rate and fees proposed for the postpetition financing should be reduced to bring the proposed postpetition financing in line with the debtor-in-possession financing approved in other cases. Finally, Mr. Seider informs the Court that the proposed postpetition financing purports to grant what it deems "adequate protection" to the holders of the 12 1/4% Senior Secured Notes by providing payment of professional fees for an informal committee of these Notes, and a superpriority administrative expense claim under 507(b) to the extent of a diminution in the value the Notes' collateral. These benefits requested by certain holders of the 12.25% Senior Secured Notes cannot be justified as adequate protection because the 12.25% will not be primed under the ADLAE DIP Proposal, and these holders have made no showing of the diminution in value of their collateral. Furthermore, the negotiation of these requested benefits may, in fact, be prohibited by the indenture governing the 12.25% Senior Secured Notes. Therefore, the Court should deny the request to provide these benefits, and the "adequate protection" provisions should be stricken from the Proposed Final Order. If the Postpetition DIP Proposal is to be approved by this Court, Mr. Seider claims that the request by the Committee to amend or delete certain provisions is necessary before the proposed financing can comply with the Bankruptcy Code. To illustrate the changes that must be made to the Postpetition DIP Proposal, the Committee will distribute a marked up form of the Debtors' Proposed Order prior to the final hearing date. Without the changes requested therein, the proposed postpetition financing should be denied. * * * Following a closed-door Chambers Conference late Wednesday afternoon with Judge Gerber, Judy G.Z. Liu, Esq., at Weil Gotshal & Manges LLP in New York, New York, notified the Court that the Debtors' motion for final approval of the proposed postpetition financing is hereby withdrawn. ----------------------------------------------------------------- [00046] DEBTORS' APPLICATION TO EMPLOY JEFFERIES AS ADVISOR ----------------------------------------------------------------- Edward E. Babcock, the Debtors' Vice President of Finance, informs the Court that the Debtors desire to retain and employ Jefferies & Company, Inc., as their financial advisor in these cases. Jefferies is an investment banking firm founded in 1962 with its principal office located at 520 Madison Avenue, New York, New York 10022, with offices located worldwide. Jefferies is a registered broker-dealer with the United States Securities and Exchange Commission, and is a member of or regulated by the Boston Stock Exchange, the CFTC, the ISE, the National Association of Securities Dealers, the MSRB, the NFA, the NSCC, the OCC, the Ontario Securities Exchange, the Pacific Stock Exchange, the Philadelphia Stock Exchange, and the SIPC. Today, Jefferies' parent is a public company with over $4,000,000,000 in assets and Jefferies and its affiliates have approximately 1,100 employees in 23 offices around the world. Jefferies provides a broad range of corporate advisory services to its clients, including services pertaining to: general financial advice; mergers, acquisitions, and divestitures; special committee assignments; capital raising; and corporate restructuring. By this Application, the Debtors request that the Court enter an order, pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code, authorizing the retention of Jefferies to provide financial advisory services to the Debtors, nunc pro tunc to May 1, 2002, the date Jefferies commenced work on the Debtors behalf in the above-captioned chapter 11 cases. The Debtors request authorization to employ and retain Jefferies pursuant to Sections 327(a) and 328(a) of the Bankruptcy Code to, among other things: A. advise and assist the Debtors in connection with the formulation of a business plan; B. advise the Debtors in connection with any transaction involving, directly or indirectly, any business combination, whether by acquisition, merger, consolidation, negotiated purchase, tender or exchange offer, reorganization, recapitalization or otherwise, or any direct or indirect sale, transfer or other disposition, whether in one or in a series of transactions, of all or any portion of the capital stock or assets of the Debtors or any subsidiary of any of the Debtors, either in connection with a Reorganization or otherwise; C. review and analyze the Debtors' business, operations and financial projections; D. assist the Debtors in determining a range of values for the Debtors on a going concern and liquidation basis; E. assist the Debtors with identifying appropriate lenders and obtaining Debtors in possession financing; F. render financial advice to the Debtors and participate in meetings with the Debtors' creditors, stakeholders and other appropriate parties in connection with a potential Reorganization and any additional chapter 11 filings; G. assist the Debtors in preparing preliminary reorganization proposals and related term sheets and other documentation required in connection with the formulation of a potential Reorganization and any additional chapter 11 filings; H. assist the Debtors in identifying and evaluating candidates for potential M&A Transactions, assisting the Debtors in the preparation of any information or offering memorandum to be used in connection herewith, and advise the Debtors in connection with and participate in negotiations, and aid in the consummation, of an M&A Transaction; I. provide testimony in any bankruptcy case relating to financial matters related to a Transaction, including the feasibility of any Reorganization or M&A Transaction and the valuation of any securities issued in connection therewith, and provide testimony in any bankruptcy case relating to an M&A Transaction; J. assist the Debtors in preparing proposals for any M&A Transaction; K. assist the management of ABIZ with presentations made to its Board of Directors regarding a proposed Reorganization or potential M&A Transaction; L. provide the Debtors with other general restructuring advice; and M. if so requested by the Board, render an opinion to the Board with respect to the fairness, from a financial point of view, to ABIZ or any of the other Debtors of the consideration to be received by ABIZ or any of the other Debtors in a M&A Transaction. An Engagement Letter provides that Jefferies will be paid: * A monthly cash retainer fee in the amount of $175,000. The Retainer Fee shall be paid on the first business day of each month. The Retainer Fees paid shall be credited against the Reorganization Fee otherwise payable to Jefferies by the Company. * In the event the Debtors consummate a Reorganization, the Debtors shall pay Jefferies in cash a fee in the amount of $4,000,000. * In addition, in the event the Debtors consummate an M&A Transaction which commences or occurs during the term of the engagement, the Debtors, upon termination of Jefferies' services or upon final resolution of the Bankruptcy proceedings, shall pay Jefferies a cash fee in an amount equal to the lesser of 1.0% of the Transaction Value of such M&A Transaction, or $4,000,000 less the sum of any Retainer Fees previously paid. All fees shall be credited against any Reorganization Fee payable. Given the numerous issues which Jefferies may be required to address in the performance of its services, Jefferies' commitment to the variable level of time and effort necessary to address all such issues as they arise, and the market prices for Jefferies' services for engagements of this nature in an out-of-court context, the Debtors submit that the fee arrangement hereunder is both fair and reasonable and should be approved. Mr. Babcock contends that Jefferies' mergers and acquisitions expertise, as well as its capital markets knowledge, financing skills, and restructuring capabilities, some or all of which will be required by the Debtors during the term of Jefferies' engagement hereunder, were important factors in determining the amount of the Monthly Retainer and the Reorganization Fee. The ultimate benefit of Jefferies' services hereunder to the Debtors and the Debtors' estates could not be measured merely by reference to the number of hours to be expended by Jefferies' professionals in the performance of such services. Moreover, the Reorganization Fee has been agreed upon by the parties in anticipation that a substantial commitment of professional time and effort will be required of Jefferies and its professionals hereunder, and in light of the fact that such commitment may foreclose other opportunities for Jefferies, and that the actual time and commitment required of Jefferies and its professionals to perform its services hereunder may vary substantially from week to week or month to month, creating "peak load" issues for the firm. Mr. Babcock adds that the Engagement Letter also provides that the Company will indemnify Jefferies pursuant to the terms and conditions set forth in the Engagement Letter; provided, however, that such indemnification excludes any claims arising from and based solely upon the bad faith or gross negligence of Jefferies or any other indemnified person. Richard Nevins, Jr., Managing Director of Jefferies, assures the Court that Jefferies does not represent and does not hold any interest adverse to the Debtors' estates or their creditors in the matters upon which Jefferies is to be engaged. In addition, Jefferies is a "disinterested person," as such term is defined in Section 101(14) of the Bankruptcy Code. However, Jefferies currently represents or in the past may have represented these parties in matters unrelated to these cases: ADC Telecommunications Inc., Adelphia Communications Corp., Ameritech Corp., AT&T, Broadwing, Capital Research Corp., Carrier Access Corp., Citizens Communications Company, Convergent, Cushman & Wakefield, Equity Office Properties, First Union Corp., Grubb & Ellis Management Services Inc., GTE Corp., Illuminet Holdings Inc., Mack Cali Realty LP, Metromedia Fiber Network, Northern Trust Corp., Sprint Corp., Sprint FON Group, Sprint PCS Group, Teachers Insurance & Annuity Association, Telergy, Tellabs Inc., Tyco Toys Inc., US West Corp., Verizon, Weil Gotshal & Manges LLP, and WorldCom Inc. Jefferies, a global investment banking firm with broad activities covering trading in equities, convertible securities and corporate bonds in addition to its financial advisory practice, is a large company with a national practice and may represent or may have represented certain of the Debtors' creditors or equity holders, or other parties in interest, in matters unrelated to these cases. With more than 80,000 customer accounts around the world, Mr. Nevins admits that it is possible that one of its clients or a counter-party to a security transaction may hold a claim or otherwise is a party-in-interest in these chapter 11 cases. Furthermore, as a major market maker in equity securities as well as a major trader of corporate bonds and convertible securities, Jefferies regularly enters into securities transactions with other registered broker-dealers as a part of its daily activities. Some of these counter-parties may be creditors of the Debtors. However, Jefferies believes none of these business relationships constitute interests materially adverse to the Debtors herein in matters upon which Jefferies is to be employed, and none involve matters related to these chapter 11 cases. As a major market maker in equity securities as well as a major trader of corporate bonds and convertible securities, Mr. Nevins informs the Court that Jefferies regularly enters into securities transactions with other registered broker-dealers as a part of its daily activities. Among its activities as a market maker, Jefferies has been a market maker in the common stock of Adelphia Communications Corporation (ACC), the Debtors' former parent. Jefferies has ceased any such market making in ACC's common stock as a consequence of NASDAQ's halting of trading in such security. Additionally, Jefferies trades in the convertible and fixed income securities of ACC. Consistent with its customary practices Jefferies' trading unit operations are separated from those of the Corporate Finance Department by an "Ethical Wall." The Debtors believe Jefferies possesses extensive knowledge and financial expertise relevant to these cases, and that Jefferies is well-qualified to advise the Debtors. The Debtors selected Jefferies because of its expertise in providing financial advisory services to debtors and creditors in chapter 11 and other distressed situations, and because Jefferies and its senior professionals have an excellent reputation for providing high quality investment banking services to debtors and creditors in bankruptcy reorganizations and other debt restructurings. In addition to Jefferies' understanding of the Debtors' financial history and the industry in which the Debtors operate, Jefferies and its senior professionals have extensive experience in the reorganization and restructuring of troubled companies, both out- of-court and in chapter 11 cases. The employees of Jefferies have advised debtors, creditors, equity constituencies, and purchasers in many reorganizations. Since 1990, these professionals have been involved in over 100 restructurings representing over $75,000,000,000 in restructured debt. Mr. Nevins maintains that Jefferies has extensive experience in reorganization cases and has an excellent reputation for services it has rendered in large and complex chapter 11 cases on behalf of debtors, creditors and creditors' committees throughout the United States such as: In re Heartland Wireless Communications, In re JCC Holdings, Inc., In re International Wireless Communications, In re Mobile Media Communications, In re ICO Global Communications Services Inc., et al., In re AmeriServe Food Distribution, Inc. et al., In re Silver Cinemas, Inc., In re Kaiser Group International, Inc., In re Sunterra Corporation, et al., In re Rhythms NetConnections, Inc., et al., In re Derby Cycle Corporation, In re VF Brands, Inc., In re Ames Department Stores, Inc., and In re Federal-Mogul Corporation. Mr. Nevins relates that Jefferies began providing services to the Debtors in these chapter 11 cases on May 1, 2002. Because Jefferies replaced the Debtors' former financial advisors on an emergency basis and due to the time required to conduct their conflicts check, Jefferies was unable to submit this application prior to the date Jefferies began providing services to the Debtors. However, because the appointment of Jefferies on the terms and conditions set forth in the Engagement Letter is necessary and in the best interests of the Debtors, their estates and their creditors, the retention of Jefferies, nunc pro tunc to May 1, 2002 should be approved. ----------------------------------------------------------------- [00047] COMMITTEE'S APPLICATION TO HIRE EYCF AS FINANCIAL ADVISOR ----------------------------------------------------------------- The Official Committee of Unsecured Creditors asks the Court to approve its application to retain Ernst & Young Corporate Finance LLC (EYCF), an affiliate of Ernst & Young, LLP, a separate legal entity, nunc pro tunc to April 8, 2002 as its financial advisors. The Committee anticipates that EYCF will: A. analyze the current financial position of the Debtors; B. analyze the Debtors' business plans, cash flow projections, Restructuring programs, and other reports or analyses prepared by the Debtors or their professionals in order to advise the Committee on the viability of the continuing operations and the reasonableness of projections and underlying assumptions; C. analyze the financial ramifications of proposed transactions for which the Debtors seek Bankruptcy Court approval including, but not limited to, DIP financing, assumption/rejection of contracts, assets sales, management compensation and/or retention and severance plans; D. analyze the Debtors' internally prepared financial statements and related documentation, in order to evaluate the performance of the Debtors as compared to its projected results on an ongoing basis; E. attend and advise at meetings with the Committee, its counsel, other financial advisors, and representatives of the Debtors; F. assist and advise the Committee and its counsel in the development, evaluation and documentation of any plan(s) of reorganization or strategic transaction(s), including developing, structuring and negotiating the terms and conditions of potential plan(s) or strategic transaction(s) and the consideration that is to be provided to unsecured creditors thereunder; G. prepare hypothetical orderly liquidation analyses; H. render testimony in connection with procedures (A) through (C) above, as required, on behalf of the Committee; and I. provide such other services, as requested by the Committee and agreed by EYCF; Chuck Owen, Chairman of the Committee, relates that the Committee selected EYCF as its financial advisors because of the firm's diverse experience and extensive knowledge in the fields of bankruptcy and telecommunications. The Committee needs assistance in collecting, analyzing and presenting accounting, financial and other information in relation to these Chapter 11 cases. EYCF has considerable experience with rendering such services to committees and other parties in numerous Chapter 11 cases. As such, EYCF is well qualified to perform the work required in these cases. Samuel Star, a Partner of EYCF, assures the Court that the firm does not hold or represent an interest adverse to the estate that would impair EYCF's ability to objectively perform professional services for the Committee and that EYCF is a "disinterested person" as that term is defined in Section 101(14) of the Bankruptcy Code. However, EYCF currently is engaged with several parties-in-interests in matters unrelated to these cases, including: A. Professionals: Weil Gotshal & Manges LLP, Jefferies & Co.; B. Major Shareholders: Alliance Capital Management L.P., and Fidelity Spartan High Income Fund; C. Secured Lenders: The CIT Group; D. Unsecured Bondholders: Teachers Annuity & Insurance Assoc., Toronto Dominion, and Barclays Bank; E. Unsecured Creditors: Ameritech, AT&T, Bank of America, Bank of New York, BellSouth, Convergent Networks, Deloitte & Touche, Fujitsu, Illuminet, Insight Communications, Intermedia Communications, Keystone Business Machines, Level 3 Communications, MCI Worldcom, Metromedia Fiber Network, Pirelli Cable Corp., Qwest, SNET, Southwestern Bell Telephone, Sprint, TSI, Verizon, and Walker & Associates Inc.; EYCF's compensation will include both monthly advisory fees and a success fee which is based on 1% of the value of the aggregate consideration to be distributed to the Debtors' general unsecured creditors. The EYCF Monthly Advisory Fee is $175,000 per month for the first three months and $125,000 per month thereafter. Upon this Court's approval and subject to confirmation of a plan of reorganization, EYCF shall be entitled to request the Success Fee, provided however, that such fee will be a minimum of $250,000 and a maximum of $750,000. 25% of the Monthly Advisory Fees will be treated as a credit in the calculation of the Success Fee. ----------------------------------------------------------------- [00048] TSI'S MOTION TO COMPEL DEBTORS' DECISION ON CONTRACT ----------------------------------------------------------------- TSI Telecommunication Services, Inc., asks the Court to compel the Debtors to assume or reject the agreement entered into by and between TSI and the Debtors and compelling the payment of administrative expense for post-petition services rendered to the Debtors. Stephen H. Gross, Esq., at Robinson & Cole LLP in New York, New York, relates that prior to the Petition Date, on September 24, 1999, Hyperion Telecommunication, Inc. d/b/a Adelphia Business Solutions and TSI f/k/a GTE Telecommunication Services, Inc. executed an Information and Network Products and Services Agreement and the Access Revenue Management Solution Addendum. Pursuant to the Agreement, TSI provides a service known as Access Revenue Management Solution to the Debtors. Access Revenue Management Solution is a service that provides the billing capability necessary for a carrier to accurately capture revenue from long distance phone calls to that carrier's own customers from another long distance carrier's customers, and revenue from local phone calls to that carrier's own customers from customers of another phone company in that area. The service provides: A. pre-billing management of the records used to produce the bills Debtors send to their customers; B. bill generation and distribution and application of payments/adjustments to members' accounts; and C. information management, which includes a web-enabled warehouse which Debtor can access to view customer billing reports, such as total monthly revenue and total monthly usage. As a result of their receipt of these TSI services, Mr. Gross submits that the Debtors are able to bill their customers approximately $15,000,000 a month for their customers' use of the Debtors' network. The services TSI provides under the Agreement furnish the Debtors' infrastructure by enabling the Debtors' to capture, bill, and record its customers' use. Clearly, without this infrastructure, the Debtors could not function as a communications services provider. The Debtors' ability to bill and collect revenues from their clients is directly tied to uninterrupted utilization of these TSI services. Without TSI's provision of these services, the Debtors' ability to bill and collect revenue from its customers would be significantly harmed and the Debtors' cash flow negatively impacted. As of the Petition Date, pursuant to the Agreement, the Debtors owed TSI the following prepetition amounts: Date Amount February 1-28, 2002 $ 461,651.33 March 1-26, 2002 314,783.70 ------------ Total $ 776,435.03 In addition, the Debtors owe TSI $685,775.85 for postpetition services provided by TSI from the Petition Date through April 30, 2002. To date, Mr. Gross informs the Court that the Debtors have failed to pay any of its postpetition obligations to TSI. A payment of $89,381.48 for services rendered from the Petition Date through March 31, 2002 was due May 10, 2002. In addition, TSI sent an invoice to the Debtors on May 10, 2002 in the amount of $596,394.37 for postpetition services provided during the month of April, 2002. Such payment is due no later than June 10, 2002. Mr. Gross contends that the continuance of the services to be furnished to the Debtors under the Agreement is crucial for the Debtors' survival, no less a successful reorganization. The services TSI provides under the Agreement consistently enable the Debtors' to bill their customers approximately $15,000,000 on a monthly basis: the unqualified benefit to the estate is self-evident. Clearly, the Debtors do not need additional time to determine whether the Agreement is necessary for its reorganization. Furthermore, Mr. Gross points out that in addition to the $685,775.85 the Debtors owe TSI for postpetition services rendered, the Debtors owe TSI $776,435.03 in prepetition expenses. TSI is left in tine untenable position of providing crucial services to the Debtors without payment and without knowing whether the Debtor will elect to assume or reject the Agreement. For these reasons, the Court should issue an order compelling the Debtors to assume or reject the Agreement within a reasonable time not to exceed 60 days following the date of the order. ----------------------------------------------------------------- [00049] COMMITTEE'S APPLICATION TO RETAIN KRAMER LEVIN AS COUNSEL ----------------------------------------------------------------- See prior entry at [00040]. Application approved. ----------------------------------------------------------------- [00050] LUCENT'S MOTION TO COMPEL DEBTORS' DECISION ON CONTRACT ----------------------------------------------------------------- See prior entries at [00039] and [00034]. Motion denied. ----------------------------------------------------------------- [00051] DEBTORS' MOTION TO REJECT 58 UNEXPIRED LEASES ----------------------------------------------------------------- See prior entry at [00036]. Judge Gerber authorizes the Debtors to reject the leases effective May 29, 2002. *** End of Issue No. 6 *** ------------------------------------------------------------------------- Peter A. Chapman peter@bankrupt.com http://bankrupt.com ------------------------------------------------------------------------- Recommended Reading: Professor Stuart Gilson's newest title, "Creating Value Through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups." List Price: $79.95 -- Discounted to $55.96 at http://amazon.com/exec/obidos/ASIN/0471405590/internetbankrupt -------------------------------------------------------------------------