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and
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In re ) Chapter 11
)
Ziff Davis Media Inc., et al.,1 )
) Case No. 08-__________(___)
Debtors. ) Jointly Administered
)
1 The Debtors in these cases include: Ziff Davis Media Inc.; Ziff Davis Development Inc.; Ziff Davis Holdings Inc.; Ziff Davis Intermediate
Holdings Inc.; Ziff Davis Internet Inc.; Ziff Davis Publishing Inc.; and Ziff Davis Publishing Holdings Inc.
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1. I am the Chief Restructuring Officer of Ziff Davis Media Inc. (“Ziff Davis
Media”), Ziff Davis Development Inc., Ziff Davis Holdings Inc., Ziff Davis Intermediate
Holdings Inc., Ziff Davis Internet Inc., Ziff Davis Publishing Inc., and Ziff Davis Publishing
Holdings Inc., all corporations organized under the laws of the State of Delaware (collectively,
the “Debtors”). In this capacity, I am generally familiar with the Debtors’ day-to-day operations,
2. On the date hereof (the “Petition Date”), each of the Debtors filed a voluntary
petition with the Court under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-
1532 (the “Bankruptcy Code”). The Debtors are operating their businesses and managing their
property as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.
No request for the appointment of a trustee or examiner has been made in these chapter 11 cases,
and no official committees have been appointed or designated. Concurrently with the filing of
this First Day Affidavit, the Debtors have sought procedural consolidation and joint
these chapter 11 cases on their businesses, the Debtors have requested various types of relief in
their “first day” motions and applications (each, a “First Day Motion”). The First Day Motions
seek relief intended to allow the Debtors to effectively transition into chapter 11 and minimize
disruption of the Debtors’ business operations, thereby preserving and maximizing the value of
the Debtors’ estates. I am familiar with the contents of each First Day Motion (including the
exhibits and schedules thereto), and I believe that the relief sought in each First Day Motion:
(a) is necessary to enable the Debtors to operate in chapter 11 with minimal disruption or loss of
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productivity and value; (b) constitutes a critical element to achieving a successful reorganization
of the Debtors; and (c) best serves the Debtors’ estates and creditors’ interests.
4. Except as otherwise indicated, all facts set forth herein are based upon my
personal knowledge of the Debtors’ operations and finances, information learned from my
review of relevant documents, and information supplied to me by other members of the Debtors’
management and the Debtors’ advisors. I am authorized to submit this Affidavit on behalf of the
Debtors, and, if called upon to testify, I could and would testify competently to the facts set forth
herein.
5. Part I of this Affidavit describes the Debtors’ businesses, their capital and
corporate structures and the circumstances surrounding the commencement of these chapter 11
cases. Part II sets forth the relevant facts in support of each of the First Day Motions.2 Part III
PART I
A. Corporate Structure
Inc. (“Ziff Davis Holdings”), a Delaware corporation. Ziff Davis Holdings is the ultimate parent
of a group of affiliated companies that includes each of the Debtors and foreign non-Debtor
affiliates (collectively, the “Company”). Ziff Davis Holdings is majority owned by various
investment funds managed by Willis Stein & Partners Management III, L.L.C. (“Willis Stein”), a
private equity firm. Ziff Davis Media is the principal operating company, owns the Debtors'
principal assets and is obligor with respect to the Debtors' principal liabilities. A chart reflecting
2 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the relevant First Day Motion.
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the corporate structure of Ziff Davis Media and its Debtor and non-Debtor affiliates is attached
hereto as Exhibit A.
7. Ziff Davis Holdings was formed in 2000 by Willis Stein and its other
shareholders to acquire certain publishing assets. In April 2000, Ziff Davis Media through Ziff
Davis Holdings acquired the assets comprising the publishing division of ZD Inc., an unrelated
company, for approximately $780 million. Substantially all of the Company’s operations are
recommendations, and analysis of certain technology and videogame products to over 26 million
individuals each month through their portfolio of 16 websites, three (3) award-winning
magazines, and direct marketing services. The Company manages its business through two
small and medium business technology purchasers. The Company’s PCMag Network reaches
millions of technology purchasers annually through its monthly publication of PC Magazine, its
10. The PCMag Network through its print and Internet publications provides
extensive and detailed technology product reviews as a result of conducting labs-based product
analysis and testing. Upon completion of such analysis and testing, the Company publishes its
testing results and makes recommendations to its subscribers and other readers. Additionally,
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through its publications, the PCMag Network assists individual and small business technology
purchasers in obtaining the best possible price and service options in connection with their
technology purchases.
11. The Company’s revenues are comprised primarily of advertising, subscription and
circulation revenues. As a result, the Company’s revenues are highly dependent, in part, on the
ability of the PCMag Network to provide technology product information to the highest possible
12. As of December 2007, the Debtors determined that approximately 6.7 million
individuals review the PCMag Network’s Internet publications each month. Further, PC
Magazine maintains an average readership per issue of approximately 4.4 million individuals.
Approximately 60% of the Company’s total revenues from continuing businesses in 2007, or $46
13. 1UP Network. The Company’s 1UP Network maintains print and Internet
publications that provide videogame users with videogame product reviews and news regarding
the videogame industry. Additionally, in connection with their Internet publications, the 1UP
Network allows readers to enter and form discussions groups and other social networking
forums, thereby providing videogame users with a community medium through which such users
14. The Company’s 1UP Network has reached millions of videogame users through
its annual print publications of Electronic Gaming Monthly and Games for Windows, and related
Internet sites, consisting primarily of 1UP.com and Filefront.com. As of December 2007, the
Debtors determined that approximately 22.9 million individuals review the 1UP Network's
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Internet publications each month. Further, the aggregate (unduplicated) readership per issue for
15. The readership of the 1UP Network’s publications consists primarily of males
between the ages of 18 and 34, which represent a significant advertising demographic.
Accordingly, the 1UP Network’s publications offer advertisers access to this significant
advertising demographic. As this demographic prefers to obtain its information from Internet
sources, the Company has been able to increase the advertising revenues generated from the 1UP
Network’s Internet publications. The total revenues generated by the 1UP Network in 2007 were
16. Prior to the summer of 2007, the Company managed a third business segment:
the “Enterprise Group.” The Enterprise Group provided extensive analysis, proprietary research,
and evaluations of technology products and systems that impact company-wide information
technology systems and operations. The Enterprise Group published three (3) magazines and
maintained 17 websites that served as resources for senior-level corporate technology executives.
17. As described more fully below, prior to the Petition Date, the Debtors experienced
a decline in their earnings and liquidity due to certain operational difficulties and high debt costs.
As a result, in an effort to obtain additional liquidity in June 2007, the Debtors entered into a
purchase and sale agreement under which the Debtors agreed to sell the Enterprise Group to
Enterprise Media Group, Inc., an unrelated party formed by Insight Venture Partners, for an
aggregate cash purchase price of approximately $150 million. This transaction (the "Enterprise
Sale") closed on July 31, 2007. Pursuant to the Enterprise Sale, the Debtors received net sale
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18. Since the Enterprise Sale, the Company has continued to provide technology and
videogame product review services through the PCMag Network and the 1UP Network.
19. As of the Petition Date, the Debtors' debt obligations included approximately
$242,257,361 of secured funded debt. The Company’s secured funded debt consists of:
(a) $218,950,361 outstanding under senior secured floating rate notes due 2012, secured by
substantially all of the Debtors’ assets; and (b) $23,307,000 outstanding under additional secured
20. Prior to the Petition Date, on or about April 22, 2005, pursuant to that certain
Indenture dated as of the same date (as amended, supplemented, amended and restated or
otherwise modified and in effect from time to time, the “Senior Secured Notes Indenture”),
among Ziff Davis Media, as issuer, the other Debtors other than Ziff Davis Intermediate
Holdings Inc., as guarantors (collectively, the “Guarantors”), and U.S. Bank National
Association, as trustee (the “Indenture Trustee”), Ziff Davis Media issued senior secured floating
rate notes due 2012 in the original aggregate principal amount of $205,000,000 (the “Floating
Rate Senior Secured Notes”). As of the Petition Date, the Debtors’ obligations under the Senior
Secured Notes Indenture in respect of the Floating Rate Senior Secured Notes included
$205,000,000 in unpaid principal, accrued and unpaid interest in the amount of at least
$13,950,361, and fees, expenses and other amounts due under the Senior Secured Notes
Indenture and the Floating Rate Senior Secured Notes (collectively, the “Pre-Petition Indenture
Obligations”).
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C. The First Lien Security Agreement
21. Pursuant to that certain First Lien Security Agreement, dated as of April 22, 2005
(as amended, supplemented, amended and restated or otherwise modified and in effect from time
to time, the “First Lien Security Agreement”), among each of the Debtors (other than Ziff Davis
Intermediate Holdings Inc.) and U.S. Bank National Association, as collateral trustee for the
holders of the Floating Rate Senior Secured Notes (the “Collateral Trustee”), as security for the
Debtors’ obligations under the Senior Secured Notes Indenture and the Floating Rate Senior
Secured Notes, the Debtors granted to the Collateral Trustee, for the benefit of the holders of the
Floating Rate Senior Secured Notes, valid and perfected first-priority continuing liens on and
security interests in (collectively, the “FRN Pre-Petition Liens”) substantially all of the Debtors’
property, including all proceeds thereof (collectively, the “Pre-Petition Collateral”), as more fully
22. Pursuant to a Collateral Trust Agreement, dated as of April 22, 2005 (as amended,
supplemented, amended and restated or otherwise modified and in effect from time to time, the
“Collateral Trust Agreement”), among Ziff Davis Media, other pledgors from time to time party
thereto (the “Pledgors”), the Indenture Trustee and the Collateral Trustee, Ziff Davis Media and
the Pledgors granted the Collateral Trustee the right to hold in trust for the benefit of all holders
of Pre-Petition Senior Secured Debt Obligations (as defined below) all right, title and interest to
and under the Pre-Petition Collateral for the benefit of the holders of the Pre-Petition Senior
Secured Debt Obligations (as defined below) and all cash and non-cash proceeds thereof. The
Collateral Trust Agreement further provides, among other things, that the Pre-Petition Indenture
Obligations shall be discharged in full prior to the discharge of any junior liens or the rights and
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remedies of any lienholders junior to the Pre-Petition Liens, including the Subordinated Notes
23. Pursuant to a Note Purchase Agreement, dated as of February 15, 2007 (as
amended, supplemented, amended and restated, or otherwise modified and in effect from time to
time, the “Note Purchase Agreement”), among Ziff Davis Media and the purchasers party
thereto, Ziff Davis Media issued new Senior Secured Notes due 2012 (the “New Notes” and,
together with the Floating Rate Senior Secured Notes, collectively, the “Senior Secured Notes”).
As of the Petition Date, the Debtors’ obligations under the Note Purchase Agreement in respect
of the New Notes included $20,000,000 in unpaid principal, accrued and unpaid interest in an
amount of at least $3,307,000, and fees, expenses and other amounts due and payable under the
Note Purchase Agreement and the New Notes (collectively, the “Pre-Petition Note Purchase
Agreement Obligations” and, together with the Pre-Petition Indenture Obligations, collectively,
24. Pursuant to the Security Agreement and the Collateral Trust Agreement, the
holders of Pre-Petition Note Purchase Agreement Obligations share equally and ratably in the
same Pre-Petition Collateral that secures the Pre-Petition Indenture Obligations, and the
Collateral Trustee serves as Collateral Trustee for both the holders of the Floating Rate Senior
Secured Notes and the New Notes. (The loan and security documentation comprising the Pre-
Petition Senior Secured Debt Obligations shall be collectively referred to herein as the “Pre-
25. Subject to specified exceptions and permitted liens, the Prepetition Secured
Lenders contend that the New Notes and guarantees (other than the guarantee of Ziff Davis
Holdings) are secured by a first-priority security interest in substantially all of the Debtors’ assets
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pursuant to the First Lien Security Agreement on an equal and ratable basis with the Floating
Rate Notes.
26. The assets sold in the Enterprise Sale constituted the Pre-Petition Collateral
pledged to the Collateral Trustee pursuant to the Pre-Petition Financing Documents. The Net
Proceeds were deposited into Ziff Davis’s operating account (account no. 725-02093, the “Initial
Account”) at Merrill Lynch, Pierce, Fenner & Smith Inc. (“Merrill Lynch”).
27. The full amount of the Net Proceeds, less payment of accrued and unpaid interest
in the amount of $5,820,078 due pursuant to the Floating Rate Senior Secured Notes on August
1, 2007, and payment of accrued and unpaid interest in the amount of $602,693 due pursuant to
the New Notes on August 1, 2007 (the “Remaining Net Proceeds”), were transferred to a special-
purpose, segregated, interest-bearing account at Merrill Lynch, account no. 725-02095 (the
“Segregated Account”), from which Merrill Lynch has made certain transfers at the joint
28. In addition to the Prepetition Secured Debt, prior to the Petition Date, the Debtors
also incurred certain unsecured debt obligations. As of the Petition Date, the Debtors have
obligations consist of: (a) approximately $173,071,608 of obligations in connection with certain
senior subordinated compounding notes due 2009; and (b) approximately $13,279,759
29. On July 21, 2000, pursuant to that certain indenture by and among Ziff Davis
Media, as issuer, its domestic affiliates, as guarantors, and Bankers Trust Company, as indenture
trustee, the Debtors issued $250 million of senior subordinated notes (the “2000 Notes”). Under
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the indenture that governs the 2000 Notes, the 2000 Notes accrue interest at the rate of 12.0% per
30. In 2002, in an effort to restructure their debt obligations, the Debtors issued senior
subordinated compounding notes due 2009 (the “Compounding Notes”) pursuant to that certain
indenture dated as of August 12, 2002, by and among Ziff Davis Media, as issuer, its domestic
affiliates, as guarantors, and Deutsche Bank Trust Company Americas, as indenture trustee. The
Compounding Notes accrue interest at the rate of 12.0% to 14.0% per annum.
31. The Compounding Notes were issued in connection with a financial restructuring
pursuant to which a substantial majority of the holders of the 2000 Notes exchanged their 2000
Notes for a combination of cash, Compounding Notes, preferred stock and warrants to purchase
common stock. As a result of the 2002 financial restructuring, the 2000 Notes are subordinated
32. The publishing business of ZD Inc., the Debtors' predecessor, reached its apex in
both size and profitability during the Internet-based business boom of the late 1990s. During this
period, those publishing assets generated annual revenues of approximately $500 million and
cash earnings margins in excess of twenty percent (20%). In April 2000, Ziff Davis Holdings
acquired those publishing assets of ZD Inc. As a result of, and after, the acquisition, the
33. After the 2000 acquisition, the Company anticipated that it would be able to
expand its publishing business and build complimentary websites to grow its Internet business.
The Company believed that such expansion would increase its advertising and subscription
revenues as a result of the favorable business conditions faced by the Company’s technology and
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Internet-based business advertising consumers during the late 1990s. In particular, the Company
expected that such favorable conditions would allow its technology and Internet-based business
customers to develop new products that could be advertised in the Company’s publications.
34. However, beginning in 2000, the factors that had caused the growth of Internet-
based businesses during the late 1990s deteriorated. Such deteriorating conditions negatively
impacted the Debtors’ businesses. As conditions for Internet-based businesses worsened, certain
technology firms were not able to remain in business and liquidated. The liquidation of these
technology firms reduced the number of actual and potential companies whose products were or
could be advertised in the Debtors’ magazines and eliminated the market available for certain of
the Company's magazines. As a result of the disappearance of a large portion of the Company's
market and the decrease in the advertising budgets of surviving technology firms, the Debtors’
experienced declining advertising revenues and were forced to discontinue publishing a number
of magazines. The Debtors' print advertising revenues have decreased from $215 million in
35. Compounding the Debtors’ decreasing advertising revenues, during the early
2000s, the Debtors also suffered decreasing revenues from subscriptions to their print magazines.
Beginning in the late 1990s, the Internet became an increasingly widely used information
medium. As many of the Debtors’ magazine subscribers are individual technology consumers,
videogame users, and corporate technology executives, they quickly adapted to obtaining their
technology and videogame product information from Internet, rather than print, sources.
36. As a result of the 2000 acquisition, the Debtors maintained a highly leveraged
capital structure that prevented them from developing sufficient Internet publications in a timely
manner to satisfy their subscribers’ demands to obtain their technology and videogame
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purchasing information and news from Internet publications. The Debtors’ magazine subscribers
canceled their print magazine subscriptions or allowed them to lapse and the Debtors were
Official U.S. PlayStation Magazine, Ziff Davis Smart Business, Yahoo! Internet Life, Family PC,
Interactive Week, Expedia Travels, Smart Partner, GMR, Game Now and Xbox Nation.
discontinuation of certain print magazines, the Debtors’ subscription and magazine circulation
revenues have declined from $50 million in 2001 to $18 million in 2007.
38. The Debtors’ decreasing subscription and advertising revenues were the principal
cause of the Debtors experiencing a decline in total annual revenues from approximately
$300 million in 2001 to approximately $76 million in 2007 (excluding revenues from the
39. As the Debtors experienced decreasing revenues and operational difficulties, they
continued to maintain significant leverage and, as such, attendant high debt costs. As of
December 31, 2007, the Debtors' books reflected approximately $500 million of debt obligations
and assets (including goodwill) of approximately $313 million. Additionally, as of June 30,
2007, the Debtors maintained a working capital deficit of approximately $401 million, of which
$378 million was the Company's secured and unsecured indebtedness that was classified as a
current liability as a result of the Company's failure to make an interest payment on the
40. As a result of the Debtors’ significant leverage, the Debtors did not have
over the past four (4) years, the Debtors have suffered net losses ranging from approximately
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$85 million to $415 million. Additionally, during this same period, the Debtors have
41. In connection with their operational and financial difficulties and declining cash
flow, on August 15, 2007, the Debtors issued a press release announcing that they were
exploring various options to restructure their debt and, in connection therewith, the Debtors
would not make the next scheduled interest payment on the Compounding Notes. The failure to
make this interest payment constituted an event of default under the Senior Secured Notes
42. On November 1, 2007, Ziff Davis Media failed to pay interest due pursuant to the
Senior Secured Notes Indenture. Such failure also constituted an event of default under the
Senior Secured Notes Indenture (the "December 1 Event of Default," and together with the
43. Each of the Events of Default entitled the Collateral Trustee to demand, pursuant
to section 7(d) of the First Lien Security Agreement, that all Cash and Cash Proceeds (both as
defined in the First Lien Security Agreement) be turned over to the Collateral Trustee. Further,
pursuant to section 7(d) of the First Lien Security Agreement, since the occurrence of the initial
Event of Default under the Senior Secured Notes Indenture, (i) all Cash and Cash Proceeds (both
as defined in the First Lien Security Agreement) were to be held in trust by the Debtors for the
Collateral Trustee, segregated from other funds and turned over to the Collateral Trustee in the
exact form received, and (ii) the Remaining Net Proceeds have in fact been so held in the
Segregated Account except as described herein. Additionally, pursuant to section 4.01 of the
Senior Secured Notes Indenture, the September 14 Event of Default obligated Ziff Davis to pay
interest on the overdue installment of interest, without regard to the thirty-day grace period, at
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the rate equal to 1% per annum in excess of the applicable interest rate on the Floating Rate
Agreement”)3 between Ziff Davis Media, the Grantors (as defined therein) and the Collateral
Trustee, the Collateral Trustee, among other things, agreed to forbear from demanding
immediate turnover of Cash and Cash Proceeds (each as defined in the Forbearance Agreement),
including the Remaining Net Proceeds. Ziff Davis agreed, among other things, not to withdraw
funds from the Segregated Account prior to providing fourteen (14) calendar days written notice
to the Collateral Trustee; provided that no notice was required to withdraw funds for Permitted
Purposes (as defined therein). The Forbearance Agreement provided for termination upon,
among other things, written notice by the Grantors to transfer funds from the Segregated
45. From November 7, 2007 through the end of January 2008, the Debtors continued
to work with the holders of the Prepetition Secured Debt and the holders of the Compounding
Notes to facilitate a resolution. However, as the end of January neared without resolution, the
Debtors determined that to continue their operations, they would require access to $20 million of
the Remaining Net Proceeds maintained in the Segregated Account. Accordingly, on January
25, 2008, Ziff Davis Media notified the Collateral Trustee (the “Withdrawal Notice”) of its intent
to withdraw $20,000,000 from the Segregated Account for a purpose other than a Permitted
3 A copy of the Forbearance Agreement is attached as Exhibit B to the Motion of the Debtors for Interim and Final Orders (A) Authorizing
the Debtors' Use of Cash Collateral, (B) Granting Adequate Protection Pursuant to Sections 105, 361 and 363 of the Bankruptcy Code and
(C) Scheduling a Final Hearing for Approval of the Debtors' Use of Cash Collateral (the "Cash Collateral Motion") filed contemporaneously
herewith.
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Termination Event (as defined in the Forbearance Agreement) resulting in termination of the
46. By letter to Merrill Lynch dated January 29, 2008, the Collateral Trustee
exercised its rights, as attorney-in-fact pursuant to section 6(iv) of the Collateral Trust
Agreement, to control the Segregated Account and directed Merrill Lynch to transfer all funds
held therein to the Collateral Trustee. By letter to Merrill Lynch dated February 8, 2008 (the
“February 8 Letter”), the Collateral Trustee agreed with the Debtors that no funds would be
withdrawn or transferred from the Account unless the Debtors and the Collateral Trustee
jurisdiction. The February 8 Letter reserved for the Collateral Trustee the right to exercise
control over the Segregated Account. By letter to Merrill Lynch dated February 9, 2008, the
Collateral Trustee, pursuant to its rights under section 6(iv) of the Collateral Trust Agreement,
provided written authorization to Merrill Lynch to transfer title to the Segregated Account from
47. The Debtors believe that the Remaining Net Proceeds constitute the Trustee’s
cash collateral within the meaning of section 363(a) of the Bankruptcy Code. In addition, the
Debtors admit that any cash not in the Segregated Account, including cash in other deposit
accounts, wherever located, whether as original collateral or proceeds or products of other Pre-
Petition Collateral, and whether now existing, or hereafter arising, constitutes cash collateral of
48. The Collateral Trustee and holders of in excess of 80% in principal amount of the
Floating Rate Senior Secured Notes (the “Floating Rate Noteholder Group”), on the other hand,
believe that the Remaining Net Proceeds are not Cash Collateral or otherwise property of the
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Debtors’ estates. Instead, the Collateral Trustee and the Floating Rate Noteholder Group believe
that the Remaining Net Proceeds are being held at Merrill Lynch in trust for the Collateral
Trustee, pursuant to section 7(d) of the First Lien Security Agreement. Alternatively, the
Collateral Trustee and the Floating Rate Noteholder Group believe that title to the Segregated
Account and the Remaining Net Proceeds was transferred to the Collateral Trustee prior to the
Petition Date.
49. The Debtors believe the Remaining Net Proceeds are property of the Debtors’
estates and that any effort by the Collateral Trustee to transfer title to the Remaining Net
Proceeds was not legally effective. Rather than dispute ownership of the Remaining Net
Proceeds at the initial Cash Collateral hearing in these cases, the Debtors, the Collateral Trustee
and the Floating Rate Noteholder Group have determined to permit the Debtors to use a portion
of the Remaining Net Proceeds and any Cash Collateral in accordance with the terms of the
proposed Stipulation and Interim Order (a) Authorizing the Debtors' Use of Cash Collateral,
(b) Granting Adequate Protection Pursuant to Sections 105, 361 and 363 of the Bankruptcy
Code and (c) Scheduling a Final Hearing for Approval of the Debtors' Use of Cash Collateral
(the "Interim Cash Order") pending the final hearing on the Debtors’ use of Cash Collateral.
50. Prior to the Petition Date, the Floating Rate Noteholder Group organized and
retained counsel and a financial advisor, the fees and expenses of which have been paid by Ziff
Davis Media out of Pre-Petition Collateral, pursuant to engagement letters executed pre-petition.
Each of the members of the Floating Rate Noteholder Group and each of the Debtors executed a
plan support agreement prior to the Petition Date pursuant to which, inter alia, each of the
members of the Noteholder Group agreed, subject to the terms and conditions specified therein,
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to support and vote in favor of, and the Debtors agreed to seek confirmation of, a plan of
51. Specifically, the Plan Support Agreement provides that, in exchange for the full
amount outstanding under the $225,000,000 in principal amount of Senior Secured Notes, the
holders thereof will receive (a) the balance of the Net Proceeds, (b) a new $50,000,000 senior
secured note, which may, under certain circumstances, be increased to $55,000,000, and
(c) 88.8% of the new common equity of the reorganized Debtors upon emergence from chapter
11 (subject to dilution).
52. The Plan Support Agreement also provides that the holders of the Senior Secured
Notes will allow the Debtors to retain sufficient cash proceeds from the Enterprise Sale to fund
operations during these chapter 11 cases as well as to fund the Debtors' business plan and
operations after emergence from chapter 11. The Debtors filed these proceedings in order to
effectuate the terms of the restructuring contemplated by the Plan Support Agreement.
necessary through these chapter 11 cases, the Debtors expect to use these chapter 11 cases to
PART II
I. PROCEDURAL MOTIONS
54. The Debtors in these chapter 11 cases are affiliated entities. The Debtors request
that, in light of the fact that Ziff Davis Media and its affiliates have each filed petitions in this
Court, the Court can and should jointly administer the chapter 11 cases. I believe that jointly
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administering these chapter 11 cases: (a) will ease the administrative burden on the Court and the
parties; (b) will protect creditors of different estates; and (c) will simplify the United States
believe that joint administration is in the best interests of the Debtors’ estates.
55. The Debtors have approximately 3,000 potential creditors (including current and
former employees). Further, the conduct and operation of the Debtors’ business operations
require the Debtors to maintain voluminous books and records and complex accounting systems.
Given the size and complexity of their business operations, the number of creditors, and the fact
that certain prepetition invoices have not yet been received, or entered into the Debtors’ financial
accounting systems, the Debtors have begun, but have not yet finished, compiling the
information required to complete their statements of financial affairs and schedules of assets and
liabilities, current income and expenditures, and executory contracts and unexpired leases
56. Given the urgency with which the Debtors sought chapter 11 relief and the
numerous critical operational matters that the Debtors’ staff of accounting and legal personnel
must address in the early days of these chapter 11 cases, I do not believe that the Debtors will be
in a position to complete the Schedules and Statements within the time specified in Bankruptcy
Rule and Local Rule 1007-1(b). Completing the Schedules and Statements for the Debtors will
require the collection, review and assembly of information from multiple locations.
Nevertheless, recognizing the importance of the Schedules and Statements in these chapter 11
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cases, the Debtors intend to complete the Schedules and Statements as quickly as possible under
the circumstances.
57. Accordingly, the Debtors respectfully request that the Court extend by an
additional thirty (30) days (for a total of forty-five days from the Petition Date), the deadline to
file the Schedules and Statements, pursuant to Rule 1007 of the Bankruptcy Rules. I believe that
the substantial size, scope and complexity of these cases and the volume of material that must be
compiled and reviewed by the Debtors’ staff in order to complete the Schedules and Statements
for each Debtor during the initial days of these chapter 11 cases provides ample “cause” for
58. The Debtors are highly complex enterprises with operations throughout the
United States and have, as noted above, approximately 3,000 potential creditors. Requiring each
of the Debtors to file a separate top 20 list in each of their respective cases would generate
hundreds of names, addresses and claim amounts. I do not believe that such a voluminous filing
would facilitate the United States Trustee’s or any other party in interest’s review of creditor
claims.
59. In addition, the exercise of compiling separate top 20 lists would consume an
excessive amount of the Debtors’ scarce time and resources. Considering the tremendous burden
that would be imposed upon the Debtors and their respective estates by filing individual top
twenty lists and the absence of any corresponding benefit to the U.S. Trustee or parties in
interest, the Debtors seek authority to file a single consolidated list of the 30 largest unsecured
creditors in these cases. I believe that such relief is not only appropriate under the
circumstances, but necessary for the efficient and orderly administration of these cases.
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60. Similarly, because many of the creditors are shared among the Debtors, the
Debtors would expend significant resources and effort to reconcile their accounts to accurately
attribute each creditor’s claim against each Debtor in order to file a list of the 20 largest
unsecured claims for each Debtor. In order to avoid duplication and to limit administrative
expenses while still providing adequate notice to unsecured creditors, the Debtors seek authority
to file a single, consolidated list of general unsecured creditors holding the 30 largest claims. I
believe it is in the best interest of the Debtors and their estates to allow the Debtors to file a
61. The Debtors, by separate application, are seeking authority to retain the BMC
Group, Inc. (“BMC”) as their notice and claims agent. The Debtors propose that BMC undertake
all mailings directed by the Court, the United States Trustee or as required by the Bankruptcy
Code. Additionally, BMC will assist the Debtors in preparing creditor lists and mailing required
notices. With such assistance, the Debtors will be prepared to file a computer readable
consolidated list of creditors and a list of equity security holders upon request, and will be
62. The Debtors seek to retain Winston & Strawn LLP (“Winston”) pursuant to
section 327(a) of the Bankruptcy Code as their attorneys because Winston has extensive
experience and knowledge in the field of debtors’ and creditors’ rights and business
possesses extensive expertise, experience, and knowledge practicing before bankruptcy courts.
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63. In preparing for its representation of the Debtors in these cases, Winston has
become familiar with the Debtors’ businesses and affairs and many of the potential legal issues
64. The Debtors have been informed that Winston, partners at Winston, as well as
other partners of, counsel to, and associates of Winston, who will be employed in these chapter
11 cases, are members in good standing of their respective state bars and that such attorneys are
admitted to practice or are requesting admission pro hac vice to appear in the United States
65. I believe that the employment of Winston is appropriate and necessary to enable
the Debtors to faithfully execute their duties as debtors and debtors-in-possession, and to
implement the restructuring and reorganization of the Debtors. Accordingly, I believe that
Winston is both well-qualified and uniquely able to represent them in the chapter 11 cases in an
66. The Debtors seek to employ and retain Alvarez & Marsal North America, LLC
(“Alvarez”), pursuant to section 327(a) and 328(a) of the Bankruptcy Code, to perform financial
and restructuring advisory services for the Debtors in these chapter 11 cases.
67. The Debtors are familiar with the professional standing and reputation of Alvarez.
The Debtors understand that Alvarez has a wealth of experience in providing financial and
related advisory services in restructurings and reorganizations, and enjoys an excellent reputation
for the services it has rendered in large and complex chapter 11 cases on behalf of debtors and
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68. On or about August 9, 2007, Alvarez was engaged to provide restructuring and
financial advisory services to the Debtors. Since this time, Alvarez has, among other activities:
(a) developed a weekly liquidity budget, a 13-week cash flow forecast and analyzed working
capital requirements in both the short term and longer term; (b) assisted the Debtors in
developing and implementing cash management strategies, tactics and processes; (c) assisted the
efforts; (d) developed financial projections models which will be used in coordination with the
Company’s business plan and valuation to which Alvarez is also providing assistance;
(e) assisted the Debtors in negotiations with creditors and customers; and (f) assisted the Debtors
69. As a result of this prepetition work performed on behalf of the Debtors, Alvarez
has developed a great deal of institutional knowledge regarding the Debtors’ operations, finance,
and systems. Such experience and knowledge will be valuable to the Debtors in their efforts to
reorganize. Accordingly, the Debtors wish to retain Alvarez to provide assistance during these
chapter 11 cases. I believe that the services of Alvarez are necessary to enable the Debtors to
maximize the value of their estates and to reorganize successfully. Further, I believe that
Alvarez is well-qualified and able to represent the Debtors in a cost-effective, efficient, and
timely manner.
70. As noted above, the Debtors have approximately 3,000 potential creditors. Upon
information and belief, the office of the Clerk of the Bankruptcy Court for the Southern District
of New York (the “Clerk’s Office”) is not equipped to efficiently and effectively serve notice on
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the large number of creditors and parties in interest and administer claims during these chapter
11 cases. The sheer size and magnitude of the Debtors’ creditor body makes it impracticable for
71. The Debtors respectfully submit that the most effective and efficient manner of
noticing these creditors and parties in interest of the filing of these chapter 11 cases, and to
transmit, receive, docket, maintain, photocopy, and scan claims, is for the Debtors to engage an
independent third party to act as the Debtors’ notice and claims agent. The Debtors may also
Accordingly, the Debtors propose to employ BMC as notice, claims, and balloting agent, inter
alia, to assist the Debtors in distributing notices, as necessary, and to process other
72. I believe that BMC is well-qualified to serve in this capacity and that BMC’s
retention is in the best interests of the Debtors’ estates and their creditors. After soliciting bids
from BMC and one other prospective notice and claims agent, and holding telephonic interviews
with such parties, the Debtors chose BMC based on both its experience and the competitiveness
of its fees. I believe that the most effective and efficient manner of noticing creditors and parties
in interest in these chapter 11 cases, and administering the claims process, is for the Debtors to
engage BMC, as an independent third party to act as the Debtors’ notice and claims agent.
73. Therefore, the Debtors wish to engage BMC to send out certain designated
notices and to collect and monitor claims and perform certain ballot-related functions with
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D. Motion of the Debtors for an Order Establishing Procedures for Interim
Compensation and Reimbursement of Expenses for Professional and
Members of the Official Committees
74. The procedures proposed by the Debtors in the Interim Compensation Motion (the
“Compensation Procedures”) will enable the Debtors to closely monitor costs of administration,
maintain a level cash flow availability, and implement efficient cash management procedures.
Moreover, these procedures will allow the Court and key parties in interest to determine the
reasonableness and necessity of the compensation and reimbursement sought pursuant to such
procedures.
75. I also submit that the efficient administration of the chapter 11 cases will be
significantly aided by establishing the Compensation Procedures. Moreover, the significant size
of these cases and the amount of time and effort that will be required from the Debtors’
Procedures requested herein. Indeed, such Compensation Procedures are necessary to ensure
that the professionals are compensated fairly and timely for their services in these cases, and are
not forced to bear undue financial burden or risk caused by delays in payment. I believe that
76. The Debtors routinely retain the services of various attorneys, accountants, and
other professionals in the ordinary course of their business operations (each an “Ordinary Course
Professional” or “OCP” and, collectively, the “OCPs”). The OCPs provide services to the
Debtors in a variety of discrete matters unrelated to these chapter 11 cases, including, but not
limited to, employee benefits, general corporate, accounting, auditing, tax, and litigation matters.
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A list of the Debtors’ current OCPs is attached to the Ordinary Course Professionals Motion as
Exhibit B.
77. The Debtors seek permission to continue to employ the OCPs post-petition
without the necessity of each OCP filing formal applications for employment and compensation
pursuant to the Bankruptcy Code. Given the number and geographic diversity of the OCPs that
are regularly retained by the Debtors, I believe it would be unwieldy and burdensome to both the
Debtors and this Court to request each such OCP to apply separately for approval of its
78. The Debtors represent that (a) they wish to employ the OCPs as necessary for the
day-to-day operations of the Debtors’ businesses, (b) expenses for the OCPs will be kept to a
minimum, and (c) the OCPs will not perform substantial services relating to bankruptcy matters
79. Although some of the OCPs may hold minor amounts of unsecured claims against
the Debtors in respect of prepetition services rendered, the Debtors do not believe that any of the
OCPs have an interest materially adverse to the Debtors, their creditors, or other parties in
interest. By the Ordinary Course Professionals Motion, the Debtors are not requesting authority
80. The Debtors’ cash management system (the “Cash Management System”)
consists of approximately twelve (12) accounts (collectively, the “Bank Accounts”), each of
which is described in detail below and in the flowchart of the Cash Management System attached
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to the Cash Management Motion as Exhibit B. A schedule of the Bank Accounts is attached to
81. The use of the Cash Management System is essential to enable the Debtors to
centrally control and monitor corporate funds, ensure cash availability and liquidity, comply with
facilitating the movement of funds, and enhance the development of accurate account balance
and presentment information. These controls are crucial given the significant volume of cash
82. The principal components of the Cash Management System and of the flow of
1. Operating Accounts
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approximately three to four times each month. Each transfer to the
Main Operating Account is in the amount of approximately
$500,000. The Debtors’ disbursements are not funded directly
from the Legacy Operating Account.
2. Disbursement Accounts
3. Receivables Accounts
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Subscription Receivables Account are transferred to the Legacy
Operating Account and ultimately to the Main Operating Account.
4. Segregated Account
5. Inactive Accounts
83. As described in greater detail below, I believe that the relief requested in the
motion will help to ensure the Debtors’ orderly administration of these chapter 11 cases. It also
will avoid many of the possible disruptions and distractions that not only could divert the
Debtors’ attention from more pressing matters during the initial days of these chapter 11 cases,
but also devastate the operations of the Debtors upon commencement of these cases.
84. I believe that, given the substantial size and complexity of the Debtors’ business
operations, a successful and orderly reorganization of the Debtors’ businesses simply cannot be
achieved unless the Debtors continue utilizing their current integrated Cash Management
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System, as described in the Cash Management Motion. It is critical that the Debtors continue to
be able to consolidate their cash management and centrally coordinate fund transfers in order to
efficiently and effectively operate their large, complex business operations. I believe that
substantially disrupting these cash management procedures would severely impair the Debtors’
ability to (a) preserve and enhance their respective going concern values and (b) reorganize
successfully during these chapter 11 cases. Moreover, creating an entirely new cash
management system would also inevitably have a deleterious effect on the Debtors’
recordkeeping. It is essential, therefore, that the Debtors be permitted to continue to use their
85. The Cash Management System in its current basic structure is a mainstay of the
Debtors’ ordinary, usual and essential business practices. The Cash Management System is
similar in form to those commonly employed by corporate enterprises comparable to the Debtors
in size and complexity. Businesses tend to use such systems because of the numerous benefits
they provide, including the ability to (a) track, and thus control, all corporate funds through an
ability to provide near-continuous status reports on the location and amount of all such funds,
(b) ensure cash availability, and (c) reduce administrative expenses by facilitating the movement
of funds and the development of timely and accurate account balance and presentment
information. These controls are particularly important here, given the significant amount of cash
86. In addition, given the Debtors’ corporate and financial structure, it would be
difficult for the Debtors to establish an entirely new system of Bank Accounts and a new Cash
Management System. The depository banks at which the Debtors’ Bank Accounts are
maintained are not all included in the list of approved depositories as issued by the Office of the
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United States Trustee for the Southern District of New York. Therefore, without the relief
requested herein, the Debtors would be required to shutdown their Cash Management System
and then establish a new system with only approved depository banks.
87. I believe that establishing new bank accounts would cause significant disruptions
to the Debtors’ businesses. The delays that would result from opening new accounts, revising
cash management procedures, and instructing customers to redirect payments would negatively
impact the Debtors’ ability to operate their businesses while pursuing these arrangements and
unnecessarily distract the Debtors’ attention away from their reorganization efforts. Thus, under
the circumstances, maintaining the Debtors’ Cash Management System is both essential and in
the best interests of their respective estates and creditors. Furthermore, preserving the “business
as usual” atmosphere and avoiding the unnecessary distractions that would inevitably be
associated with any substantial disruption in the Debtors’ Cash Management System obviously
88. Before the Petition Date, the Debtors, in the ordinary course of business,
maintained several Bank Accounts with certain financial institutions (collectively, the “Banks”).
Each of the Bank Accounts with the corresponding Bank is listed in Exhibit C attached to the
Cash Management Motion. Some of these Bank Accounts are located at Banks other than those
designated as authorized depositories by the United States Trustee. The Debtors’ main operating
89. If enforced in these chapter 11 cases, the requirement of opening new bank
accounts would cause enormous disruption in the Debtors’ businesses and would impair their
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burdens and expenses if they were required to close and reopen new accounts, execute new
signatory cards and/or depository agreements, and create an entirely new manual system for
issuing checks and paying postpetition obligations, as generally required by the US Trustee.
90. I believe that maintaining the Bank Accounts would greatly facilitate the Debtors’
postpetition, and to ensure as smooth a transition into chapter 11 as possible, the Debtors should
be permitted to continue to maintain the existing Bank Accounts and, if necessary, to open new
accounts and close existing accounts in the normal course of business operations.
91. The Debtors represent that, if the relief requested is granted, they will implement
appropriate mechanisms to ensure that no payments will be made on any debts incurred by them
before the Petition Date, other than those authorized by this Court. Specifically, the Debtors
have centralized the control and management of their accounts payable systems, and
implemented procedures, which prohibit payments to be issued without prior approval of the
Debtors’ senior financial management. In turn, the Debtors’ senior financial management shall
consult with the Debtors’ advisors and bankruptcy counsel in connection with such approvals.
92. In the ordinary course of their businesses, the Debtors use a multitude of checks
and other business forms. By virtue of the nature and scope of the Debtors’ business operations
and the large number of suppliers of goods and services with whom the Debtors deal on a regular
basis, I believe it is important that the Debtors be permitted to continue to use their existing
checks and other business forms without alteration or change, except as requested in the Cash
Management Motion. Indeed, because parties doing business with the Debtors undoubtedly will
be aware of the Debtors’ status as a debtor-in-possession as a result of the large and highly
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publicized nature of these chapter 11 cases, changing preprinted business forms is unnecessary
for the Debtors to conduct transactions by debit, wire, or ACH payments and other similar
methods. In addition, a portion of the Debtors’ customer receipts are received through wire
transfers. To deny the Debtors the opportunity to conduct transactions by debit, wire, or ACH
payments or other similar methods would interfere with the Debtors’ performance of their
contracts and unnecessarily disrupt the Debtors’ business operations, as well as create additional
costs to the Debtors and their non-debtor affiliates. Currently, certain commercial relationships
with the Debtors’ vendors include payment by these means as part of a negotiated set of terms
and conditions.
94. In the ordinary course of business, the Debtors fund the Payroll Account for the
cost of employee payroll, tax withholdings, and other employee benefits. The Debtors provide
affiliate of Automatic Data Processing, Inc., and drawn on the Debtors’ accounts. If ProBusiness
is not authorized to continue this practice it could result in a disruption of the Debtors’ employee
payroll, which could lead to a significant erosion of the Debtors’ employees’ morale.
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B. Motion of the Debtors for an Order (A) Authorizing the Debtors to Pay
Certain Prepetition (I) Wages, Salaries, Bonuses, and Other Compensation,
(II) Reimbursable Employee Expenses, and (III) Employee Medical and
Similar Benefits; (B) Confirming that the Debtors May Continue Prepetition
Employee Programs in the Ordinary Course of Business; and (C) Directing
Banks and Other Financial Institutions to Honor All Related Checks and
Electronic Payment Requests
95. As of the Petition Date, the Debtors and their non-Debtor affiliates employ
approximately 266 employees, of whom approximately 258 are full-time employees (the “Full-
Time Employees”) and approximately 8 are part-time employees (the “Part-Time Employees,”
and together with the Full-Time Employees, the “Employees”).4 Approximately 20 Employees
(8%) are paid on an hourly basis and approximately 246 Employees (92%) are paid salary. None
of the Employees are unionized and none of the Debtors are party to any collective bargaining
agreements.
administration, finance, human resources, product research and development, customer service,
editorial, internet and online operations, management, marketing, purchasing and sales, shipping,
technical services, training and compliance, and other tasks. The Employees’ skills and their
knowledge and understanding of the Debtors’ operations, customer relations, and infrastructure
97. Just as the Debtors depend on their Employees to operate, the Employees depend
on the Debtors. The vast majority of the Debtors’ Employees rely exclusively on their
pay their daily living expenses, and these Employees will be exposed to significant financial
4 The Part-Time Employees include four (4) interns who are paid as Part-Time Employees and earn an hourly rate but are not eligible for and
do not receive any Employee Benefits (as defined herein).
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difficulties if the Debtors are not permitted to pay the Employees their full unpaid compensation,
Employee Obligations
98. In the ordinary course of business, the Debtors incur payroll obligations to the
Employees. Such obligations generally comprise wages and salaries, but may also include
incentive bonuses awarded for sales productivity and goal attainment. The Debtors pay their
Employees periodic payments for wages and salaries in arrears on a semi-monthly basis,
typically on the fifteenth and the last day of every month (each a “Pay Date”).5 Approximately
95% of the Debtors’ payroll is made by direct deposit through electronic transfer of funds
directly to Employees (“Direct Deposit”) with the other 5% of Employees receiving checks.6 On
average, the Debtors have gross payroll expenses of approximately $2.5 million per month.
99. Because all of the Employees are paid in arrears, as of the Petition Date, some of
the Employees have not been paid all of their prepetition wages. Additionally, some Employees
may be entitled to compensation because (a) discrepancies may exist between the amounts paid
and the amounts that should have been paid and (b) some payroll checks issued to Employees
prior to the Petition Date may not have been presented for payment or may not have cleared the
banking system and, accordingly, have not been honored and paid as of the Petition Date.
100. The Debtors outsource their payroll to a payroll services company, ProBusiness.7
In the ordinary course of business, the Debtors provide ProBusiness a schedule in advance of the
5 Paychecks are distributed on the fifteenth and last day of every month. If the Pay Date falls on a weekend day, Monday or holiday,
Employees are paid on the preceding business day.
6 Funds are available on each Pay Date for Employees on Direct Deposit. In New York, paychecks are available for distribution at 10:00 a.m.
on each Pay Date. In other locations, paychecks are mailed to the designated Employee in advance of each Pay Date.
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payroll payment period, and begin funding the payroll account two business days in advance of
each Pay Date. ProBusiness is also responsible for paying all the withholdings and payroll taxes
101. The Debtors’ last gross payroll for the Employees, in the approximate amount of
$1.3 million (including all employee deductions, withholding and employer-paid taxes and
benefits) was paid on February 29, 2008. The Debtors estimate that, as of the Petition Date,
approximately $290,000 in prepetition accrued wages, salaries, and other compensation (but
excluding reimbursable expenses, bonuses and vacation pay) earned prior to the Petition Date
remains unpaid (the “Unpaid Compensation”).8 The Debtors seek authority, but not direction, to
102. I believe that only one Employee is owed in excess of the $10,950.00 cap9 for the
aggregate amount of (i) Unpaid Compensation and bonuses (excluding bonuses pursuant to the
Management Incentive Program discussed below), (ii) amounts owed in connection with the
Employee Benefit Programs,10 and (iii) cash for vacation pay to terminated employees in those
states that require accrued vacation benefits to be paid to employees at the time of termination.
Such Employee is not an officer or director of the Debtors and is owed approximately
$11,028.00.
9 Under the new amendments to the Bankruptcy Code adopted on April 20, 2005, the claim amount for wages and salaries that is entitled to
priority under section 507(a) was increased from $4,925 per employee to $10,000 per employee, effective immediately upon enactment.
On April 1, 2007, this amount was automatically adjusted to $10,950 pursuant to section 104(b) of the Bankruptcy Code.
10 Most of the Debtors' employees receive medical benefits through the Debtors' self insured health insurance program. Therefore, amounts
received by each employee pursuant to such program depend on the number and cost of the specific medical claims submitted by each such
employee. Employee medical claims are confidential and may not be disclosed pursuant to applicable law. Therefore, the Debtors are
unable to calculate aggregate benefit costs on a per employee basis. However, the Debtors believe that the average benefit payment
(including all benefits) made on account of each employee is approximately 15% of the Debtors' gross payroll or $128,000. The average
benefit amount per employee per payroll is approximately $483.00. The Debtors believe that no employee will receive in excess of the
$10,950 cap including such employee's wages and compensation plus the average benefit cost per employee.
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• Deductions and Withholdings
103. During each applicable pay period, the Debtors routinely deduct certain amounts
from paychecks, including, without limitation, (a) garnishments, child support, and similar
deductions, and (b) other pre-tax and after-tax deductions payable pursuant to certain of the
Employee benefit plans discussed herein (such as an Employee’s share of health care benefits
and insurance premiums, contributions under flexible spending plans, 401(k) contributions,
legally ordered deductions, and miscellaneous deductions) (collectively, the “Deductions”). The
Debtors forward the amount of the Deductions to the appropriate third-party recipients. On
average, the Debtors have deducted approximately $200,000 from the Employees’ paychecks per
month. Due to the commencement of these chapter 11 cases, however, certain Deductions that
were deducted from Employees’ earnings may not have been forwarded to the appropriate third-
party recipients prior to the Petition Date. The Debtors estimate that as of the Petition Date,
approximately $15,000.00 in Deductions have not been forwarded to the appropriate third-party
recipients. Accordingly, the Debtors request authority, but not direction, to forward the
Deductions to the appropriate third party recipients and to continue to forward these prepetition
Deductions to the applicable third party recipients on a postpetition basis, in the ordinary course
104. Further, the Debtors are required by law to withhold from an Employee’s wages
amounts related to federal, state and local income taxes, social security and Medicare taxes for
remittance to the appropriate federal, state, or local taxing authority (collectively, the “Withheld
Amounts”). The Withheld Amounts are approximately $660,000 per month. The Debtors must
then pay social security and Medicare taxes and pay, based on a percentage of gross payroll,
additional amounts for federal and state unemployment insurance (the “Employer Payroll
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Taxes”). The Employer Payroll Taxes, including both the employee and employer portions, for
105. Prior to the Petition Date, the Debtors withheld the appropriate amounts from
Employees’ earnings for the Withheld Amounts and the Employer Payroll Taxes (collectively,
the “Payroll Taxes”), but such funds may not yet have been forwarded to the appropriate taxing
authorities. As discussed above, ProBusiness is responsible for paying all Payroll Taxes to the
applicable third parties once the Debtors fund the payroll account. The Debtors estimate that as
of the Petition Date, less than approximately $10,000 in Payroll Taxes (which comprise the
Withheld Amounts and Employer Payroll Taxes) have not been forwarded to the appropriate
taxing authorities. The Debtors request authority, but not direction, to forward the Payroll Taxes
to the appropriate third parties, and to continue to honor and process the prepetition payments for
Payroll Taxes on a postpetition basis, in the ordinary course of business, as routinely done prior
106. Prior to the Petition Date and in the ordinary course of their business, the Debtors
reimbursed Employees for certain reasonable and customary expenses incurred on behalf of the
Debtors in the scope of their employment (the “Reimbursable Expenses”). The Reimbursable
Expenses are paid on a semi-monthly basis, typically on the 15th and 30th day of each month
and include (a) travel expenses for meals, hotels and rental cars, (b) business development
expenses, (c) automobile gas mileage expenses, (d) telephone expenses, and (e) other business-
related expenses that are paid by the Employee. Employees obtain approval of their supervisor,
and then manually submit expense reports to the accounts payable department. The expense
reports are typically processed in four (4) business days and paid either by check or direct
deposit through the accounts payable system. As of the Petition Date, the Debtors do not have
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any pending requests for expense reimbursement. However, it is possible that certain Employees
may have incurred prepetition expenses for which they have not yet submitted requests for
reimbursement and will submit such requests to the Debtors after the Petition Date. The Debtors
estimate that the amount of postpetition requests for reimbursement of prepetition expenses will
107. Reimbursable Expenses are all incurred on the Debtors’ behalf and with the
understanding that they will be reimbursed. Accordingly, to avoid harming Employees who may
have incurred Reimbursable Expenses, the Debtors request authority, to be exercised in their sole
prepetition practices, (b) modify their prepetition policies relating thereto as they deem
appropriate, and (c) pay all Reimbursable Expenses that relate to the prepetition period and are
Employees and to maximize advertising sales which constitute a significant portion of the
Debtors' revenue, the Debtors offer a bonus-based sales incentive program (as modified on an
annual basis, the “Sales Incentive Program”). The Sales Incentive Program is typical of the
incentive programs used by other companies in the Debtors' industry. Under the Sales Incentive
Program, an Employee can earn bonuses, in addition to base salary, for a percentage of the
revenue that the Debtors recognize generated by that Employee’s sales of advertising for the
Debtors’ print publications (the “Print Ad Sales”) or websites (the “Online Ad Sales”). Certain
Employees can also earn bonuses based on the level of new business and existing business,
including referrals that result in additional business. The Sales Incentive Program further
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provides for certain additional bonuses which will be paid on all sales in-excess of budgeted
levels if an Employee reaches or exceeds his or her sales goals for the year.
109. Employees under the Sales Incentive Program receive 100% of the earned
standard bonus rate on all net sales on a monthly basis. Any bonuses for Online and Print Ad
Sales are paid on the last day of the month following the calendar month of billed advertising.
Employee bonuses constitute a substantial portion of their income. As a result, Employees rely
110. The Sales Incentive Program is an important part of the Employees' compensation
and brings substantial value to the estates because it encourages Employees to meet their
performance targets. Additionally, because the Sales Incentive Program has been a part of
Employees' compensation for more than seven years and is in the ordinary course of the Debtors'
business, the Employees rightfully consider these bonuses to be an integral part of their
the Employees and reassure the Employees of the Debtors' continued commitment to rewarding
111. The Debtors request (i) confirmation that the they may continue their prepetition
Sales Incentive Program in the ordinary course of business and (ii) authority to pay any
prepetition amounts related to the Sales Incentive Program. Under the Sales Incentive Program,
approximately 45 Employees are entitled to receive bonuses. The average payout for any
individual is less than $5,000.00. As of the Petition Date, the Debtors estimate11 that their
obligations for all unpaid prepetition bonuses under the Sales Incentive Program are
11 Bonuses for February sales are calculated in mid-March and payable at the end of March. Accordingly, the dollar amounts included in this
paragraph are the Debtors' estimates based upon each Employee's historical performance and are subject to change.
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in excess of the $10,950.00 cap. The Sales Incentive Program has been a long standing ordinary
course practice of the Debtors and was not adopted in anticipation of a chapter 11 filing.
target bonus program (as modified on an annual basis, the “Management Incentive Program,”
together with the Sales Incentive Programs, the "Incentive Programs"), which is open to
Employees holding certain management positions ranging from editorial content, subscriber
circulation, sales, marketing and technology managers. The Management Incentive Program has
been in effect since prior to the Debtors’ inception in 2000. It is typical of the incentive
programs used by other companies in the Debtors' industry to incentivize management. The
Management Incentive Program is designed to focus the attention of participants on results that
are directly tied to the Debtors’ performance and to share in that success by providing financial
rewards to selected individuals who make major contributions toward the Debtors’ goals.
Individual bonus payments are calculated within the discretion of the Debtors' Chief Executive
Officer based on the following three (3) factors: (a) a percentage of base salary; (b) the Debtors’
overall annual earnings performance compared to the earnings target set at the beginning of each
year by the Debtors’ board of directors; and (c) each individual’s performance as recommended
by the Debtors’ designated leadership team and approved by the board of directors (the “Board
113. Upon completion of the Debtors’ financial statements in March of the year
following the year in which the Debtors’ and the individual’s performance is reviewed, the
Board of Directors reviews the Debtors’ and each eligible bonus participant’s performance to
determine the incentive bonus amounts, if any, to be paid to each eligible Employee. The
Debtors made approximately $1.3 million (net of amounts paid to employees that are no longer
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employed by the Debtors) of bonus payments under the Management Incentive Program in 2007
restructuring efforts. If the Debtors are not able to continue the Management Incentive Program
in the ordinary course of business, management may not be sufficiently motivated to put forth
the extra effort necessary to effectuate this reorganization. If the Debtors do not fulfill their
obligations pursuant to the Management Incentive Program, management level employees may
conclude that the Company is not acknowledging the goals and objectives achieved to date as
well as the dedication that has been required of them during the past few months and that will be
required of them throughout these chapter 11 cases. The Debtors submit that a management
team that believes it is valued by the Debtors and knows it will be rewarded for exceeding
115. The Debtors are in the process of finalizing their 2007 financial statements. After
completion of the Debtors' 2007 financial statements, the Board of Directors has authorized the
Debtors' CEO to review the Debtors’ and each eligible bonus participant’s performance and
determine if the actual performance achieved warrants bonus payments under the Management
Incentive Program. The Debtors estimate that pursuant to the Management Incentive Program,
management that meets or exceeds their 2007 performance targets will be entitled to receive
payments in an aggregate amount not in excess of $600,000. Accordingly, the Debtors request
(i) confirmation that they may continue the Management Incentive Program in the ordinary
course of business, (ii) authority to make payments due in March 2008 under the 2007
Management Incentive Program in an amount not in excess of $600,000, and (iii) authority to
make payments pursuant to the 2008 Management Incentive Program in the ordinary course of
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business. The Management Incentive Program has been a long standing practice of the Debtors
Employee Benefits
116. The Debtors offer the Employees the ability to participate in a number of
insurance and benefits programs, including health care and dental plans, vacation time and other
paid leaves of absence, a severance program, retirement savings plans, flexible benefit plans, life
insurance, accidental death and dismemberment insurance, short-term and long-term disability
insurance, business accident insurance, wellness programs, adoption assistance, and tuition
117. The Debtors offer both fully-insured and self-insured health insurance to their
Employees for medical, dental and vision insurance coverage (collectively, the “Health
Insurance”).
12 The Indemnity Medical Plan is available to Employees working at predetermined areas where the medical network is not available in an
Employee’s home zip code area. Only a handful of Ziff David Media employees are outside the medical network service area.
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which costs the Debtors approximately $190,000, per year,
of which approximately $35,000 is funded through
withholdings from Employees.
• Workers’ Compensation
118. The Debtors provide workers’ compensation insurance for their Employees at the
statutorily-required level for each state (the “Workers’ Compensation Program”). These benefits
are currently provided for Employees through Chubb (“Chubb”). Chubb administers and pays
the Debtors’ workers’ compensation claims, subject to the Debtors’ deductible of $500,000 per
incident. The Debtors expect to pay annual insurance premiums and fees to Chubb in an
aggregate amount of approximately $135,000 for the policy period of September 7, 2007 through
September 7, 2008 (the “Policy Period”). At this time, the Debtors do not have any Employees
receiving workers’ compensation benefits nor any Employees who have or indicated they plan to
file a workers’ compensation claim. However, it is possible that an Employee may have a
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worker’s compensation claim that accrued prepetition but was not submitted to the Debtors prior
119. For the claims administration process to operate in an efficient manner and to
ensure that the Debtors comply with their state law requirements, claim assessment,
determination, and adjudication must continue. The costs associated with the Workers’
Compensation Program may fluctuate according to the various claims submitted, excluding
insurance premiums, the Debtors did not incur any overall costs associated with the Workers’
Compensation Programs in 2007. The Debtors do not expect costs to increase in 2008.
120. The Debtors provide vacation time to their Full-Time Employees and part time
employees working at least 20 hours as a paid time-off benefit (the “Vacation Time”). The
amount of Vacation Time available to a particular Employee and the rate at which such Vacation
Time accrued is generally determined by the Employee’s length of employment. When a Full-
Time Employee elects to take Vacation Time, that Employee is paid his or her regular hourly or
salaried rate. Generally, Employees are required to use their Vacation Time during the year that
they earn it and may not carry unused days into the next year.13 If an Employee ceases
employment with the Debtors, the Employee’s final paycheck will include any accrued unused
vacation time. The Debtors estimate that approximately $300,000 of earned but unused Vacation
13 Vacation Time carryover in the state of California is administered in accordance with applicable state law which requires employers to
allow employees to carry over accrued unused Vacation Time, but caps the amount of Vacation Time that can be accrued. The maximum
number of days the Employees in California may accrue is equal to 1.5 times of the number of Vacation Time that they could earn in a year.
Although Vacation Time carryover is permitted, once an Employee reaches the maximum accrual days he or she will not accrue additional
Vacation Time. Thereafter, as the Employee uses Vacation Time and his or her Vacation Time allotment falls below his or her applicable
maximum, the Employee will resume accruing additional Vacation Time. If the Employee ceases employment with the Debtors, his or her
final paycheck will include any accrued unused Vacation Time.
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121. In addition, in the ordinary course of business, Employees are eligible for sick
leave due to illness or injury up to ten days per calendar year for Employees (“Sick Leave”).
Unused Sick Leave cannot be carried forward to a new calendar year. Employees may not cash
122. The Debtors also allow their Employees to take certain other leaves of absence for
personal reasons, many of which are required by law (“Leaves of Absence”). Leaves of Absence
include family medical leaves, pregnancy, adoption and foster care leaves, military leaves, jury
duty, voting leaves, personal leaves, and bereavement leaves. Employees also receive up to three
paid personal days each year to take care of personal matters such as moving, religious holidays
or personal emergencies. Employees are not permitted to carry over unused personal days from
one year to the next and Employees may not cash out their unused personal days upon
termination or resignation.
123. The Debtors offer severance benefits to full time Employees in the event
another form of involuntary termination. Employees deemed eligible for severance benefits may
receive two (2) weeks base salary for each full year of employment, prorated for partial years.
The maximum severance benefit is 26 weeks base salary. The Debtors request authority to pay
any severance benefits owed as of the Petition Date. The Debtors estimate that as of the Petition
124. The Debtors maintain a retirement savings plan meeting the requirements of
Section 401(k) of the Internal Revenue Code for the benefit of all Full-Time Employees
(the “401(k) Plan”). Employees are automatically eligible to participate in the 401(k) Plan
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(the “Participants”). The 401(k) Plan allows for automatic pre-tax salary deductions of eligible
compensation up to the limits set by the Internal Revenue Code. After six months of service, the
Debtors will make matching contributions in an amount equal to 50% of the first 4% of the
Employee’s eligible compensation that the Employee contributes each pay period.
Approximately 154 Full-Time Employees currently participate in the 401(k) Plan, and the
approximate monthly amount withheld from the Participants’ paychecks for 401(k) contributions
is $80,000.14 The Debtors make payments of approximately $25,000 per month of matching
contributions. The Debtors seek confirmation that they may continue the 401(k) Plan in the
ordinary course of business, and request authority to pay any amounts owed as of the Petition
Date. The Debtors estimate that as of the Petition Date they have paid all of the prepetition
125. The Debtors provide Employees with primary life insurance coverage and
primary accidental death and dismemberment insurance through CIGNA, a third-party insurer
(the “Life and AD&D Insurance”). This coverage costs the Debtors approximately $70,000.00
per year. Employees are also offered the opportunity to purchase supplemental life and
accidental death and dismemberment insurance (the “Supplemental Life and AD&D Insurance”),
the premiums for which are paid entirely by the electing Employee. The Debtors estimate that
approximately 91 Employees have elected to purchase Supplemental Life and AD&D Insurance.
14 The Debtors’ 401(k) Plan also features a “Profit Share Contribution” where the Debtors make a discretionary potential annual contribution
to each eligible Employee’s account, with the amount subject to determination each year based upon the Debtors’ company performance.
The Debtors have not made any payments under this Profit Share Contribution feature, and there are no payments currently owing under
this feature.
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The Employee contributions held by the Debtors for transfer to CIGNA are included in the
126. In addition, the Debtors provide Employees with short- and long-term disability
benefits through CIGNA (the “Short-Term Disability Benefits” and the “Long-Term Disability
Benefits,” respectively). Short-Term Disability Benefits are paid by CIGNA, the third-party
administrator, and are fully funded by the Debtors. Employees are automatically eligible for
Short-Term Disability Benefits after they complete three months of service. This coverage costs
the Debtors approximately $9,000 per year. Employees may purchase Long-Term Disability
Benefits at their own cost. The Debtors estimate that approximately 130 Employees have elected
to pay for additional disability benefits. The Employee contributions for additional disability
benefits held by the Debtors for transfer to CIGNA are included in the $15,000.00 in Deductions
described herein.
127. The Debtors also provide accident insurance coverage for Employees while
traveling on official company business (the “Business Accident Insurance”) from Chubb. The
coverage premiums cost approximately $9,000.00 per year. As of the Petition Date, the Debtors
do not owe any amounts with respect to Business Accident Insurance premiums.
128. The Debtors offer their Employees the ability to contribute a portion of their pre-
tax compensation to flexible spending accounts to pay for eligible out-of-pocket health care and
dependent care costs and expenses (the “Flexible Benefit Plan”). Approximately 39 Employees
participate in the health care portion of the Flexible Benefit Plan and approximately 7 Employees
participate in the dependent care portion of the Flexible Benefit Plan. The administration of the
Flexible Benefit Plan costs the Debtors approximately $1,500 per month.
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• Wellness Program Benefits
129. The Debtor’s Wellness Program provides Employees with the following benefits:
130. The Debtors offer financial assistance up to $5,000 to Full-Time Employees who
adopt a child. Eligible Employees must be Full-Time Employees of the Company during the
entire adoption process. There are no employees who have applied for this assistance as of the
Petition Date, and there were none in the past year; however I believe maintaining the program
is warranted for the benefit of employees who may desire to participate during the year.
131. The Debtors also offer a tuition reimbursement program for certain Full-time
Employees who enroll in courses of accredited study or degree programs that are directly related
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to the Employee’s current position or career development with the Debtors. The Debtors
reimburse Employees for 100% of tuition costs, registration fees and books payable upon the
Employee’s satisfactory completion of the approved coursework. Prior to the Petition Date,
132. I believe that the relief sought in the Wages Motion is crucial to the successful
reorganization of the Debtors' businesses and is within the Debtors' sound business judgment.
C. Motion of the Debtors for an Order (A) Authorizing, But Not Directing, the
Debtors to Remit and Pay Certain Taxes and Fees and (B) Authorizing and
Directing Banks and Other Financial Institutions to Honor Related Checks
and Electronic Payment Requests
133. In the ordinary course of the Debtors’ businesses, the Debtors (a) collect sales
taxes from their customers and incur taxes, including, but not limited to, use, franchise,
minimum business operating taxes, personal property, and other taxes in conducting their
businesses (collectively, the “Taxes”) and (b) charge fees and other similar charges and
assessments (collectively, the “Fees”) on behalf of various taxing, licensing, and regulatory
authorities (collectively, the “Authorities”), and pay Fees to such Authorities for licenses
required to conduct the Debtors’ businesses. The Taxes and Fees are paid to the respective
134. Each of the Taxes and Fees incurred by the Debtors fall under one of the
following categories: (a) sales and use taxes; (b) franchise and minimum business operating
taxes; (c) personal property taxes; and (d) business license fees and other charges and
assessments.
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Sales and Use Taxes
135. The Debtors collect and remit sales taxes in connection with the sale of goods to
their customers. Generally, sales taxes collected from customers are remitted to the Authorities
in the month following their collection. The Debtors also may be responsible for remitting use
taxes on account of the purchase of various supplies and office equipment. Use taxes typically
arise if a supplier does not have business operations in the state in which it is supplying goods
and does not charge state taxes. The Debtors estimate that they owe approximately $10,000.00
with respect to sales and use taxes incurred prior to the Petition Date.
136. The Debtors pay franchise taxes in Delaware based on the capital employed in the
Debtors’ businesses. Payment of such franchise taxes allows the Debtors to continue operating
their business in Delaware. The Debtors’ records reflect that they are current with respect to
137. To operate their businesses in certain other taxing jurisdictions, the Debtors pay
the applicable Authorities certain minimum business operating taxes. Such taxes are usually
based on a flat fee. The Debtors estimate that they remit less than $1,500 each year on account
138. The Debtors pay personal property taxes to the City of San Francisco on account
of certain equipment they maintain in California. The Debtors typically pay these property taxes
on a quarterly basis. The Debtors are generally current with respect to personal property taxes.
139. The Debtors also are required to obtain business licenses and pay corresponding
fees in certain jurisdictions in which they operate. Further, the Debtors are required to pay
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various business taxes in certain states. These taxes may be based on gross receipts or other
140. It is crucial to the Debtors’ businesses that the Debtors provide comprehensive
and timely information regarding certain technology and videogame products. To provide such
information to the largest number of individuals, the Debtors operate 16 websites, publish three
magazines, and conduct hundreds of consumer and business events in various jurisdictions.
141. If the Debtors do not pay the Taxes or Fees, the respective Authorities may take
actions that could have wide-ranging and adverse effect on the Debtors’ operations as a whole.
In fact, the Debtors’ failure to pay the Taxes and Fees could have a material adverse impact on
the Debtors’ business operations in several ways: (a) the Authorities may initiate audits of the
Debtors, which would divert unnecessarily their attention away from the reorganization process;
(b) the Authorities may attempt to suspend the Debtors’ operations, file liens, seek to lift the
automatic stay, or pursue other remedies that will harm the estates; and (c) certain directors and
officers might be subject to personal liability, which would likely distract those key employees
142. The Debtors estimate that the total amount of prepetition Taxes and Fees owing to
the various Authorities will not exceed approximately $100,000.00. I believe that payment of
such Taxes and Fees is appropriate in these chapter 11 cases. Some of these outstanding tax
liabilities are for trust fund taxes that the Debtors have collected and hold in trust for the benefit
of the Authorities. Therefore, the Debtors understand that these funds do not constitute property
of their estates and could not otherwise be used by them. In addition, unpaid taxes may result in
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D. Motion of the Debtors for an Order Authorizing the Debtors to (A) Pay
Prepetition Premiums Necessary to Maintain Insurance Coverage in Current
Effect and (B) Enter into New Insurance Policies
143. In the ordinary course of business, the Debtors maintain in current effect
numerous insurance policies providing coverage for, among other things, general liability
(property and casualty), workers’ compensation, directors and officers liability, media liability,
umbrella liability, and automotive liability (collectively, the “Policies”). A detailed list of the
Debtors’ current Policies is attached to the Insurance Motion as Exhibit B. The Policies are
essential to the preservation of the value of the Debtors’ business, property, and assets. In many
cases, insurance coverage such as that provided by the Policies is required by the diverse
regulations, laws, and contracts that govern the Debtors’ commercial activities. Prior to the
Petition Date, the Debtors were not in default for any payments due under the Policies.
144. The Debtors maintain the Policies through a number of different insurance
carriers. The total annual premiums for the Policies equal $601,498. While the majority of the
Policies are prepaid, it is not always economically advantageous for the Debtors to pay the
premiums on the Policies on a lump-sum basis. Accordingly, the Debtors pay certain Policy
premiums on an installment basis. Specifically, as of the Petition Date, the Debtors maintain two
Policies on which they pay the insurers periodic payments for coverage: worker’s compensation
coverage and general liability (property and casualty) coverage (the “Installment Policies”). The
total amount outstanding on the Installment Policies as of the Petition Date is approximately
$105,000.
145. If the Debtors are unable to continue making the remaining installment payments
on the Installment Policies, the insurer may be permitted to terminate such Policies. The Debtors
would then be required to obtain replacement insurance on an expedited basis. If the Debtors
were required to obtain replacement insurance and to pay a lump sum premium for the
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replacement policy in advance, this payment likely would be greater than what the Debtors
currently pay.
146. In view of the importance of maintaining insurance coverage with respect to their
business activities, I believe it is in the best interests of the Debtors’ estates to authorize the
Debtors to honor their periodic obligations under the Installment Policies. The Debtors will need
to continue their insurance coverage throughout the entire duration of these chapter 11 cases. By
spreading out the cost of these two Policies over the applicable coverage period, this provides
liquidity advantages as compared to the payment of up-front lump sums for insurance coverage.
147. The Debtors’ current policies are slated to continue through September 5, 2008.
Should the Debtors elect to renew any or all of these Policies, or enter into entirely new policies,
I believe that such renewal or negotiation falls squarely within the ordinary course of their
business. To reduce the administrative burden of these chapter 11 cases, as well as the expense
of operating as debtors in possession, the Debtors seek the Court’s authority now to continue
making payments under the Policies, renew their existing Policies and enter into new policies
E. Motion of the Debtors for Entry of Interim and Final Orders Determining
Adequate Assurance of Payment for Future Utility Services
148. In connection with the operation of their businesses, the Debtors obtain electric,
water, sewer, waste removal, telephone, Internet, and other similar utility services provided by
several utility companies (the “Utility Providers”). These utility services are provided by
approximately twelve (12) Utility Providers through approximately nineteen (19) accounts.
Attached to the Utilities Motion as Exhibit B is a list of the Utility Providers who rendered
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services to the Debtors as of the Petition Date (the “Utility Service List”).15 The Debtors pay the
Utility Providers, on average, approximately $244,237 per month for services rendered.16 I
believe they are generally current on utility payments as of the Petition Date.
149. The Utility Providers service the Debtors’ corporate headquarters in New York
City, New York, and a satellite office in San Francisco, California. Preserving utility services on
an uninterrupted basis is essential to the Debtors’ ongoing operations and, therefore, to the
success of their reorganization. Indeed, any interruption of utility services, even for a brief
period of time, would disrupt the Debtors’ ability to operate and maintain their portfolio of
sixteen (16) websites, three (3) magazines, and direct marketing services for their customers and
would thereby negatively impact the Debtors’ customer relationships, revenues and profits. Such
a result could seriously jeopardize the Debtors’ reorganization efforts and, ultimately, value and
creditor recoveries. It is, therefore, critical that utility services continue uninterrupted during
150. The Debtors intend to pay postpetition obligations owed to the Utility Providers in
a timely manner. Moreover, the Debtors expect that pursuant to their motion for approval to use
cash collateral filed contemporaneously herewith (the “Cash Collateral Motion”), they will be
15 Although I believe that Exhibit B to the Utilities Motion includes all of the Debtors’ Utility Providers, the Debtors reserve the right, without
further order of the Court, to supplement the list if any Utility Provider has been omitted. Additionally, the listing of an entity on Exhibit B
is not an admission that such entity is a utility within the meaning of section 366 of the Bankruptcy Code, and the Debtors reserve the right
to contest any such characterization in the future.
16 I believe that a substantial portion of the monthly amounts paid to the Utility Providers are for services that may not qualify as “utility
services” for purposes of section 366 of the Bankruptcy Code, but may constitute utility services under the Federal Power Act or other state
or local regulations. The Debtors reserve the right to argue that some or all of the services provided by any given Utility Provider do not
properly constitute “utility” services under section 366 of the Bankruptcy Code, and that, as such, section 366 of the Bankruptcy Code does
not entitle such Utility Provider to adequate assurance with respect to such services.
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151. Even though the Debtors maintain that their ability to use cash collateral under the
Cash Collateral Motion is sufficient adequate assurance of payment, the Debtors propose to
provide a deposit equal to two (2) weeks of utility service, calculated based on the historical
average over the twelve (12) months before the Petition Date to any Utility Provider who
requests such a deposit in writing (the “Adequate Assurance Deposit”), provided that such Utility
Provider does not already hold a deposit equal to or greater than the value of two (2) weeks of
utility services, and provided further that such Utility Provider is not currently paid in advance
for its services. As a condition of requesting and accepting an Adequate Assurance Deposit, the
requesting Utility Provider shall be deemed to have stipulated that the Adequate Assurance
Deposit constitutes adequate assurance of payment to such Utility Provider within the meaning
of section 366 of the Bankruptcy Code, and shall further be deemed to have waived any right to
seek additional adequate assurance during the course of these chapter 11 cases.
152. The Debtors submit that the Adequate Assurance Deposit, in conjunction with the
Debtors’ ability to pay for future utility services in the ordinary course of business (collectively,
the “Debtors’ Adequate Assurance”), constitutes sufficient adequate assurance to the Utility
Providers. If any Utility Provider believes additional adequate assurance is required, they may
request such assurance (an “Additional Assurance Payment”) pursuant to the procedures set forth
Procedures”).17
153. In most cases, I believe the Utility Providers will conclude that an Additional
Assurance Payment is unnecessary. The Debtors have a good relationship with all of the Utility
17 To the extent that there are any discrepancies between this Affidavit and the Adequate Assurance Procedures as set forth on Exhibit 1
annexed to Exhibit A attached to the Utilities Motion, the Adequate Assurance Procedures control in all respects.
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F. Motion of the Debtors for an Order Authorizing the Debtors to Reject a
Certain Unexpired Lease of Nonresidential Real Property Effective as of the
Petition Date
154. On July 29, 1998, ZD Inc. entered into a lease attached to the Lease Rejection
Motion as Exhibit B (the “Lease”) with CEP Investors VI, L.P. (the “Lessor”) for certain
commercial office space located at 800 Jorie Boulevard, Oak Brook, Illinois 60523
(the “Premises”). In 2000, the Debtors assumed the Lease from ZD Inc., thereby becoming
tenants under the Lease. The Debtors conducted certain of their advertising, sales, editorial
writing, product testing, and subscription management operations on the Premises. By its terms,
155. In 2002, in an effort to reduce their costs and increase earnings, the Debtors
restructured and consolidated certain of their operations. In connection with such consolidation,
the Debtors moved all the operations conducted on the Premises to the Debtors’ San Francisco
office. As a result, the Debtors no longer maintain any assets on the Premises.
156. In connection with exiting the Premises, the Debtors commenced negotiations
with the Lessor with respect to termination of the Debtors’ obligations under the Lease. Such
negotiations have proven unsuccessful. As a result, the Debtors arguably continue to maintain
approximately $50,000.
157. I believe that as they no longer utilize the Premises in connection with their
operations, the Lease provides no benefit to the Debtors and constitutes a drain on the Debtors’
estates. Accordingly, rejection of the Lease as of the Petition Date is in the best interest of the
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G. Motion of the Debtors for Interim and Final Orders (A) Authorizing the
Debtors' Use of Cash Collateral;(B) Granting Adequate Protection Pursuant
to Section 105, 361 and 363 of the Bankruptcy Code; and (C) Scheduling a
Final Hearing for Approval of the Debtors' Use of Cash Collateral
158. As explained above in Section I, prior to the Petition Date, the Debtors
experienced a decline in their earnings and liquidity due to certain operational difficulties and
high debt costs. As a result, in an effort to obtain additional liquidity, the Debtors entered into
the Enterprise Sale pursuant to which the Debtors received the Net Proceeds. The assets sold by
the Debtors in the Enterprise Sale constituted Pre-Petition Collateral pledged to the Collateral
Trustee pursuant to the Prepetition Financing Documents. The Net Proceeds were deposited into
the Initial Account at Merrill Lynch. The Remaining Net Proceeds were transferred to the
Segregated Account.
Agreement described in Section I above, the Collateral Trustee exercised its rights, as attorney in
fact, to control the Segregated Account and directed Merrill Lynch to transfer all funds held
therein to the Collateral Trustee. The Debtors believe that the Remaining Net Proceeds held in
the Segregated Account constitute Cash Collateral. In addition, the Debtors admit that any cash
not in the Segregated Account, including cash in other accounts, wherever located, constitutes
Cash Collateral. By the Cash Collateral Motion, the Debtors request (i) entry of the Interim Cash
Order authorizing the Debtors to use up to $5 million of the Cash Collateral, providing adequate
protection to Prepetition Secured Lenders and scheduling a final hearing on the relief requested
in the Cash Collateral Motion, and (ii) entry of a final order authorizing the use of Cash
Collateral on a final basis and providing adequate protection to the Prepetition Secured Lenders.
160. The Debtors and the holders of over eighty percent (80%) of the Senior Secured
Notes have agreed on the Interim Cash Order and the Budget (as defined below). The Debtors
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have an urgent need for the immediate use of the Cash Collateral pending the final hearing on the
Cash Collateral Motion. Accordingly, the Debtors seek to use Cash Collateral existing on or
after the Petition Date that may be subject to the Prepetition Secured Lenders’ liens. As of the
Petition Date, the Debtors have only a limited amount of unencumbered cash and this
unencumbered cash is not sufficient to fund the Debtors’ business operations and to pay present
operating expenses.
161. Absent the ability to use Cash Collateral, the Debtors will not be able to pay
insurance, wages, rent, utility charges, and other critical operating expenses. In short, without
access to Cash Collateral, the Debtors will not be able to maintain their business operations and
continue their restructuring efforts. Accordingly, the Debtors’ estates would be immediately and
irreparably harmed.
162. If the Debtors are unable to obtain sufficient operating liquidity to meet their
postpetition obligations on a timely basis, a permanent and irreplaceable loss of business will
occur, causing a loss of value to the detriment of the Debtors and their creditors. This potential
loss of revenue and going concern value would be extremely harmful to the Debtors, their estates
and their creditors at this critical juncture. The Debtors cannot obtain funds sufficient to
administer their estates and operate their businesses other than by obtaining the relief requested
163. The Debtors’ management and financial advisors have formulated a budget for
the use of Cash Collateral from the Petition Date through the final hearing on the Cash Collateral
Motion (the “Budget”). A true and correct copy of the Budget is attached to the Cash Collateral
Motion as Exhibit C. The Debtors believe that the Budget includes all reasonable, necessary and
foreseeable expenses to be incurred in the ordinary course in connection with the operation of
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their businesses for the period set forth in the Budget. The Debtors also believe that the use of
Cash Collateral in accordance with the Budget will provide the Debtors with adequate liquidity
to pay administrative expenses as they become due and payable during the period covered by the
Budget.
PART III
164. In accordance with Local Bankruptcy Rule 1007-2(a)(3), and to the best of my
knowledge, information, and belief, two ad hoc creditors’ committees were organized prior to the
165. In accordance with Local Bankruptcy Rule 1007-2(a)(4), Schedule A(4) hereto is
a list of the names, addresses, and, where available, telephone numbers, fax numbers and e-mail
addresses of the creditors holding the 30 largest unsecured claims (excluding insiders) against
the Debtors. Such list includes the amount of the claim, the nature of the claim and a statement
reserving the Debtors' rights to assert that any such claim is contingent, unliquidated, disputed, or
subject to offset.
166. In accordance with Local Bankruptcy Rule 1007-2(a)(5), Schedule A(5) provides
the names and addresses of the respective trustees that represent the holders of the only secured
167. In accordance with Local Bankruptcy Rule 1007-2(a)(6), Schedule A(6) hereto
168. In accordance with Local Bankruptcy Rule 1007-2(a)(7), Schedule A(7) provides
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169. In accordance with Local Bankruptcy Rule 1007-2(a)(8), Schedule A(8) hereto is
170. In accordance with Local Bankruptcy Rule 1007-2(a)(9), Schedule A(9) hereto is
a list of the premises owned, leased, or held under other arrangement, from which the Debtors
171. In accordance with Local Bankruptcy Rule 1007-2(a)(10), Schedule A(10) hereto
provides the location of the Debtors’ substantial assets, and the location of their books and
records. To the best of my knowledge, information, and belief, the Debtors do not hold any
provides that I do not believe there are any actions or proceedings, pending or threatened, against
the Debtors or their properties where a judgment against the Debtors or a seizure of their
provides a list the individuals who comprise the Debtors' existing senior management, their
tenure with the Debtors, and a brief summary of their relevant responsibilities and experiences.
174. In accordance with Local Bankruptcy Rule 1007-2(b)(1), Schedule B(1) provides
the estimated consolidated amount of payroll to all employees of the Debtors and non-debtor
domestic affiliates (exclusive of directors, officers, stockholders and partners) for the 30 day
provides the amounts paid and proposed to be paid during the 30 days following the Petition
Date for services to be provided by the Debtors’ directors, officers and stockholders.
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176. In accordance with Local Bankruptcy Rule 1007-2(b)(2), Schedule B(2)(C)
provides the amounts proposed to be paid during the 30 days following the Petition Date for
services to be provided by the Debtors’ financial and restructuring consultant, Alvarez & Marsal.
177. In accordance with Local Bankruptcy Rule 1007-2(b)(3), Schedule B(3) provides
for the 30 day period following the Petition Date estimated cash receipts and disbursements, net
cash gain or loss, and obligations expected to accrue but remain unpaid, other than professional
fees.
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SCHEDULE A(3)
On information and belief, the following ad hoc committees were formed prior to the
Petition Date:
I do not have first hand knowledge regarding the names and addresses of the committee
members, the circumstances surrounding the committees' formation or the respective dates of the
committees' formation.
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SCHEDULE A(4)
Contemporaneously with the filing of their petitions, the Debtors filed a motion
requesting, among other things, authority to file a consolidated list of the 30 largest unsecured
creditors (the “Top 30 List”)1 in lieu of separate lists of each Debtor’s 20 largest unsecured
creditors. Attached hereto is the Top 30 List which is based on the Debtors’ books and records
as of approximately March 3, 2008. The Top 30 List was prepared in accordance with Fed. R.
Bankr. P. 1007(d) for filing in these chapter 11 cases. The Top 30 List does not include:
(1) persons who come within the definition of “insider” set forth in 11 U.S.C. § 101; or
(2) secured creditors, unless the value of the collateral is such that the unsecured deficiency
places the creditor among the holders of the 30 largest unsecured claims. The information
presented in the Top 30 List shall not constitute an admission by the Debtors nor is it binding
upon the Debtors. The Debtors reserve all rights to challenge the priority, nature, amount, and
status of any claim or debt.
1 Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Affidavit of Jason Young, Chief Executive
Officer of Ziff Davis Media Inc. in Support of the First Day Motions (the “Affidavit”).
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(1) (2) (3) (4) (5)
Name of creditor and Name, telephone number and Nature of Indicate if Amount of
complete mailing address, complete mailing address, claim claim is claim
including zip code including zip code of employee, (trade debt, contingent, (secured
agents, or department of creditor bank loan, unliquidated, also state
familiar with claim who may be government disputed or value of
contacted contracts, subject to set security)
etc.) off
Deutsche Bank Trust Company Deutsche Bank Trust Company Americas, 12% Senior Principle amount
Americas as Trustee Indenture Trustee Subordinated of $12,280,000
Trust & Securities Services Trust & Securities Services Notes due 2010
60 Wall Street, 27th Floor 60 Wall Street
New York, NY 10005 MS NYC60-2720
New York, NY 10005-2858
Attn: Stanley Burg
Fax: (212) 787-0022
Email: stan.burg@db.com
and
American Express
5976 West Topika Drive
Glendale, AZ 85308
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(1) (2) (3) (4) (5)
Name of creditor and Name, telephone number and Nature of Indicate if Amount of
complete mailing address, complete mailing address, claim claim is claim
including zip code including zip code of employee, (trade debt, contingent, (secured
agents, or department of creditor bank loan, unliquidated, also state
familiar with claim who may be government disputed or value of
contacted contracts, subject to set security)
etc.) off
Sony Computer Entertainment Sony Computer Entertainment Trade Debt $631,264
919 E. Hillsdale Boulevard 919 E. Hillsdale Boulevard
Foster City, CA 94404 Foster City, CA 94404
(650) 655-6099
Attn: Jim Bass
Fax: (650) 655-8170
Email: jim_bass@playstation.sony.com
Perella Weinberg Partners LP Perella Weinberg Partners LP Services Provided $401,091
767 Fifth Avenue 767 Fifth Avenue
New York, NY 10153 New York, NY 10153
(212) 287-3200
Attn: Derron Slonecker
Fax: (212) 287-3201
Email: dslonecker@pwpartners.com
Kable Fulfillment Kable Fulfillment Trade Debt $316,646
4515 Paysphere Circle 4515 Paysphere Circle
Chicago, IL 60674 Chicago, IL 60674
(303) 666-7000
Attn: Amy Bardell
Fax: (815) 734-5223
Email: abardell@kable.com
and
Kable Fulfillment
335 Centennial Parkway
Louisville, CO 80027
4
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(1) (2) (3) (4) (5)
Name of creditor and Name, telephone number and Nature of Indicate if Amount of
complete mailing address, complete mailing address, claim claim is claim
including zip code including zip code of employee, (trade debt, contingent, (secured
agents, or department of creditor bank loan, unliquidated, also state
familiar with claim who may be government disputed or value of
contacted contracts, subject to set security)
etc.) off
Solar Communications Solar Communications Trade Debt $85,014
5917 Paysphere Circle 5917 Paysphere Circle
Chicago, IL 60674 Chicago, IL 60674
(630) 848-3844
Attn: Michael Hudetz
Fax: (630) 983-5880
Email: mhudetz@solarcc.com
and
Solar Communications
1150 Frontenac Road
Naperville, IL 60563-1799
5
CHI:2044741.12
(1) (2) (3) (4) (5)
Name of creditor and Name, telephone number and Nature of Indicate if Amount of
complete mailing address, complete mailing address, claim claim is claim
including zip code including zip code of employee, (trade debt, contingent, (secured
agents, or department of creditor bank loan, unliquidated, also state
familiar with claim who may be government disputed or value of
contacted contracts, subject to set security)
etc.) off
SunGard f/k/a VeriCenter SunGard f/k/a VeriCenter Trade Debt $42,129
757 N. Eldridge Street, Suite 200 c/o Allyance Communications
Houston, TX 77079 17110 Armstrong Avenue, 2nd Floor
Irvine, CA 92614
(949) 863-0051
Attn: Lawrence Lee
Fax: (949) 480-0037
Email: llee@allyance.net
and
Aspire Technology Partners, LLC Aspire Technology Partners, LLC Trade Debt $39,150
121 Monmouth Street 121 Monmouth Street
Red Bank, NJ 07701 Red Bank, NJ 07701
(732) 345-8523
Attn: Doug Stevens
Fax: (732) 879-0210
Email: dstevens@atp-us.com
Advantage Security Advantage Security Trade Debt $39,075
232 Madison Avenue, #16 232 Madison Avenue, #16
New York, NY 10016 New York, NY 10016
(212) 689-0200
Attn: Caroline Gagliardi
Fax: (212) 481-9706
Email: cgagliardi@advantagesecurity.net
Comsys Services Comsys Services Trade Debt $36,990
4400 Post Oak Parkway, #1800 4400 Post Oak Parkway, #1800
Houston, TX 77027 Houston, TX 77027
(713) 386-1400
Attn: Amy Bobbitt
Fax: (713) 961-0719
Princeton Information Princeton Information Trade Debt $35,712
2 Penn Plaza, Suite 1100 2 Penn Plaza, Suite 1100
New York, NY 10121 New York, NY 10121
(212) 565-5030
Attn: Jeffrey Zuckerman
Fax: (212) 563-5919
Email:
jeffrey.zuckerman@princetoninformation.com
VoltDelta Resources, LLC VoltDelta Resources, LLC Trade Debt $32,364
c/o MainTech c/o MainTech
39 Paterson Avenue 39 Paterson Avenue
Wallington, NJ 07057 Wallington, NJ 07057
(973) 330-3263
Attn: Gene D. Goodman
Fax: (973) 330-3187
Email: ggoodman@maintech.com
6
CHI:2044741.12
(1) (2) (3) (4) (5)
Name of creditor and Name, telephone number and Nature of Indicate if Amount of
complete mailing address, complete mailing address, claim claim is claim
including zip code including zip code of employee, (trade debt, contingent, (secured
agents, or department of creditor bank loan, unliquidated, also state
familiar with claim who may be government disputed or value of
contacted contracts, subject to set security)
etc.) off
ONE PR Studio ONE PR Studio Trade Debt $30,870
3645 Grand Avenue, Suite 305 3645 Grand Avenue, Suite 305
Oakland, CA 94610 Oakland, CA 94610
(510) 893-3271
Attn: Jeane Wong
Fax: (510) 893-2581
Email: jeane@oneprstudio.com
Terracotta Inc. Terracotta Inc. Trade Debt $30,000
650 Townsend Street, Suite 325 650 Townsend Street, Suite 325
San Francisco, CA 94103 San Francisco, CA 94103
(415) 738-4062
Attn: Sandy Wallace
Fax: (415) 738-4099
Email: info@terracottatech.com
Zinio Systems Zinio Systems Trade Debt $29,023
139 Townsend Street, Suite 300 139 Townsend Street, Suite 300
San Francisco, CA 94107 San Francisco, CA 94107
(415) 494-2732
Attn: Jared Katzman
Fax: (415) 494-2701
Email: jkatzman@zinio.com
Clear Channel Communications, Inc. Clear Channel Communications, Inc. Trade Debt $27,999
1120 Avenue of the Americas 1120 Avenue of the Americas, 18th Floor
18th Floor New York, NY 10036
New York, NY 10036 (212) 549-0628
Attn: Nicole Merino
Fax: (917) 206-9169
Email: nicolemerino@clearchannel.com
and
7
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SCHEDULE A(5)
The following is a schedule of the holders of the largest secured claims for the Debtors on
a consolidated basis. The information contained herein shall not constitute an admission of
liability by, nor is it binding upon, the Debtors. The Debtors reserve all rights to assert that any
debt or claim listed herein is a disputed claim or debt, and to challenge the priority, nature,
amount, or status of any such claim or debt. The descriptions of the collateral securing the
underlying obligations are intended only as brief summaries. In the event of any inconsistencies
between the summaries set forth below and the respective corporate and legal documents relating
to such obligations, the descriptions in the corporate and legal documents shall control. The
schedule estimates outstanding claim amounts as of the Petition Date.
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SCHEDULE A(6)
The following unaudited financial data is the latest available information. Total assets
and liabilities are current as of December 31, 2007. The following financial data shall not
constitute an admission of liability by the Debtors.
1 Total assets include: (i) $118.7 million being held in a segregated account pursuant to the terms of a forbearance agreement with the
Debtors' prepetition secured lenders, and (ii) good will.
2 Total debts do not include mandatory redeemable preferred stock amount of $1,049,849,000 set forth on the Form 10-Q filed on
June 30, 2007.
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SCHEDULE A(7)
As of June 30, 2007, Ziff Davis Media Inc. (“Ziff Davis”) had outstanding 2,311,049
shares of common stock. There are 30 holders of record of Ziff Davis common stock. Ziff
Davis also has outstanding 329,127.5 shares of its Series A preferred stock (“Series A Preferred
Stock”) held by two stockholders, 98,285.6 shares of its Series B preferred stock
(“Series B Preferred Stock”) held by one stockholder, 5,172.9 shares of its Series C preferred
stock (“Series C Preferred Stock”) held by one stockholder, 80,207.3 shares of its Series D
preferred stock (“Series D Preferred Stock”) held by one stockholder, and 28,526.4 shares of its
Series E preferred stock (“Series E Preferred Stock”) held by multiple stockholders.
The following table sets forth information, as of June 30, 2007, concerning (a) the
holders of Ziff Davis’ Common Stock and Series A through E Preferred Stock, (b) the number of
shares held by each holder, respectively, and (c) the percentage of shares of ownership held by
each holder, respectively.
Title of Class of Shares Name of Holder Number of Shares Percentage of
Shares of
Ownership
1 Includes shares held by Willis Stein & Partners II, L.P., Willis Stein & Partners III, L.P., Willis Stein & Partners Dutch, L.P., Willis Stein &
Partners Dutch III-A, L.P., Willis Stein & Partners Dutch III-B, L.P., and Willis Stein & Partners III-C, L.P. (collectively, the “Willis Stein
Entities”). Includes shares held by stockholders who have executed investor rights agreements to vote their shares as directed by the Willis
Stein Entities.
2 Includes shares held by DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ EAB Partners, L.P., DLJ ESC II L.P., DLJ
First ESC L.P., DLJ Merchant Banking Partners II-A, L.P., DLJ Offshore Partners II, CV. and DLJMB Funding II, Inc., which are private
equity investment funds affiliated with DLJ Merchant (collectively, the “DLJ Entities”).
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SCHEDULE A(8)
List of Debtors’ Property in Possession of Third Parties
None of the Debtors has any property that is in the possession or custody of any
custodian, public officer, mortgagee, pledgee, assignee of rents or secured creditor, or any agent
for any such entity, other than, if any:
(i) bank accounts that may be subject to claims of setoff by the Debtors’ lenders or
their agents;
(ii) cash held by third party independent system operators in settlement accounts;
(iii) certain restricted cash accounts held by various trustees on behalf of the Debtors,
including the Cash Collateral (as defined in the Affidavit) maintained in the
Segregated Account (as defined in the Affidavit); and
(iv) various security deposits held by certain lessors, utility companies, regulatory
agencies and others.
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SCHEDULE A(9)
List of Premises Owned and Leased From Which the Debtors Operate
Pursuant to Local Bankruptcy Rule 1007-2(a)(9), the following lists the premises owned,
leased, or held under other arrangements from which the Debtors operate their businesses.1
1 Although the Debtors lease premises located at 800 Jorie Blvd., Oak Brook, Illinois 60523, they vacated the premises and do not operate
their business at that location.
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SCHEDULE A(10)
Pursuant to Local Bankruptcy Rule 1007-2(a)(10), the following lists the location of the
Debtors’ substantial assets, the location of their records, and the nature, location, and value of
any assets held by the Debtors outside of the territorial limits of the United States.
Nature, Location and Value of Debtors’ Assets Held Outside the United States:
None.
13
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SCHEDULE A(11)
Litigation
Pursuant to Local Bankruptcy Rule 1007-2(a)(11), the Debtors do not believe that there
are any actions or proceedings, pending or threatened, against the Debtors or their properties
where a judgment against the Debtors or a seizure of their property may be imminent.
14
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SCHEDULE A(12)
Pursuant to Local Bankruptcy Rule 1007-2(a)(12), the following sets forth the names of
the individuals who comprise the Debtors’ existing senior management, their tenure with the
Debtors, and a brief summary of their relevant responsibilities and experiences.
15
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Name Title Tenure Responsibilities Experience
16
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SCHEDULE B(1)
17
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SCHEDULE B(2)(A)
Pursuant to Local Bankruptcy Rule 1007-2(b)(2), the Debtors estimate that the amounts
paid and proposed to be paid for services to be provided by the Debtors’ directors for the 30 day
period following the filing of the Debtors’ chapter 11 petitions is approximately $5,000.00. The
Debtors estimate that the amounts proposed to be paid for services to be provided by the
Debtors’ officers for the 30 day period following the filing of the Debtors’ chapter 11 petitions is
approximately $200,000.00 (gross). The Debtors will not make any payroll related payments to
their stockholders during the 30 day period following the Petition Date. The Debtors, however,
may provide goods and services to one another in the ordinary course of business.
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SCHEDULE B(2)(C)
Prior to the Petition Date, the Debtors retained Alvarez & Marsal, North America, LLC
("A&M"), a leading corporate advisory and restructuring firm, to assist the Debtors in their
restructuring efforts. Following the Petition Date, the Debtors will retain A&M, subject to
Bankruptcy Court approval, to provide financial and restructuring consulting services. The
estimated fees for A&M for the 30 days following the Petition Date are approximately
$275,000.00.
19
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SCHEDULE B(3)
Schedule of 30 Day Estimated Cash Receipts and Disbursements, Net Cash Gain or Loss,
and Accrued Obligations and Receivables (Other than Professional Fees)
Pursuant to Local Rule 1007-2(b)(3), and as reflected in the budget filed in connection
with the Cash Collateral Motion (as defined in the Affidavit), the following provides, for the 30
day period following the filing of the chapter 11 petitions, the estimated cash receipts and
disbursements, net cash gain or loss, and obligations and receivables expected to accrue that
remain unpaid, other than professional fees, for the Debtors on a consolidated basis:
20
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FIRST DAY AFFIDAVIT EXHIBIT A
64
CHI:2044610.15
Ziff Davis Media Inc. and Affiliates
Corporate Structure
Ziff Davis Holdings Inc.
(Delaware)
36-4335050
100%
100%
100% 100%
100%
100%
100% Debtor