rNTHE UNITED STATES BA1--.TKRUPTCY COURT FOR THE DISTRICT OF DELA WARE
In re: FOCAL COMMUNlCATIONS CORPORATION, et a!.,[ Debtors. ) ) ) ) ) ) Chapter 11 Case No.
02-/3701 ( )
Jointly AdministeredMOTION FOR ADMINISTRATIVE ORDER UNDER II U.S.c. §§105(a)AND 331 ESTABLISHING PROCEDURES FOR INTERIM COMPENSATION AND REIMBURSEMENT OF EXPENSES FOR PROFESSIONALS AND COMMITTEE MEMBERS
The above captioned debtors and debtors-in-possession herein (collectively, the "Debtors"), hereby move the Court for entry of an administrative order under
11 U.S.c. §§ 10S(a) and 331 establishing procedures for interim compensation and reimbursement of expenses for professionals and committee members (the "Motion"), In support of this Motion, the Debtors respectfully state as follows:2
I.The Debtors are the following entities: Focal Communications Corporation, Focal Communications Corporation of
California, Focal Communications Corporation of Colorado, Focal Communications Corporation of Connecticut, Focal Communications Corporation of Florida, Focal Communications Corporation of Georgia, Focal
Communications Corporation of Illinois, Focal Communications Corporation of Massachusetts, Focal Communications Corporation of Michigan, Focal Communications Corporation of the Mid-Atlantic, Focal Communications Corporation of Minnesota, Focal Communications Corporation of Missouri, Focal Communications Corporation of New England, Focal Communications Corporation of New Jersey, Focal Communications Corporation of New York, Focal Communications Corporation of Ohio, Focal Communications Corporation of Pennsylvania, Focal Communications Corporation of Texas, Focal Communications Corporation of Virginia, Focal Communications Corporation of Washington, Focal Communications Corporation of Wisconsin, Focal Financial Services, Inc., Focal International Corp., Focal Telecommunications Corporation, Focal Equipment Finance, LLC and Focal Fiber Leasing, LLC
2 The facts and circumstances supporting this Motion are set forth in the Affidavit ofM. Jay Sinder, Chief Financial Officer of the Debtors, in Snpport of First Day Motions, filed contemporaneously berewith.
Jurisdiction
I. This Court has jurisdiction over this Motion under 28 U.S.C. § 1334. This matter is a core proceediug within the meaning of 28 U.S.C. § 157(b)(2)(A) and (0).
2. Venue of these proceedings and this Motion is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409.
3. The statutory predicates for the relief requested herein are Sections I 05(a), and 331 of title II of the United States Code (the "Bankruptcy Code").
Background
4. On December 17, 2002 (the "Petition Date"), the Debtors filed voluntary petitions for relief under Chapter II of the Bankruptcy Code.
5. Each Debtor continues in possession of its properties and is operating and managing its business as debtor-in-possession pursuant to Bankruptcy Code §§ 1107(a) and
1108.
6. No trustee or examiner has been appointed, and no official committee of creditors or equity security holders has been established in any of the Debtors' Chapter II cases.
7. Focal Communications Corporation ("FCC") and the other captioned Debtors are national communications providers of voice and data services to communications-intensive users in major cities and metropolitan areas in the United States, including in Atlanta, Baltimore, Boston, Chicago/Northwest Indiana, Cleveland, Connecticut, Dallas, Detroit, Fort Worth, Houston, Los Angeles, Miami/Fort Lauderdale, Minneapolis/St. Paul, New York, New
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Jersey, Northern Virginia, Oakland, Orange County, California, Philadelphia/Northern Delaware, San Francisco, San Jose, Seattle, and Washington, D.C.
8. All of the Debtors (other than FCC) are direct or indirect subsidiaries of FCC. For the fiscal year ended December 31, 200 I, the Debtors generated consolidated net revenue of$332 million and a net operating loss of$141 million. The Debtors currently have approximately 835 full time employees.
Equity and Significant Indebtedness
9. FCC's 4,935,829 shares of common stock issued and outstanding at $.01 par value are traded on the NASDAQ and are widely held. FCC's 50,000 shares of preferred stock issued and outstanding at $.01 par value is convertible, at the holder's option, into a number of shares of common stock equal to the sum of $1,000 per share of preferred stock plus accrued and unpaid dividends divided by the conversion price. The conversion price, which is subject to adjustment based on future events, was $35.69 as of September 30, 2002. FCC has received notification from NASDAQ that its common stock has not maintained its required $5 million minimum market value and its minimum $1.00 per share value, and that FCC has not maintained its required $10 million minimum stockholders' equity, all of which are conditions for the continued listing of FCC's common stock on the NASDAQ exchange. NASDAQ also notified FCC that if FCC failed to provide to NASDAQ by December 5,2002 its plan for regaining compliance with these rules, then FCC's common stock would be delisted. FCC responded to NASDAQ by requesting that FCC's common stock be moved to the NASDAQ's Over-the-Counter Bulletin Board (the OTCBB) voluntarily. NASDAQ has granted FCC's request and
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FCC's common stock will be traded on the OTCBB under the symbol FCOM effective December 18, 2002.
10. As of the Petition Date, the Debtors maintained a secured credit facility (the "Senior Secured Loan") among the Debtor, Focal Financial Services, Inc. ("FFSI"), the other Debtors as guarantors, and Goldman Sachs Credit Partners L.P., Salomon Smith Barney Inc., and Citicorp USA, Inc. (the "Agents") and certain other lenders (collectively, with the Agents, the "Senior Secured Lenders") under the Amended and Restated Credit and Guaranty Agreement, dated October 26,2001, as amended (as so amended, the "Prepctition Credit Agreement"). The Senior Secured Loan consists of a Delayed Draw Term Loan of up to $75 million, the outstanding balance of which is approximately $75.65 million (consisting of$75 million in principal and $650 thousand in accrued interest), and a revolving loan of up to $150 million, the outstanding balance of which is approximately $3.15 million following the Debtors' permanent cash prepayment in the amount of $15 million to the Senior Secured Lenders, which was applied to the revolving loan portion of the Senior Secured Loan prior to the filing of these cases.
11. Contemporaneously with the Senior Secured Loan transaction, the Debtors also borrowed $100 million from a group of institutional investors, most or all of whom also were existing shareholders of FCC (collectively, the "Convertible Secured Noteholders"), pursuant to a Preferred Stock Purchase and Loan Commitment Agreement dated August 9, 2001, as amended (as so amended, the "Convertible Secured Notes Loan Agreement") among the Debtor FCC, the other Debtors as guarantors, and the Convertible Secured Noteholders, which
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loan is evidenced by secured notes (the "Convertible Secured Notes") convertible into shares of FCC's common stock on tenus more particularly set forth in a Conversion Agreement dated as of October 26, 2001. The outstanding balance of the Convertible Secured Notes is
approximately $109.2 million (consisting of$100 million in principal and $9.2 million in accrued interest).
12. The Debtors also maintain a secured equipment loan facility in the maximum amount of$50 million (the "NTFC Loan") between FCC, the other Debtors as guarantors, and NTFC Capital Corporation ("NTFC"), under the Loan and Security Agreement dated December 30, 1998, as amended (as so amended, the "NTFC Loan Agreement"). The outstanding balanceofthe NTFC Loan is approximately $17.14 million (consisting ofS 17 million in principal and $140 thousand in interest).
13. FCC also has issued: (i) its 12.125% Senior Unsecured Discount Notes due 2008 in the aggregate original principal amount of $270 million issued as of February 12, 1998 (the "2008 Unsecured Bonds") pursuant to an Indenture dated February 18, 1998 (the "2008 Indenture") between FCC, as issuer, and BNY Midwest Trust Company (as successor to Harris Trust and Savings Bank), as Bond Indenture Trustee (the "2008 Indenture Trustee"), the current accreted value of which after certain retirements is approximately $129.6 million; and (ii) its 11.875% Senior Unsecured Notes due 2010 in the aggregate original principal amount of $275 million issned as of January 12, 2000 (the "2010 Unsecured Bonds") pursuant to311 Indenture dated January 12, 2000 (the "2010 Indenture") between FCC, as issuer, and BNY Midwest Trust Company (as successor to Harris Trust and Savings Bank), as Bond Indenture
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Trustee (the "2010 Indenture Trustee"), the outstanding balance of which after certain retirements is approximately $1 18 million (consisting of$113.9 million in principal and $4.1 million in interest).
14. The Prepetition Credit Agreement and the Convertible Secured Notes Loan Agreement and related loan documents provide that the Senior Secured Loan is secured by first priority security interests and liens, and the Convertible Seemed Notes are secured by second priority security interests and liens, in substantially all of the Debtors' assets, the primary exclusion being the equipment and other personal property that is subject to the liens and
security interests of NTFC. The NTFC Loau Agreement and related loan documents provide that the NTFC Loan is secured by first priority security interests and liens on the equipment and other personal property financed by the NTFC Loan.
Factors Leading to and Commencement of the Debtors' Chapter 11 Cases
15. The Debtors' businesses have suffered as a result of the market conditions that have ravaged the telecommunications industry. Specifically, the general malaise in the economy resulted in less than forecasted demand for Debtors' sophisticated telecommunications services. The Debtors face an acute liquidity crisis and have defaulted under certain financial covenants of the Prepetition Credit Agreement and the NTFC Loan Agreement, including minimum revenue and EBITDA requirements. In addition, the Debtors' businesses require signifieaut capital and operating expenditures to finauce their businesses, including for the purchase and installation of equipment, for operation of the network, and for employee payroll expense.
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16. In response to these financial challenges, the Debtors recently have implemented aggressive cost cutting measures, including a 27% reduction in workforce, while diligently investigating and pursuing their strategic alternatives. While these efforts remain ongoing, and in light of the financial crisis facing the Debtors, the Debtors' Board of Directors and management detcnnined that Chapter 11 provided the best opportunity to preserve and enhance the Debtors' enterprise value, assure continued service to the Debtors' customers, and permit the orderly financial restructuring and reorganization of the Debtors.
Relief Requested
17. Pursuant to Sections 105(a) and 331 ofthe Bankruptcy Code, the Debtors request that the Court establish procedures for compensating and reimbursing Court-approved, retained professionals on a monthly basis similar to those recently established in other large chapter 11 cases in this District. Such an order will streamline the professional compensation process and enable the Court and all other parties to more effectively monitor the professional fees incurred in these chapter 11 cases. Further, it will avoid forcing the professionals to finance these bankruptcy cases while awaiting final approval of their fees and expenses.
18. Briefly stated, the requested procedures would permit each retained professional subject to these procedures to present to the Debtors, the United States Trustee, counsel to the Debtors' Prepetition Secured Lenders, counsel to any official committee of creditors appointed by the United States Trustee (the "Committee") to serve in these chapter 11 cases, and certain other interested parties an application for interim approval and allowance of
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fees for services rendered and expenses incurred by each retained professional during the immediately preceding month.
19. Specifically, the Debtors propose that, except as otherwise provided in an order of the Court authorizing the retention of a particular professional, the professionals retained pursuant to an order of the COUli in these cases (collectively, the "Professionals") be permitted to seek interim payment of compensation and reimbursement of expenses in accordance with the following procedures (collectively, the "Compensation Procedures"):
a. On or about tbe 25th day of each calendar month, each Professional seeking interim compensation shall file an application (the "Monthly Fee Application") with the COUli pursuant to Section 331 of the Bankruptcy Code for interim approval and allowance of compensation for services rendered and reimbursement of expenses incurred during the immediately preceding month (the "Compensation Period").
b. Each Monthly Fee Application shall comply with the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), applicable Third Circnit law and the Local Rules of this COUli and shall be served upon all parties set forth on the service list attached hereto as Exhibit A (the "Notice Parties").
c. Each Notice Party shall have twenty (20) days after service of a Monthly Fee Application to object to such application (the "Objection Deadline"). Upon the expiration of the Objection Deadline, each Professional may file a certificate of no objection or a certificate of partial objection with the Court, whichever is applicable, after which the Debtors are authorized to pay each Professional an amount (the "Actual Interim Payment") equal to the
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lesser of(i) 80 percent of the fees and 100 percent of the expenses requested in the Monthly Fee Application (the "Maximum Payment"), or (ii) 80 percent of the fees and 100 percent of the expenses not subject to an objection.
d. If any Notice Party objects to a Professional's Monthly Fee Application, it must file a written objection with the Court and serve it on the Professional and each of the Notice Parties so that it is received on or before the Objection Deadline. Thereafter, the objecting party and the Professional may attempt to resolve the objection on a consensual basis. Ifthe parties are unable to reach a resolution of the objection within 20 days after service of the objection, then the Professional may either (i) file a response to the objection with the Court, together with a request for payment of the difference, if any, between the Maximum Payment and the Actual Interim Payment made to the affected Professional (the "Incremental Amount"); or (ii) forego payment ofthe Incremental Amount nntil the next interim or final fee application hearing, at which time the Court will consider and dispose of the objection, if requested by the parties.
e. Beginning with the period ending on February 28, 2003, and at three month intervals or such other intervals convenient to the Court ("Interim Period"), each Professional shall file with the Court and serve upon the Notice Parties, pursuant to Section 331 of the Bankruptcy Code, an interim application for allowance of compensation and
reimbursement of expenses, of the amounts sought in the Monthly Fee Applications filed during such period (the "Interim Fee Application"). The Interim Fee Application must include a summary ofthe Monthly Fee Applications that are the subject of the request and any other
information requested by the Court or required by the Loeal Rules. An Interim Fee Application must be filed and served within 45 days of the conclusion of the Interim Period. The first Interim Fee Application should cover the time between the commencement of these cases tbrough and including February 28, 2003, and shall be filed on or before April 15,2003. Any Professional who fails to file an Interim Fee Application when due will be ineligible to receive further interim payments of fees or expenses under the compensation procedures until such time as the Interim Fee Application is submitted.
f. The Debtors shall request that the Court schedule a hearing on the Interim Fee Applications at least once every six months or at such other intervals as the Court deems appropriate.
g. The pendency of an objection to payment of compensation or reimbursement of expenses will not disqualify a Professional from future payment of compensation or reimbursement of expenses, unless the Court orders otherwise.
h. Neither the payment of or the failure to pay, in whole or in part, monthly interim compensation and reimbursement of expenses, nor the filing of or failure to file an objection will bind any party in interest or the Court with respect to the allowance of interim or final applications for compensation and reimbursement of expenses of Professionals.
I. All fees and expenses paid to Professionals are subject to
disgorgement until final allowance by tbe COUli.
20. The procedures requested in this Motion will relieve the burden on the Court imposed by alternative interim compensation procedures that require monthly court orders,
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while preserving all rights of objection, enabling the parties to closely monitor costs of administration, and enabling Professionals to maintain a level cash flow.
21. The Debtors further request that each member of the Committee be permitted to submit statements of expenses (excluding fees and expenses of a Committee member's counsel) and supporting vouchers to counsel to the Committee, who will collect and submit such requests for reimbursement in accordance with the Compensation Procedures as if such Committee members were Professionals.
Authoritv for the Requested Relief
22. Section 331 of the Bankruptcy Code provides, in relevant part, as follows: A trustee, an examiner, a debtor's attorney, or any
professional person employed under section 327 or 1103 of this title may apply to the court not more than once every 120 days after an order for relief in a case under this title, or more often if the court permits, for such compensation for services rendered before the date of such an application or reimbursement for expenses incurred before such date as is provided under section 330 of this title ....
11 U.S.C. § 331 (2001).
23. Section 105(a) of the Bankruptcy Code provides, in relevant part, as follows:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title ... shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules ..
11 U.S.c. § 105(a)(2001).
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24. Procedures comparable to those proposed in this Motion have been established in other large chapter] 1 cases in this District See,~,In re Peregrine Systems, Inc., Chapter II Case Nos. 02-]2740 - 02-12741 (JKF) (Bankr. D. Del. October 15, 2002); In re Waccamaw's HomePlace, Chapter 11 Case Nos. 0]-0]81- 01-0]84 (PJW) (Bankr. D. Del. January 17,2001); In re Mariner Post-Acute Network, Inc., Chapter 11 Case Nos. 00-00113 through 00-002]4 (MFW) (Bankr, D. Del. January 19, 2000); In re Vencor, Inc., Chapter II Case Nos. 99-3199 through 99-3327(MFW) (Bankr. D. Del. September 13, 1999); Inre
Hechinger Inv. Co. of Del., Inc., No. 99-2261 (PJW)(Bankr. D. Del. June 22,1999), In re PWS Holding Corn., Bruno's, Inc., Case Nos. 98-212 through 98-223, Administrative Order dated February 2,1998; and Inre Montgomery Ward Holding Corp., Case No. 97-1409,
Administrative Order dated July 8,1997. Such an order will permit the Court, the Office of the United States Trustee, and all other interested parties to monitor the fees incurred more
effectively. Further, such procedures are needed to avoid having professionals fund the reorganization case. See In re Int'! Horizons, Inc., 10 B.R. 895, 897 (Bankr, N.D. Ga. 1981) (court established procedures for monthly interim compensation). Appropriate factors to consider include "the size of [the] reorganization cases, the complexity of the issues included, and the time required on the part of the attorneys for the Debtor in providing services necessary to achieve a successful reorganization of the Debtor." Id. Debtors submit that the procedures sought herein are appropriate considering the above factors.
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Notice
25. Notice of this Motion has been given to (i) the Office of the United States Trustee; (ii)counsel to the Debtors' Senior Secured Lenders; (iii) counsel to NTFC Capital Corporation; (iv) each of the Convertible Secured Noteholders; and (v) BNY Midwest Trust Company, as Bond Indenture Trustee. Immediately subsequent to the hearing to consider "first day" motions in these proceedings, notice of this Motion will be given to (a) the creditors holding the twenty (20) largest unsecured claims against each of the Debtors and (b) those persons who have requested notice pursuant to Rule 2002 of the Federal Rules of Bankruptcy Procedure. The Debtors submit that, in light of the nature of the relief requested, no other or further notice need be given.
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WHEREFORE, Debtors respectfully request that the Court enter an order approving interim compensation procedures on the terms and conditions set forth above, and granting such other and further relief as is jnst and proper.
Dated: December \
e
2002PACHULSKI, STANG, ZIEHL, YOlJNG & JONES P.C.
aura D 's Jones (Bar No. 2436)
David, . Bertenthal (CA Bar No. 167624) Bruce Grohsgal (Bar No. 3583)
ChristopherJ. Lhulier (Bar No. 3850) 919 North Market Street, 16th Floor P.O. Box 8705
Wilmington, Delaware 19899-8705 (Courier 19801) Telephone: (302) 652-4100
Facsimile: (302) 652-4400
[Proposed] Counsel for Focal Communications
Corporation., et a!., Debtors and Debtors In Possession
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