IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

Chapter 11 In re: DIGITAL DOMAIN MEDIA GROUP, INC., et al., Debtors. Case No.: 12-12568J (Joint Administration Requested)

DECLARATION OF MICHAEL KATZENSTEIN IN SUPPORT OF FIRST DAY MOTIONS I, Michael Katzenstein, hereby declare that the following is true to the best of my knowledge, information and belief: I am the Chief Restructuring Officer of Digital Domain Media Group, Inc. ("DDMG"), et al., the debtors and debtors in possession in the above-captioned cases (collectively, the "Debtors" or the "Company"). I was appointed to serve in this capacity on the date hereof. I am a senior managing director with FTI Consulting, which was retained on or about August 10, 2012, to provide consulting and interim management services to the Debtors. On August 29, 2012, I was appointed Interim Chief Operating Officer of the Debtors. I am familiar with the day-to-day operations, business affairs and books and records of the Debtors, in a manner consistent with my tenure at the Debtors. 2. In order to enable the Debtors to minimize the adverse effects of the

commencement of their Chapter 11 Cases (defined below) on their businesses, the Debtors have
The Debtors in these proceedings and the last four digits of each Debtors federal or foreign taxpayer identification number, if any, are as follows: D2 Software, Inc. (5602); DDH Land Holdings, LLC; DDH Land Holdings II, LLC; Digital Domain (8392); Digital Domain Institute, Inc. (6275); Digital Domain International, Inc. (9344); Digital Domain Media Group, Inc. (9505); Digital Domain Productions, Inc. (5757); Digital Domain Productions (Vancouver) Ltd. (6450); Digital Domain Stereo Group, Inc. (4526); Digital Domain Tactical, Inc. (6809); Mothership Media, Inc. (2113); Tradition Studios, Inc. (4883). The Debtors mailing address is 10250 SW Village Parkway, Port St. Lucie, Florida 34987.

DOCSNY:280 11.11

requested various types of relief in "first-day" applications and motions (collectively, the "First Day Motions"). The First Day Motions seek relief that is: (a) necessary to enable the Debtors to operate in chapter 11 with minimal disruption to their current business operations; and (b) essential to maximizing the value of the Debtors assets for the benefit of their estates and creditors. I submit this declaration (the "Declaration") in support of the Debtors petitions and First Day Motions. Except as otherwise indicated, all statements in this Declaration are based upon my personal knowledge, my review of the Debtors books and records, relevant documents and other information prepared or collected by the Debtors employees at my direction, or my opinion based on my experience with the Debtors operations and financial condition. In making my statements based on my review of the Debtors books and records, relevant documents and other information prepared or collected by the Debtors employees, I have relied upon these employees accurately recording, preparing, or collecting any such documentation and other information. 4. If I were called to testify as a witness in this matter, I could and would

competently testify to each of the facts set forth herein based upon my personal knowledge, review of documents, or opinion. I am authorized to submit this Declaration on behalf of the Debtors. 5. Part I of this Declaration describes the business of the Debtors and the

developments that led to their filing for relief under chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). Part II of this Declaration sets forth the relevant facts in support of the First Day Motions filed concurrently herewith.

DOCSNY:2801 1.11

PART I I. BACKGROUND 6. On the date hereof (the "Petition Date"), each of the Debtors filed a

voluntary petition for relief under chapter 11 of the Bankruptcy Code and a motion to procedurally consolidate their chapter 11 cases (the "Chapter 11 Cases") for administrative purposes only. The Debtors are continuing to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No request has been made for the appointment of a trustee or examiner and no official committee of creditors has been appointed in these Chapter 11 Cases. II. OVERVIEW OF THE DEBTORS AND THEIR OPERATIONS A. 7. INTRODUCTION DDMG leverages its expertise in digital visual effects ("") and

computer-generated ("CG") animation across a group of interrelated businesses. At its foundation is Digital Domain Productions, Inc. ("DDP"), an award-winning digital production company founded in 1993. DDP, as a leading provider of visuals, has contributed to more than ninety (90) major motion pictures, including Titanic, the Transformers series, Pirates of the

Caribbean: At Worlds End, and TRON: Legacy. Mothership Media, Inc. ("Mothership"), a
DDP subsidiary, focuses on creating advertising, entertainment, and branded content, from concept to completion, across multiple media platforms, and recently created the virtual likeness of rapper Tupac Shakur at the Coachella Valley Music Festival. 8. As part of its prepetition initiative to refocus its resources on its core

business in California and Vancouver, on September 7, 2012, the Company began the cessation of its Port St. Lucie operations by reducing virtually its entire Port St. Lucie workforce, retaining

DOCSNY:2801 1.11

approximately 20 employees. 2 The Digital Domain Institute ("j"), based in West Palm Beach, continues to operate. The Company and its employees have been recognized with numerous film industry awards and nominations, including seven awards issued by the Academy of Motion Picture Arts and Sciences -- three Academy Awards for Best Visual Effects and four awards for Scientific and Technical Achievement. The Company also participates as a co-producer in major

productions and is currently co-producing the upcoming live-action sci-fi feature film Ender s Game, as well as virtual likenesses for Elvis Presley that will be jointly owned by CORE Media Group and DDMG. The Company also holds several patents with respect to the conversion of two-dimensional (2D) imagery to three-dimensional (3D) imagery. Prior to the Petition Date, the Company also applied its CG expertise to convert existing and newly made films from 2D to 3D, and to produce an original, family-friendly animated feature film at its subsidiary Tradition Studios, Inc. ("Tradition Studios"). 10. DDI, the Companys education subsidiary, has a public-private partnership

with The Florida State University College of Motion Picture Arts ("j"). 11. DDP operates out of Los Angeles, San Francisco, and Vancouver and DDI

operates its educational institute in West Palm Beach. DDMG has a global VFX production partnership in India and China and arrangements that may lead to establishing studios in Abu Dhabi.

In addition, on September 7, 2012, John C. Textor resigned from his positions as Chief Executive Officer and Chairman of the Board of Directors of DDMG and from all other positions as officer and director of DDMGs subsidiaries.

DOCS_NY:2801 1.11

B. CORPORATE STRUCTURE 12. Digital Domain, DDP, and D2 Software, Inc. ("D2 Software") are

incorporated under the laws of the State of Delaware. DDMG, DDI, DDH Land Holdings, LLC, DDH Land Holdings II, LLC, Digital Domain Stereo Group, Inc. ("DDSG"), Digital Domain International, Inc., Digital Domain Tactical, Inc., and Tradition Studios are incorporated under the laws of the State of Florida. Mothership is incorporated under the laws of the State of California. Digital Domain Productions (Vancouver) Ltd. ("DDP Vancouver") is organized under the laws of British Columbia, Canada. A chart setting forth the Debtors corporate structure is attached as Exhibit A to this declaration. 13. As indicated on Exhibit A, DDMG is the direct parent of nine (9) wholly-

owned subsidiaries. DDMGs indirect subsidiaries, Mothership, D2 Software, Digital Domain Productions (Sydney) Pty Ltd. (a non-debtor), and DDP Vancouver are wholly owned by DDP, which itself is wholly owned by Digital Domain. DDMG owns an 86.9% interest in DDP. The remaining 13.1% interest in Digital Domain is owned by various minority shareholders. C. DOMESTIC BUSINESS OPERATIONS 14. Prior to the Petition Date, the Company consisted of three core business

segments: (i) digital production; (ii) animated feature film production; and (iii) education. On September 7, 2012, with the termination of substantially all employees who worked at Tradition Studios, the Debtors effectively exited the business of producing original animated feature films. I. 15. Digital Production The Company is one of the leading digital production companies, offering

its clients innovative, end-to-end solutions across multiple media platforms spanning the entire content production process from idea generation and pre-production to design, directing, live-

DOCS_NY:2801 1.11

action production, and post-production. The Company has two key digital production business units: DDP -- VFX for feature films and advertising; and Mothership -- digital advertising and marketing solutions. Until September 7, 2012, with the termination of substantially all its employees who worked at Tradition Studios, DDSG engaged in the creation and conversion of 3D content.

1. Digital Domain Productions

16. DDP provides digital content production services for feature films and

commercials and currently represents the largest component of the Companys business. Through DDP, the Company is one of the largest end-to-end providers of digital content production services in the entertainment industry. DDP also runs a leading-edge virtual production studio which combines virtual cinematography, award-winning facial animation and capture, Simulcam, and one of the largest motion capture sound stages in the world. Services of the studio are available not only to Digital Domain feature film, advertising and videogame clients, but to outside projects as well. 17. In the feature film realm, DDP typically is hired by a major motion picture

studio, often at the recommendation of a producer or director, to provide digital effects for a film project in the development stage. DDPs revenues from a large feature film project range in size from several million dollars to more than $70 million, and such projects can take from as short as three months to more than two years to complete. In the advertising realm, DDP typically is hired by an advertising production company, advertising agency, brand directly, videogame developer or videogame distributor, to provide digital visual effects for advertising and videogame projects.

DOCS_NY:2801 iii

18.

Recently, the Company has leveraged its role as a provider of visual

effects for live-action feature film projects of major film studios and leading filmmakers to coproduce Ender s Game, a large-scale live-action feature film. The Company invested in the films overall production budget and is also creating digital visual effects for the film. 2. Mothers hip 19. Mothership is the Companys digital advertising and marketing business,

founded in 2010, which provides end-to-end creative services focused on the development, creation, production and implementation of marketing solutions for brand advertisers, advertising agency clients, videogame developers, videogame distributors and entertainment companies. Mothership s in-house talent and creative teams include directors, designers, writers, strategists, digital artists and technologists. Mothership creates content across multiple media platforms, referred to as "cross-platform" advertising, which includes television, online, print, mobile, and other forms of interactive media. It is currently working with CORE Media to create and co-own virtual likenesses of Elvis Presley, and created the "virtual Tupac" performance for Dr. Dre that garnered worldwide attention for this completely new form of entertainment.

3. Digital Domain Stereo Group

20. The Company formed DDSG in November 2010 to acquire the business of

In-Three, Inc., the pioneer of proprietary Dimensionalization solutions for the conversion of 2D content into high quality 3D stereo imagery, including the patents and proprietary technology related thereto. The Companys Dimensionalization solutions were used in 3D work on Transformers: Dark of the Moon, The Smurfs, Alice in Wonderland, and G-Force. The Companys cessation of its Port St. Lucie operations includes those of DDSG, but as of the

DOCS_NY:2801 LII

Petition Date the Company continues to provide limited 2D to 3D conversion capabilities to studios as part of its operations in California. ii. Animation 1. Tradition Studios 21. The Company created Tradition Studios, a feature film animation studio,

to focus on the development of original full-length, family-oriented CG animated feature films. As described above, immediately prior to the Petition Date, the Company began the cessation of its Port St. Lucie operations, including those of Tradition Studios. iii. Education 1. Digital Domain Institute 22. In October 2010, the Company founded DDI, a for-profit post-secondary

educational institution, in partnership with FSU. In April 2011, the Company entered into agreements with FSU establishing a first-of-its-kind public-private education partnership whereby DDI graduates will receive fully-accredited four-year Bachelor of Fine Arts degrees from FSU. Working closely with FSUs College of Motion Picture Arts and the Florida Department of Education, the Company designed a curriculum for DDI that is intended to produce workforce-ready graduates possessing both traditional motion picture arts and state-ofthe-art technical animation and VFX skills. DDI commenced the first classes for its Digital Arts Essential Skills Program in the first calendar quarter of 2012. 23. To assist with the establishment of DDI, in December 2010, the City of

West Palm Beach granted the Company (i) title to approximately 2.5 acres of land for DDIs headquarters and primary campus facility (the "DDI Campus"), conditioned on development of the property, and (ii) a $10 million cash grant (discussed more fully below). Located on the

DOCSNY:2801 1.11

primary thoroughfare into downtown West Palm Beach, the DDT Campus is intended to house (i) PSUs new degree program in Animation and Digital Arts, (ii) a working digital production facility, (iii) FSUs Torchlight Program (which focuses on post-production film marketing), and (iv) FSUs "applied digital media research center," which will pursue government and industry funded digital media research. DDI recently entered into a lease for temporary space adjacent to the DDI Campus to temporarily house FSUs Torchlight Program and DDIs first class of students. D. INTERNATIONAL OPERATIONS i. China - Digital Domain-Galloping Horse Studio Joint Venture 24. On March 30, 2012, DDMG entered into ajoint venture agreement with

Beijing Galloping Horse Film Co., Ltd. ("GH"), pursuant to which DDMG and OH have agreed to form a joint venture company for the purpose of creating, owning and operating a VFX studio to be located in China (the "China Studio"). 25. Pursuant to the joint venture agreement, GH is to fund construction of the

China Studio, in an amount not to exceed $50,000,000, and DDMG is to (i) grant to the joint venture an exclusive, royalty-free license to use the Companys VFX intellectual property rights and (ii) design and supervise the build-out of the China Studio. ii. India and Abu Dhabi - Joint Marketing VFX Services Agreement 26. On July 8, 2011, DDP entered into a three-year joint marketing agreement

(the "Joint Marketing Agreement") with RelianceMediaWorks Limited ("RMW"), a film and entertainment services company headquartered in Mumbai, India, pursuant to which RMW is responsible for creating and staffing studio facilities in both Mumbai and London for use by DDP.

DOCS_NY:2801 1.11

27.

On August 1, 2012, RMW and DDP revised the Joint Marketing

Agreement to include a contract for RMW to train Indian VFX professionals to staff the new production studio that DDMG is developing in Abu Dhabi. Additionally, under the revised Joint Marketing Agreement, RMW licensed DDMGs technology patents covering 2D-to-3D conversion for $3.2 million. W. Vancouver Operations 28. In January 2010, DDP Vancouver opened a 30,000 sq. ft. digital

production studio in Vancouver, British Columbia, which is integrated with the Companys Los Angeles-based production facility. E. EMPLOYEES 29. As of March 1, 2012, the Company employed approximately 933 full and

part-time employees. Of these employees, approximately 374 were located in Venice and Playa Vista, California, 272 were located in Port St. Lucie, Florida, 23 were located in San Francisco, and 264 were located in Vancouver, British Columbia. Prior to the Petition Date, the Company also hired additional employees and contractors on a project-by-project basis. 30. On September 7, 2012, the Company terminated all but approximately 20

employees at the Port St. Lucie location. Thus, as of the Petition Date, the Company employs approximately 765 full and part-time employees. III. SIGNIFICANT INDEBTEDNESS 31. The Companys debt structure consists of: (i) secured notes that are

guaranteed by DDMGs subsidiaries and secured by substantially all of the Debtors personal property assets; (ii) unsecured notes; (iii) governmental contract and lease obligations; and (iii) trade debt.

DOCS_NY:28011.11

10

32.

As of June 30, 2012, the Company reported total balance sheet assets of

approximately $205 million, including $78 million in property and equipment and $29 million in film inventory. As of the same date, the Company reported total balance sheet liabilities in the approximate amount of $214 million, including $57 million in warrant and debt liabilities, $33 million in accounts payable and other accrued liabilities, and $35 million in net government lease obligations. A. SENIOR SECURED NOTES 33. On May 7, 2012, DDMG, as borrower, issued 9.0% senior secured

convertible notes in the face amount of $35.0 million due May 7, 2017 (the "Senior Notes") and warrants to initially purchase up to 1,260,288 shares of the Companys common stock (the "Warrants"), for an aggregate purchase price of $35.0 million, pursuant to a Securities Purchase

Agreement between DDMG and: (i) Tenor Opportunity Master Fund, Ltd. ("Tenor OMF");
(ii) Tenor Special Situations Fund, L.P. ("Tenor SSF"); (iii) Parsoon Special Situation Ltd. ("Parsoon"); (iv) Hudson Bay Master Fund Ltd. ("Hudson Bay Master Fund"); (5) Empery Asset Masters, Ltd. ("Empery"); and (vi) Hartz Capital Investments, LLC ("Hartz" and, collectively with Tenor OMF, Tenor SSF, Parsoon, Hudson Bay Master Fund, and Empery, the "Initial Senior Noteholders"). The Senior Notes were issued in conjunction with the restructuring of DDMGs $27.4 million senior secured debt obligation owed to Comvest Capital II, L.P. ("Comvest"), discussed below. 34. On August 16, 2012, DDMG, as borrower, and with the consent of the

Initial Senior Noteholders, issued to PBC Digital Holdings II, LLC ("") an additional $5.0 million in notes under the Securities Purchase Agreement (the "PBC Senior Subordinated Notes") and a warrant to purchase up to an aggregate of 250,000 shares of the Companys

DOCS_NY:2801 1.11

11

common stock. Pursuant to an intercreditor agreement, the PBC Senior Subordinated Notes are subordinate only to the Initial Senior Notes (together, the "Senior Notes"). Accordingly, as of the Petition Date, approximately $40.0 million in original principal obligations is outstanding under the Senior Notes, exclusive of unpaid interest, fees, and other charges such as make whole obligations that total approximately $24.7 million. The obligations under the Senior Notes are secured by a first priority lien against substantially all of the Debtors personal property assets.

B. COM VEST SUBORDINATED SECURED NOTE

35. As discussed above, DDMG issued the Senior Notes to enable the

Company to retire and refinance its existing $27.4 million senior secured debt obligation owing to Comvest, which was otherwise due and payable by September 30, 2012. On May 7, 2012, DDMG entered into a new agreement with Comvest, pursuant to which DDMG paid $22.5 million in the aggregate to Comvest from the Senior Notes proceeds and issued a new 10.0% subordinated secured convertible notes (the "Subordinated Notes") in the face amount of $8 million due June 30, 2016. As of the Petition Date, the outstanding principal amount of the Subordinated Notes is approximately $8 million. The obligations under the Subordinated Notes are secured by a second priority lien against substantially all of the Debtors personal property assets, junior only to the Senior Notes.

C. UNSECURED NOTES
36. In connection with a Settlement and Release Agreement entered into on

March 19, 2012 between DDMQ, DDP, and Legendary Pictures Funding, LLC ("Legendary Pictures"), DDMG issued a $3.0 million 8% unsecured convertible note (the "Legendary Note")

DOCS_NY:28011.I1

12

to Legendary Pictures. 3 On August 13, 2012, Legendary Pictures agreed to extend the maturity date to September 30, 2013 and terminate the Legendary Note in exchange for the assignment of receivables in the amount of $3.2 million (the "Receivables Amount") owed to DDP from affiliates of Warner Brothers, a related party of Legendary Pictures. In connection with this arrangement, personal guarantees of the Legendary Note issued by John Textor, the Companys then CEO and Chairman, are released effective as of the receipt by Legendary Pictures of the Receivables Amount. D. TRADE DEBT 37. The Company owes approximately $12,514,000 in trade debt to its

vendors and approximately $14,875,000 in other payables. E. EQUITY I. Initial Public Offering 38. On November 18, 2011, DDMU raised $41.8 million through an initial

public offering on the New York Stock Exchange under the ticker symbol "DDMG." As of the Petition Date, 43.56 million shares of common stock were outstanding ii. PIPE Offering 39. On June 7, 2012, DDMG entered into a securities purchase agreement

with: (i) Hudson Bay Master Fund; (ii) Empery; (iii) Hartz; (iv) Parsoon; (v) Tenor OMF; (vi) Aria Opportunity Fund, Ltd.; (vii) Kingsbrook Opportunities Master Fund LP; and (viii) Iroquois Master Fund Ltd. (the "PIPE Purchasers"), pursuant to which DDMG agreed to issue and sell to the PIPE Purchasers an aggregate of 1,500,004 shares of DDMG common stock at a purchase price of $7.00 per share, and warrants to purchase up to 600,000 additional shares of
Pursuant to its terms, the Legendary Note is convertible, at the sole option of Legendary Pictures, into 531,915 shares of common stock of DDMG.

DOCS_NY:28011.11

13

DDMG common stock at an exercise price of $8.05 per share, for an aggregate purchase price of $10.5 million. F. GOVERNMENT GRANT FUNDING AND TAX INCENTIVES 40. Over the past two years, the Company has worked closely with State and

local government authorities in Florida to execute economic stimulus contracts designed to create jobs and stimulate Floridas economy. As of the Petition Date, the Company had contracted to receive a total of approximately $135 million in such government stimulus financing, including $19.9 million in tax credits. This financing consists of cash grants, land grants, low-interest financing, and tax incentives. All of these incentives have been structured over a three- to five-year period, with portions of these grants to be funded as the Company meets target thresholds of business initiation, capital expenditures, and/or job creation. 41. The first stimulus package, signed in June 2009, provides for $20 million

in cash grants from the State of Florida. The second stimulus package was awarded to the Company by the City of Port St. Lucie, Florida in December 2009 and January 2010, and provides for: (i) an additional $10 million in cash grants; (ii) 15 acres of land appraised at $10.5 million; and (iii) $39.9 million in low-interest building and equipment lease financing. The Company used these incentives to construct its headquarters and state-of-the-art animated features film studio, Tradition Studios, in Port St. Lucie, Florida. 42. The third stimulus package, signed in November 2010 with the City of

West Palm Beach, Florida Community Redevelopment Agency (the "Agency"), provides for: (i) grants of $10 million in cash; (ii) title to 2.4 acres of land appraised at $9.8 million; and (iii) $15 million in low-interest construction financing. These grants were designed to incentivize the Company to build DDIs educational campus at a site in the City of West Palm Beach. The cash

DOCS_NY:28011.11

14

grant will be released as DDMG and DDI achieve various benchmarks, including commencement of construction, student enrollment targets, and other business progress targets. The deed on the granted property provides that it reverts to the Agency if certain conditions are not met or if construction of the site is not commenced by December 13, 2012. As of the Petition Date, the foregoing conditions have not been fulfilled, and construction has not commenced nor has financing for such construction been identified. IV. EVENTS LEADING TO CHAPTER 11 43. The Senior Notes contain a number of affirmative and negative covenants

(collectively, the "Liquidity Covenants"), including covenants requiring the Company to maintain minimum levels of available cash and free cash flow as of certain measurement dates. As a result of negative working capital, the Company failed to meet the Liquidity Covenants and was running out of cash. In late August 2012, the Company was notified by the Initial Senior Noteholders that the Company was in default of its obligations under the Senior Notes. Although the Company and the Initial Senior Noteholders entered into short-term forbearance agreements, they were unable to reach agreement on the terms of an extended forbearance agreement. 44. While negotiating with the Initial Senior Noteholders regarding the terms

of an extended forbearance agreement and restructuring of the Senior Notes debt, the Company also continued to seek additional external sources of debt and/or equity capital, but was unable to locate sufficient sources of capital to enable it to restructure its debt and pay operating expenses going forward. 45. On August 22, 2012, the Board of Directors established a special

committee of the Board comprising disinterested and independent members thereof to review

DOCS_NY:28011.I1

15

and evaluate the full range of strategic alternatives available to maximize the value of the Company. 46. As set forth above, on September 7, 2012, the Company initiated its

strategic realignment back to its core business focused on creating digital visual effects, CG animation and digital production for the entertainment and advertising industries at its locations in California and Vancouver. In conjunction with such realignment, the Company began the cessation of its Port St. Lucie operations. 47. The Initial Senior Noteholders agreed to provide debtor in possession

financing to the Company as a bridge to a sale of certain of the Companys assets pursuant to section 363 of the Bankruptcy Code and the orderly wind-down of the remaining segments of the Companys operations. Such financing will provide for the payment of terminated employees wages and certain benefits, as well as future payroll and other operating expenses of the Company through the closing of a sale. The Company has no sources of financing or liquidity other than the DIP financing.

PART II
A. 48.

FIRST DAY MOTIONS

In order to enable the Debtors to minimize the adverse effects of the

commencement of the Chapter 11 Cases on their restructuring efforts, the Debtors have requested various types of relief in the First Day Motions filed concurrently with this Declaration. 49. I have reviewed each of these First Day Motions (including the exhibits

and schedules thereto). The facts stated therein are true and correct to the best of my knowledge, information and belief based upon my tenure at the Company, and I believe that the type of relief

DOCS_NY:28011.11

16

sought in each of the First Day Motions: (a) is necessary to enable the Debtors to operate in chapter 11 with minimal disruption to their current business operations; and (b) is essential to maximizing the value of the Debtors assets for the benefit of their estates and creditors. Accordingly, and to this extent, I incorporate herein by reference the factual statements set forth in the First Day Motions. 50. It is my further belief that, with respect to those First Day Motions

requesting the authority to pay discrete prepetition claims (e.g., those First Day Motions seeking relief related to the Debtors obligations to their employees, vendors, and banks), the relief requested is essential to the Debtors efforts to preserve and maximize value in these Chapter 11 Cases and avoid immediate and irreparable harm to the Debtors and their estates and creditors. 51. I believe that any diminution in the limited relief requested in the First

Day Motions could have an immediate and irreparable harmful impact upon the going concern value of the estates to the detriment of all of the Debtors stakeholder constituencies. The Debtors believe that payment of those selected prepetition claims identified in the First Day Motions will forestall such irreparable harm and that all creditors of the Debtors will ultimately benefit from the relief requested therein. B. DIP FINANCING MOTION 52. As part of the First Day Motions, the Debtors have filed a motion seeking

authority to obtain secured postpetition financing (the "DIP Facility") and use cash collateral to ensure that the Debtors have sufficient liquidity to pay operational expenses and meet their other

" Capitalized terms used in the following paragraphs not defined herein shall have the meaning ascribed to them in the Motion of Debtors for Entry of Interim and Final Orders (I) Authorizing Debtors to Obtain Postpetition Financing and Use Cash Collateral, (II) Granting Adequate Protection, (III) Scheduling Final Hearing and (IV) Granting Certain Related Relief (the "DIP Financing Motion").

DOCSNY:28011.11

17

financial obligations during the pendency of these Chapter 11 Cases. The proposed DIP Facility would be provided by the existing Initial Senior Noteholders. 53. The Debtors have an immediate and critical need to obtain postpetition

financing under the DIP Facility and to use cash collateral in order to effectuate an orderly sale process that will maximize value for creditors. Without access to the DIP Facility and the continued use of cash collateral, the Debtors and their estates would suffer immediate and irreparable harm because they could not continue to operate. 54. The use of cash collateral alone would be insufficient to meet the Debtors

postpetition liquidity needs. The Debtors are unable to obtain (a) adequate unsecured credit, (b) adequate credit secured by a senior lien on unencumbered assets or a junior lien on encumbered assets, or (c) secured credit from parties other than the DIP Lenders on terms more favorable than the terms of the DIP Facility. The only source of secured credit available to the Debtors, other than the use of cash collateral, is the DIP Facility. The Debtors require both additional financing and the continued use of cash collateral in order to satisfy their postpetition liquidity needs. 55. The DIP Lenders have indicated a willingness to provide the Debtors with

certain financing commitments, but solely on the terms and conditions set forth in the DIP Term Sheet and the Interim Order. After considering all of their alternatives, the Debtors have concluded, in an exercise of their sound business judgment, that the financing to be provided by the DIP Lenders pursuant to the terms of the DIP Term Sheet and the Interim Order represents the best financing presently available to the Debtors. These funds will be used to maintain the Debtors assets and knowledge base pending an orderly sale process.

DOCS_NY:28011.11

18

56.

The Debtors have negotiated the DIP Facility and the DIP Term Sheet in

good faith and at arms-length with the DIP Agent. The Debtors believe that the terms of the DIP Facility are fair and reasonable, reflect the Debtors exercise of prudent business judgment consistent with their fiduciary duties, and are supported by reasonably equivalent value and fair consideration. 57. The Debtors have been unsuccessful in obtaining alternative financing.

Prior to the Petition Date, the Debtors were unequivocally advised that the Prepetition Lenders would not consent to a priming financing facility from any other party. The Debtors have no material assets that are not encumbered by the liens of the Prepetition Lenders. In view of this fact and the significant negative cash flow of the Debtors, I believe it virtually impossible to secure DIP financing from any source other than the Prepetition Lenders. Indeed, the Debtors have solicited alternative financing proposals from outside parties without success. 58. Based on the foregoing, I believe that the urgent need to preserve the

Debtors business, and avoid immediate and irreparable harm to the estates, makes it imperative that the Debtors be authorized to access postpetition financing under the terms of the DIP Facility and use cash collateral immediately upon the first day of these Chapter 11 Cases, pending a final hearing on the DIP Financing Motion, in order to continue their operations and administer their Chapter 11 Cases. 59. Pursuant to 28 U.S.C. 1746, I declare under penalty of perjury that the

foregoing is true and correct. Dated: September!!, 2012

Michael Katzenstein

DOCS_NY;28011.11

19