IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA ALEXANDRIA DIVISION

Transcription

1 Malcolm M. Mitchell, Jr., (VSB No ) Byron L. Pickard, (VSB No ) Vorys, Sater, Seymour and Pease LLP 277 South Washington Street, Suite 310 Alexandria, Virginia (703) Local Co-Counsel for the Official Committee Of Unsecured Creditors IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA ALEXANDRIA DIVISION In re: ) Chapter 11 ) US Airways Group, Inc., et al., ) Case Nos (SSM) ) Debtors. ) FINAL APPLICATION OF ERNST & YOUNG CORPORATE FINANCE LLC AS FINANCIAL ADVISOR TO THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF US AIRWAYS GROUP, INC., ET AL., FOR ALLOWANCE OF COMPENSATION FOR SERVICES RENDERED AND REIMBURSEMENT OF DISBURSEMENTS FOR THE PERIOD FROM AUGUST 22, 2002 THROUGH MARCH 31, 2003 Name of Applicant: Ernst & Young Corporate Finance LLC Authorized to Provide Professional Services to: US Airways Group, Inc. et al., Date of Retention: Effective as of August 22, 2002 Period for which compensation and reimbursement are sought: August 22, 2002 through March 31, 2003 Amount of Compensation sought as actual, reasonable, and necessary: $2,321,665 Total Amount of Expense Reimbursement sought as actual, reasonable, and necessary: $74,709 This is a: final application for monthly allowance of compensation for services rendered

2 Malcolm M. Mitchell, Jr., (VSB No ) Byron L. Pickard, (VSB No ) Vorys, Sater, Seymour and Pease LLP 277 South Washington Street, Suite 310 Alexandria, Virginia (703) Local Co-Counsel for the Official Committee Of Unsecured Creditors IN THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA ALEXANDRIA DIVISION In re: ) Chapter 11 ) US Airways Group, Inc., et al., ) Case Nos (SSM) ) Debtors. ) FINAL APPLICATION OF ERNST & YOUNG CORPORATE FINANCE LLC AS FINANCIAL ADVISOR TO THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF US AIRWAYS GROUP, INC., ET AL., FOR ALLOWANCE OF COMPENSATION FOR SERVICES RENDERED AND REIMBURSEMENT OF DISBURSEMENTS FOR THE PERIOD FROM AUGUST 22, 2002 THROUGH MARCH 31, 2003 TO THE HONORABLE STEPHEN S. MITCHELL, UNITED STATES BANKRUPTCY JUDGE: Pursuant to 11 U.S.C. 330 and 331 and Rule 2016 of the Federal Rules of Bankruptcy Procedure, Ernst & Young Corporate Finance LLC ( EYCF ), hereby moves this Honorable Court for an Order awarding reasonable compensation with respect to US Airways Group, Inc., et al (the Debtors or the Company ) for services rendered as financial advisors to the Official Committee Of Unsecured Creditors (the Committee ) in the amount of $2,321,665 together with reimbursement for actual, reasonable and necessary expenses incurred in the amount of $74,709 for the period from August 22, 2002 through March 31, 2003 (the Final Compensation Period ). In support of this Application, EYCF respectfully represents as follows:

3 1. On August 11, 2002 (the Petition Date ), US Airways Group, Inc. filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (the Bankruptcy Code ) with this Court. US Airways Group, Inc., et al., operated their businesses and managed their properties as debtors in possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code through March 31, EYCF was retained to advise the Committee, pursuant to an Order entered by this Court on September 30, 2002, effective nunc pro tunc to August 22, 2002 (the EYCF Retention ). See Exhibit A attached hereto. 3. There is no agreement or understanding between EYCF and any other person, other than the members, associates and employees of EYCF, for the sharing of compensation received or to be received for services rendered in connection with this proceeding. 4. EYCF makes this final application for allowance of reasonable compensation for actual and necessary professional fees and out-of-pocket expenses incurred during the Final Compensation Period in accordance with the procedures set forth in the administrative order entered September 6, 2002 (the Administrative Order ) for the Debtors Chapter 11 case. 5. The following exhibits are annexed to this Application: Exhibit A Exhibit B Exhibit C Exhibit D Order Authorizing Employment and Retention of Ernst & Young Corporate Finance LLC ( EYCF ) As Financial Advisors to The Official Committee Of Unsecured Creditors Summary of Hourly Fees by Professional Summary of Hourly Fees by Project Code and Detail of Hourly Fees by Project Code Summary of Expenses

4 6. In rendering the services described herein, EYCF expended 5,603.6 hours. An overall billing summary, which sets forth the hourly rates, number of hours incurred and related fees for each professional is annexed hereto as Exhibit B. 7. As presented and described in the pages that follow, EYCF has summarized the services rendered by project code, identifying the activities within the category, naming each person who performed the activity, and the number of hours spent by such person. Description of the work performed in tenth-hour detailed statements of services is also attached hereto as Exhibit C. 8. In addition to the time expended, expenses were incurred during the Final Compensation Period in the sum of $74,709. These expenses were reasonable and necessary and were incurred on behalf of the Committee. A summary of these expenses is attached hereto as Exhibit D. 9. In accordance with the Administrative Order, EYCF has submitted monthly fee invoices requesting the Debtors to pay 85% of fees and 100% of expenses during the Final Compensation Period. For the period August 22, 2002 through March 31, 2003, EYCF has previously submitted monthly fee statements to the Debtors in the aggregate amount of $1,969,905 representing 85% of EYCF s fees ( $2,317,535) and 100% of all expenses incurred ($74,709). In addition to the monthly fee statements submitted to the Debtors, EYCF had incurred an additional 18.0 hours for preparation of this final fee application. We have included these hours in the total amount requested for fees incurred of $2,321,665. As of the date hereof, EYCF has received payment for fees and expenses in the amount of $2,037,947.

5 10. During the Final Compensation Period, EYCF provided the following services to the Committee (Detailed descriptions provided below for PCD categories in excess of $10,000) PCD 1 Planning, Supervision, Review and Information Requests $122,084 Includes the development of work plans and report outlines, identification of analyses needed to be performed, supervision and review of staff work product, and internal meetings regarding case status. Additionally, information requests were prepared and a tracking system was utilized to monitor data received. As with any case of this size and fast pace, effective planning was critical to efficiently performing our services and meeting the needs of our client and the accelerated timeline set forth by the Debtors. PCD 6 Valuation and Related Matters $112,819 Includes preparation of valuation analyses of the Reorganized Debtors in order to assist the Committee in its evaluation of strategic options, including the evaluation of its proposed equity allocations and expected recoveries. We prepared an independent calculation of value ranges using the present value of cash flows and the terminal value based upon Company provided information and our judgment regarding significant factors including: terminal value, weighted average cost of capital, lease adjusted debt, etc. Additionally, we reviewed analyst reports, industry data, and market capitalization, valuation and trading multiples of competitors. Due to the ongoing revisions to the seven-year business plan, it was necessary to continually perform updates to this analysis. The results of our analyses were communicated to the Committee in various meetings and included in the EYCF report dated January 9, PCD 7 Liquidation Analysis and Related Matters $8,354 PCD 9 Analysis of Long-Term Business Plan and Related Matters $263,426 We analyzed and assessed the Debtors 18-month forecast and seven-year business plans, including the related restructuring and corporate finance issues. These services included, but were not limited to: (i) challenging the Debtors revenue strategy which included fleet and hub restructurings, an alliance with another major airline, and the deployment of

6 regional jets; (ii) analyzing the Debtors cost cutting initiatives which included labor concessions and business optimization strategies; (iii) analyzing the risks and opportunities included in the business plans; (iv) assessing the achievability of the business plans; (v) performing revenue and cost sensitivity analyses to assess flexibility under DIP financial covenants; and (vi) reviewing industry research to understand issues impacting the Debtors operations. These services were critical in order to assess the Debtors long-term viability. PCD 10 Analysis of Current Operating Results and Related Matters $151,751 We analyzed the Debtors current operating performance and various cash flow availability issues including, but not limited to: (i) analyzing financial results and discussing variances with management; (ii) evaluating certain credit card processing contracts to determine collateral requirements; (iii) reviewing and analyzing weekly cash flow projections, including reconciling projections to the Debtors 18-month plan; (iv) analyzing current industry issues impacting the Debtors operations; (v) analyzing industry operating statistics compared to the Debtors operations; and (vi) analyzing the Debtors market share fluctuations. The analysis of current financial performance was important to the Committee in considering the costs/benefits of various courses of action proposed by the Debtors. The results of our analyses were communicated to the Committee in various meetings and included in each of our Committee meeting reports. PCD 11- Analysis of Weekly/Monthly Flash Reports $136,692 We reviewed the Debtors cash flows and operating statistics each week as part of the flash reporting procedures that were instituted by the Committee. These procedures included but were not limited to: (i) reviewing and discussing weekly cash, operating statistics and variances to the 13-week cash flow with the Debtors and their representatives; (ii) communicating a summary of the Debtors cash position, cash flows, and operating statistics to the Committee on a weekly basis; (iii) assessing the Debtors cash burn on a weekly and cumulative basis; and (iv) reviewing the appropriateness of the Debtors pre-petition vendor payments. These services were critical in this proceeding, as it kept the Committee informed of the Debtors performance on a timely basis. In addition, the analysis of the Debtors weekly performance provided a strong basis for analyzing the Debtors business plans. PCD 15 Preparation for and Attendance at Court Hearings $19,847 Includes the attendance of various court hearings regarding proposed DIP financing, bidding procedures, disclosure statement approval, and pension plan termination. Observations/commentary were provided to the Committee on several occasions.

7 PCD 17 - Analysis of Return to Vendor Program $913 PCD 19 Analyze of Claims $12,429 Includes the review of inter-company claims, including the analysis of claims of each debtor entity and review of the asserted PBGC claims. Discussions were held with Debtor representatives and feedback was provided to the Committee as appropriate. PCD 21 Analyze Liabilities Subject to Compromise $1,765 PCD Meetings $1,193 PCD 25 Preparation and Participation in Meetings/Conference calls with Debtors (a) $113,846 We participated in numerous meetings and conference calls with the Debtors and its advisors and attended various formal presentations given by the Debtors. Meetings were necessary with management and Company advisors in order to coordinate information requests, to understand the underlying business plan assumptions and assess achievability, to challenge short-term cash forecasts, and to monitor operating results and liquidity trends. Additionally, we met with Company advisors to discuss issues such as the plan sponsor process, DIP financing, exit financing, aircraft lease restructuring, employee compensation and POR items (proposed equity allocations, corporate governance, valuation, etc.). We interacted with the Debtor and its representatives regularly regarding many case issues. This frequent involvement allowed us to play an active role in many aspects of the case on behalf of the Committee. PCD 26 Prepare Information and Participation in Creditor Committee Meetings (a) $458,006 We played a significant role in weekly conference calls and monthly meetings with the Committee. On a weekly basis, EYCF provided the Committee with updates on operating performance as compared to budget and important economic developments. We also prepared six comprehensive written reports to the Committee and presented them at face-to-face meetings. Presentations addressed key case issues including but not limited to: business plan assumptions and achievability, DIP financing assessment (including financial covenant analyses), cash position and liquidity trends, POR issues (proposed equity allocations, corporate governance, valuation, claims, etc.), fleet restructuring, exit financing, pension plan issues and other important items. In addition to formal presentations at meetings, EYCF responded to questions from Committee members and provided insight on various areas of concern. This code also includes discussions held with Committee counsel and with Committee members on an individual basis regarding the plan sponsor process, plan of reorganization issues, and various

8 motions (credit cards, claims trading, employee bonuses, simulator sales, pension plan termination etc.). PCD 30 Analyze Employee Severance, Pension, Retention and Bonus Program $80,249 We analyzed the Debtors proposed incentive compensation bonus plan and the ordinary course retention program in order to assess whether these plans were reasonable. This analysis included: (i) reviewing each of the programs for each employee group; (ii) consulting with the Debtors management and advisors and the Committee on plan details (iv) reviewing management s concessions; and (iii) analyzing compensation levels of prior management. These services enabled the Committee to make well informed decisions regarding the appropriateness of such compensation levels and bonus proposals. Additionally, we reviewed and analyzed various pension plan items including cash funding requirements, termination of Pilots pension plan, and impact on PBGC claims. PCD 31 Analyze Employee Benefit Matters $12,873 Due to the significant impact the unfunded pension liability has on the Company s business plan and ultimate recovery to General Unsecured Creditors, we spent time addressing this issue. We held discussions with Debtor representatives and assessed the various alternatives related to the unfunded pension liability. PCD 34 Analysis of Motions, Including Analysis to Assume Or Reject $105,457 EYCF reviewed and analyzed terms and conditions related to court filed motions including: (i) thresholds related to claims trading; (ii) validity of claims brought by Richard Sweet; (iii) economics of fuel hedging contracts; (iv) proposed Midway and Mesa regional jet arrangements, and (v) GECC related motions. Services provided by EYCF included, but were not limited to: (i) reviewing the key terms associated with court filings; (ii) discussing with the Debtors the economic issues associated with assuming or rejecting the motions; (iii) presenting key economic issues to Committee members; and (iv) providing recommendations on whether to assume or reject motions. PCD 36 Analyze DIP Facility Matters $51,523 Review and analysis of the DIP facility was performed which addressed milestone requirements, adequacy of availability, comparison of terms to comparable DIP financings, covenant requirements, and collateral values. Discussions were held with Committee counsel and Debtors advisors regarding the DIP Process and the impact of the DIP (including amendments to the DIP) on both the TPG and RSA Investment

9 Agreements. A detailed summary of our work was provided in a formal presentation to the Committee. During the latter part of the case, we reviewed and analyzed the amendments to the DIP and kept the Committee updated on the status of DIP proceeds. PCD 37 Analyze Other Financing Matters $158,003 EYCF analyzed the aircraft financing issues of the Debtors in order to advise the Committee on the impact of aircraft lease restructuring on cash flow, aircraft fleet requirements, debt obligations, unsecured claims, and valuation impact. These analyses included the monitoring of aircraft lease related motions filed by the Debtors, analysis of settlement agreements between the Debtors and Lessors (including the GECAS settlement proposal) and analysis of the Debtors' aircraft contracts and lease structures. Additionally, EYCF reviewed the Company s hedging programs and related matters and examined the Debtors' proposed retention of the Seabury Group by analyzing the appropriateness of the agreed upon fee structure. PCD 38 Analyze Exit Financing Matters $15,491 EYCF met with representatives of the ATSB to understand key terms surrounding the loan guarantee to the Reorganized Debtors. Additionally, EYCF conducted research on prior ATSB loans in order to assess proposed allocations of warrants to the ATSB as well as understanding potential covenant requirements. PCD 41 Participate in Negotiation and Formulation of Plan of Reorganization $275,723 We performed a thorough review and analysis of the proposed Investment Agreements (TPG and RSA), including review of proposed equity allocations, bidding procedures, break-up fees and data room procedures. Included in our reports to the Creditors Committee were detailed summaries of the review and findings. Additionally, various meetings were conducted with both the plan sponsor and the Company s advisors regarding the plan sponsor process and POR recovery to General Unsecured Creditors. EYCF took an active role in searching for alternative plan sponsors and provided various suggestions to the Debtors advisors. EYCF also played a key role in the negotiation of a guaranteed allocation of equity to General Unsecured Creditors. In conjunction with the equity split, we performed research on the allocation of management equity in comparable transactions. Analyses of these results, and the entire equity allocation, were prepared and provided to the Committee on several occasions. Additionally, EYCF performed review of the proposed disclosure statement, including the proposed treatment of various classes of claims, and provided relevant comments to the Debtor. PCD 45 Firm Retention $45,319

10 Includes the preparation of documents to be filed with the Court and the performance of an extensive connections check to determine whether any potential conflict exists. PCD 46 Preparation of Fee/Expense Applications $65,399 We kept detailed records of the time spent on the various activities performed throughout the case in accordance with the applicable provisions of the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the local rules and orders of the Bankruptcy Court. This information was compiled into detailed reports, and with summaries of expenses, was included in EYCF s Monthly Fee Invoices. PCD 69 Non-Working Travel Time $117,634 Includes time spent traveling to meetings with the Debtors, Debtors advisors, and the Committee. Also includes time spent traveling to Company s headquarters to meet with Company personnel. EYCF bills only 50% of time incurred in this category. The total below reflects that reduction. PCD 76 Short-Term Cash Flow Projections $13,599 We reviewed and analyzed the Debtors short-term cash flow projections on a weekly basis. The weekly procedures performed by EYCF included but were not limited to: (i) analyzing passenger collection assumptions; (ii) reviewing cash outflow assumptions; (iii) reconciling month ending cash levels to the Debtors 18 month plan; and (iv) reviewing cash receipt levels for compliance with DIP covenants. These services were important to this proceeding, as it facilitated the understanding of the Debtor s short term cash needs during important phases of the case, and it enabled the Committee to closely monitor the cash position of the Debtors. PCD 77 Review/Analyze Information Included in SOFAs and Schedules $36,093 We analyzed the SOFA's and Schedules filed by the Debtors for propriety, internal consistency, and any unusual items. EYCF s analyses included analyzing significant payments with 90 days of petition, examining significant insider payments within one year of petition, and reviewing inter-company balances. The analyses were performed at the request of the Committee and Counsel to the Committee.

11 Subtotal $2,380,483 Less: 50% Travel Time Billed (58,817) Total (b) $2,321,665 (a) In certain instances, meetings and conference calls included two or more professionals. Professionals responsible for the day to day field work will participate in such meetings with the senior executive so that responses to detailed questions or follow up procedures can be handled in a cost effective and efficient manner. Furthermore, when presenting our observations and findings to the Committee, different executives will lead the discussion depending on the topic (e.g., 7-year business plan, POR issues) since different professionals will focus on the details of different issues to avoid duplication of effort. (b) Additionally, the fees requested may include time charges for intra-office conferences. With respect to intra-office conferences, we submit that the reason for such interaction between the professionals is twofold. (1) To perform our services in the most cost effective and efficient manner. By delegating certain mechanical tasks to lower levels (i.e., less costly professionals), the average hourly rates are kept down. Of course, the more experienced professionals will need to supervise and review the work to insure the tasks are completed in the most efficient manner and that the appropriate issues are raised and addressed in a timely fashion. (2) Our professional standards require the active supervision of staff. The Consulting Services Special Report 93 issued by the American Institute of Certified Public Accountants discusses the need to adequately plan and supervise the performance of professional services both to control costs and to focus the practitioner s work product on the engagement requirements. Wherefore, EYCF respectfully requests that a final allowance be made to it in the sum of $2,396,374 representing (a) compensation for necessary professional services rendered on behalf of the Committee in the amount of $2,321,665, which consists of 100% of professional services fees during the period from August 22, 2002 through March 31, 2003 and time subsequently incurred for fee application preparation and (b) compensation for 100% of out-of-pocket expenses and disbursements incurred in the amount of $74,709 during the period from August 22, 2002 through March 31, 2003, and that such sum be authorized for payment pursuant to the Administrative Order, and for such other and further relief as this Court may deem just and proper. /s/ Samuel E. Star Samuel E. Star Managing Director

12 Ernst & Young Corporate Finance LLC 5 Times Square, 21 st Floor New York, NY (212) and /s/ Malcolm M. Mitchell, Jr. Malcolm M. Mitchell, Jr. Vorys, Sater, Seymour and Pease LLP 277 S. Washington Street, Suite 310 Alexandria, Virginia mmmitchell@vssp.com Sworn to before me this _30th day of May 2003 /s/ Lorraine Ehlen Notary Public

13 VERIFICATION STATE OF NEW YORK COUNTY OF NEW YORK Samuel E. Star, after being duly sworn according to law, deposes and says: 1. I am managing director of the applicant firm, Ernst & Young Corporate Finance LLC. 2. I have personally performed and/or overseen all of the professional services rendered by Ernst & Young Corporate Finance LLC as financial advisor to the Official Committee of Unsecured Creditors of US Airways Group, Inc., et al. and am familiar with the other work performed on behalf of the Committee by the other professionals and client service associates in the firm. 3. The facts set forth in the foregoing Application are true and correct to the best of my knowledge, information and belief. By: /s/ Samuel E. Star Samuel E. Star Managing Director Subscribed and sworn to before me This 30th day of May, /s/ Lorraine Ehlen Lorraine Ehlen Notary Public

14 CERTIFICATE OF SERVICE I, Malcolm M. Mitchell, Jr., do hereby certify that, on May 30, 2003, I caused a copy of the Final Application of Ernst & Young Corporate Finance LLC as Financial Advisor to the Official Committee of Unsecured Creditors of US Airways Group, Inc., et al., for Allowance of Compensation for Services Rendered and Reimbursement of Disbursements for the Period from August 22, 2002 through March 31, 2003, on the following parties, via overnight delivery: Elizabeth K. Lanier, Esquire US Airways Group, Inc Crystal Drive Arlington, Virginia Debtors John Wm. Butler, Jr., Esquire Skadden, Arps, Slate, Meagher & Flom 333 West Wacker Drive, Suite 2100 Chicago, Illinois Counsel to the Debtors Lawrence E. Rifken, Esquire McGuireWoods LLP 1750 Tysons Boulevard Suite 1800 McLean, Virginia Co-counsel to the Debtors Lorraine S. McGowen Orrick, Herrington & Sutcliffe LLP 666 Fifth Avenue New York, New York Counsel for The Retirement Systems of Alabama Dennis J. Early Office of the U.S. Trustee 115 South Union Street Plaza Level, Suite 210 Alexandria, Virginia Alexandria Assistant U.S. Trustee. /s/ Malcolm M. Mitchell, Jr. Malcolm M. Mitchell, Jr.