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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: Chapter 11
KCS ENERGY, INC., PROLIQ, INC., KCS Case No. 00-0028 (PJW) and
ENERGY MARKETING, INC., KCS Case Nos. 00-0310 (PJW) through
RESOURCES, INC. A/K/A KCS MOUNTAIN 00-0318 (PJW)
RESOURCES, INC., KCS MEDALLION
RESOURCES, INC., MEDALLION CALIFORNIA JOINTLY ADMINISTERED
PROPERTIES, INC., MEDALLION GAS
SERVICES, INC., KCS ENERGY SERVICES,
INC., KCS MICHIGAN RESOURCES, INC. AND
NATIONAL ENERDRILL CORP.,
Debtors.
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SECOND AMENDED DISCLOSURE STATEMENT FOR SECOND AMENDED JOINT PLAN OF
REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE PROPOSED BY THE OFFICIAL
COMMITTEE OF UNSECURED CREDITORS AND CREDIT SUISSE FIRST BOSTON CORPORATION
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GIBSON, DUNN & CRUTCHER LLP ANDREWS & KURTH LLP
D.J. Baker Peter S. Goodman
200 Park Avenue 850 Third Avenue, 7th Floor
New York, New York 10166 New York, New York 10022
(212) 351-4000 (212) 850-2800`
GIBSON, DUNN & CRUTCHER LLP ANDREWS & KURTH LLP
Michael A. Rosenthal Hugh M. Ray
James M. Schober 600 Travis, Suite 4200
2100 McKinney Avenue, Suite 1100 Houston, Texas 77002
Dallas, Texas 75201 (713) 220-4200
(214) 698-3100
ATTORNEYS FOR CREDIT SUISSE
ATTORNEYS FOR THE OFFICIAL FIRST BOSTON CORPORATION
COMMITTEE OF UNSECURED CREDITORS
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INTRODUCTORY STATEMENT
THIS SECOND AMENDED JOINT DISCLOSURE STATEMENT UNDER SECTION 1125 OF
THE BANKRUPTCY CODE WITH RESPECT TO THE SECOND AMENDED JOINT PLAN OF
REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE PROPOSED BY THE OFFICIAL
COMMITTEE OF UNSECURED CREDITORS AND CREDIT SUISSE FIRST BOSTON CORPORATION (THE
"DISCLOSURE STATEMENT") CONTAINS SUMMARIES OF CERTAIN PROVISIONS OF THE SECOND
AMENDED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
PROPOSED BY THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS AND CREDIT SUISSE
FIRST BOSTON CORPORATION (THE "PLAN"), AND OTHER DOCUMENTS RELATING TO THE PLAN.
WHILE THE PROPONENTS OF THE PLAN BELIEVE THAT THESE SUMMARIES PROVIDE ADEQUATE
INFORMATION WITH RESPECT TO THE DOCUMENTS SUMMARIZED, SUCH SUMMARIES ARE
QUALIFIED TO THE EXTENT THAT THEY DO NOT SET FORTH THE ENTIRE TEXT OF SUCH
DOCUMENTS. IF ANY INCONSISTENCIES EXIST BETWEEN THE TERMS AND PROVISIONS OF THIS
DISCLOSURE STATEMENT AND THE TERMS AND PROVISIONS OF THE PLAN OR OTHER DOCUMENTS
DESCRIBED THEREIN, THE TERMS AND PROVISIONS OF THE PLAN AND OTHER DOCUMENTS ARE
CONTROLLING. EACH HOLDER OF AN IMPAIRED CLAIM OR AN IMPAIRED EQUITY INTEREST
SHOULD REVIEW THE ENTIRE PLAN AND ALL RELATED DOCUMENTS AND SEEK THE ADVICE OF
ITS OWN COUNSEL BEFORE VOTING WHETHER TO ACCEPT OR REJECT THE PLAN.
THIS DISCLOSURE STATEMENT MAY NOT BE RELIED UPON BY ANY PERSON OR
ENTITY FOR ANY PURPOSE OTHER THAN BY HOLDERS OF CLAIMS AND EQUITY INTERESTS
ENTITLED TO VOTE ON THE PLAN IN DETERMINING WHETHER TO VOTE TO ACCEPT OR REJECT
THE PLAN. NOTHING CONTAINED HEREIN WILL CONSTITUTE AN ADMISSION OF ANY FACT OR
LIABILITY BY ANY PARTY, OR BE ADMISSIBLE IN ANY PROCEEDING INVOLVING THE DEBTORS
OR THE PROPONENTS OR ANY OTHER PARTY, OR BE DEEMED CONCLUSIVE EVIDENCE OF THE
TAX OR OTHER LEGAL EFFECTS OF THE REORGANIZATION ON THE DEBTORS OR ON HOLDERS OF
CLAIMS OR EQUITY INTERESTS.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT THAT ARE NOT
HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE
BASED ON THE PROPONENTS' BELIEFS AS WELL AS ASSUMPTIONS MADE BY, AND INFORMATION
CURRENTLY AVAILABLE TO, THE PROPONENTS. BECAUSE SUCH STATEMENTS ARE BASED ON
EXPECTATIONS AS TO FUTURE PERFORMANCE AND ARE NOT STATEMENTS OF FACT, ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED. WHILE THE PROPONENTS BELIEVE
THESE FORWARD-LOOKING STATEMENTS TO BE REASONABLE, THERE CAN BE NO ASSURANCE
THAT SUCH STATEMENTS WILL BE REFLECTIVE OF ACTUAL OUTCOMES. YOU SHOULD CAREFULLY
REVIEW AND CONSIDER
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SECTION X OF THIS DISCLOSURE STATEMENT, ENTITLED "CERTAIN FACTORS TO BE
CONSIDERED," BEFORE VOTING TO ACCEPT OR REJECT THE PLAN. NOTHING CONTAINED IN
THIS DISCLOSURE STATEMENT, EXPRESS OR IMPLIED, IS INTENDED TO GIVE RISE TO ANY
COMMITMENT OR OBLIGATION OF THE DEBTORS OR THE PROPONENTS OR WILL CONFER UPON
ANY PERSON ANY RIGHTS, BENEFITS OR REMEDIES OF ANY NATURE WHATSOEVER.
IN PREPARING THIS DISCLOSURE STATEMENT, THE PROPONENTS HAVE RELIED
UPON INFORMATION AND SUMMARIES OF INFORMATION PROVIDED BY THE DEBTORS, INCLUDING
INFORMATION TAKEN OR DERIVED FROM DOCUMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION AND FROM DISCLOSURE STATEMENTS FILED BY THE DEBTORS IN THEIR
CHAPTER 11 CASES. THE PROPONENTS HAVE NOT CONDUCTED AN AUDIT OF ANY SUCH
DOCUMENTS OR OF THE DEBTORS' BOOKS AND RECORDS, AND ACCORDINGLY THE PROPONENTS
CANNOT AND DO NOT WARRANT THAT THE INFORMATION DIRECTLY OR INDIRECTLY PROVIDED
TO THEM BY THE DEBTORS IS ACCURATE OR COMPLETE. THE PROPONENTS HAVE RETAINED
CONSULTANTS AND PROFESSIONALS WHO ARE REVIEWING SUCH INFORMATION PROVIDED
HEREIN, AND RESERVE THE RIGHT TO CONTEST SUCH INFORMATION AT OR PRIOR TO THE
CONFIRMATION HEARING IN THE EVENT THAT THE PROPONENTS DETERMINE SUCH INFORMATION
TO BE INACCURATE.
EXCEPT AS OTHERWISE NOTED HEREIN, THE INFORMATION CONTAINED HEREIN IS
GENERALLY INTENDED TO DESCRIBE FACTS AND CIRCUMSTANCES ONLY AS OF THE DATE OF
THIS DISCLOSURE STATEMENT, AND NEITHER THE DELIVERY OF THIS DISCLOSURE STATEMENT
NOR THE CONFIRMATION OF THE PLAN WILL CREATE ANY IMPLICATION, UNDER ANY
CIRCUMSTANCES, THAT THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS
CORRECT AT ANY TIME AFTER THE DATE OF THIS DISCLOSURE STATEMENT OR THAT THE
DEBTORS OR THE PROPONENTS WILL BE UNDER ANY OBLIGATION TO UPDATE SUCH
INFORMATION IN THE FUTURE.
ii
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TABLE OF CONTENTS
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I. INTRODUCTION............................................................................................................1
II. NOTICE TO HOLDERS OF CLAIMS AND EQUITY INTERESTS........................................................................1
A. GENERAL.................................................................................................1
B. VOTING..................................................................................................3
C. VOTING RECORD DATE......................................................................................3
D. BALLOTS.................................................................................................3
E. VOTING DEADLINE.........................................................................................3
F. CONFIRMATION HEARING AND OBJECTION DEADLINE.............................................................4
III. OVERVIEW OF PLAN........................................................................................................4
IV. GENERAL INFORMATION.....................................................................................................6
A. OVERVIEW OF THE DEBTORS' BUSINESS.......................................................................6
B. ORGANIZATIONAL STRUCTURE OF THE DEBTORS.................................................................7
C. OIL AND GAS EXPLORATION AND PRODUCTION..................................................................8
1. Development and Production Activities.........................................................8
2. Volumetric Production Payment Program.........................................................8
D. OIL AND GAS PROPERTIES..................................................................................9
E. HEDGING ACTIVITIES.....................................................................................13
F. SELECTED FINANCIAL INFORMATION.........................................................................13
G. THE DEBTORS' SIGNIFICANT DEBT OBLIGATIONS..............................................................14
1. The Resources Facility.......................................................................14
2. The Medallion Facility.......................................................................14
3. The Old Senior Notes.........................................................................14
4. The Old Senior Subordinated Notes............................................................14
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V. THE DEBTORS' CHAPTER 11 CASES...........................................................................................15
A. EVENTS PRECEDING THE FILING OF THE CHAPTER 11..........................................................15
1. Brief History of Debtors' Operations.........................................................15
2. Disappointing Results in Manderson Field and Drop in Oil and Gas Prices Led to Defaults
Under the Credit Facilities..................................................................16
3. Forbearance Agreements with Old Bank Lenders.................................................16
4. Efforts to Negotiate a Restructuring.........................................................17
B. EVENTS DURING THE CHAPTER 11 CASES.....................................................................18
1. Creditors' Committee.........................................................................18
2. Commencement of the Chapter 11 Cases, "First Day" Motions and Orders, and Proceedings on
the Debtors' Plan............................................................................18
3. Exit Facility Commitment.....................................................................24
4. No Bar Date Fixed in These Chapter 11 Cases..................................................24
VI. THE PLAN OF REORGANIZATION.............................................................................................25
A. CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS UNDER THE PLAN.............................25
1. Classification...............................................................................25
2. Administrative Expense Claims................................................................25
3. Professional Compensation and Reimbursement Claims...........................................26
4. Priority Tax Claims..........................................................................26
5. Other Priority Claims (Class 1)..............................................................27
6. Secured Bank Claims (Class 2)................................................................27
7. Other Secured Claims (Class 3)...............................................................27
8. Old Senior Notes Claims (Class 4)............................................................27
9. Old Senior Subordinated Notes Claims (Class 5)...............................................28
10. General Unsecured Claims (Class 6)...........................................................29
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11. Old KCS Common Stock Equity Interests (Class 7)..............................................29
12. Old KCS Warrants Equity Interests; and Old Employee and Director Stock Option Plan Equity
Interests (Class 8)..........................................................................31
B. IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS IMPAIRED; ACCEPTANCE OR REJECTION OF PLAN OF
REORGANIZATION.........................................................................................31
C. MEANS OF IMPLEMENTING PLAN.............................................................................31
1. New Credit Facility..........................................................................31
2. Authorization of New Securities..............................................................32
3. Issuance of New Securities...................................................................32
4. Cancellation of Existing Securities and Agreements...........................................32
5. Corporate Action.............................................................................32
6. Confirmation Under Section 1129(b) of the Bankruptcy Code....................................33
D. SUMMARY OF CERTAIN OTHER PROVISIONS OF THE PLAN........................................................34
1. Provisions Governing Distributions...........................................................34
2. Procedures for Treating Disputed Claims Under Plan of Reorganization.........................37
3. Provisions Governing Executory Contracts and Unexpired Leases................................38
4. Conditions Precedent to Effective Date.......................................................39
5. Effect of Confirmation.......................................................................39
6. Retention of Jurisdiction....................................................................41
7. Miscellaneous Provisions.....................................................................41
VII. DIRECTORS, OFFICERS AND OWNERSHIP OF REORGANIZED DEBTORS..............................................................44
A. BOARDS OF DIRECTORS OF REORGANIZED DEBTORS.............................................................44
1. Identities and Compensation..................................................................44
B. MANAGEMENT.............................................................................................44
1. Identities and Compensation..................................................................44
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2. Biographies of Current Senior Management.....................................................45
C. SECURITY OWNERSHIP.....................................................................................45
D. NEW EMPLOYEE AND DIRECTOR STOCK OPTIONS................................................................46
VIII. SECURITIES TO BE ISSUED PURSUANT TO PLAN.............................................................................47
A. NEW NOTES..............................................................................................47
B. NEW KCS COMMON STOCK...................................................................................47
C. NEW KCS SUBSCRIPTION WARRANTS..........................................................................47
D. NEW EMPLOYEE AND DIRECTOR STOCK OPTIONS................................................................48
IX. SECURITIES LAW MATTERS.................................................................................................48
A. OWNERSHIP AND RESALE OF NEW SECURITIES.................................................................48
B. REGISTRATION RIGHTS....................................................................................51
X. CERTAIN FACTORS TO BE CONSIDERED........................................................................................51
A. VARIANCES FROM PROJECTIONS.............................................................................52
B. VOLATILE NATURE OF OIL AND GAS MARKETS; FLUCTUATIONS IN PRICES.........................................52
C. DEPENDENCE ON ACQUIRING AND FINDING ADDITIONAL RESERVES................................................53
D. SUBSTANTIAL CAPITAL REQUIREMENTS.......................................................................53
E. UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES AND FUTURE NET CASH FLOWS.............................54
F. NEW MANAGEMENT ........................................................................................55
G. FINANCING REQUIREMENTS AND RESTRICTIONS................................................................55
H. RISKS OF HEDGING TRANSACTIONS..........................................................................55
I. EXPLORATION AND DEVELOPMENT RISKS......................................................................56
J. MARKETING RISKS........................................................................................56
K. ACQUISITION RISKS......................................................................................56
L. OPERATING RISKS........................................................................................57
M. COMPETITIVE INDUSTRY...................................................................................57
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N. GOVERNMENTAL REGULATIONS...............................................................................57
O. ABSENCE OF PUBLIC MARKET...............................................................................58
P. EFFECTIVE SUBORDINATION OF THE NEW NOTES...............................................................58
Q. ISSUES RELATING TO GUARANTEES..........................................................................58
R. PENDING LITIGATION AND OTHER LEGAL PROCEEDINGS.........................................................58
S. CERTAIN TAX MATTERS....................................................................................59
XI. VOTING PROCEDURES AND REQUIREMENTS.....................................................................................59
A. CLASSES ENTITLED TO VOTE UNDER THE PLAN................................................................59
B. VOTING REQUIREMENTS....................................................................................59
C. ACCEPTANCE BY CLASSES OF CLAIMS OR EQUITY INTERESTS....................................................59
XII. CONFIRMATION OF THE PLAN..............................................................................................60
A. CONFIRMATION HEARING...................................................................................60
B. REQUIREMENTS FOR CONFIRMATION OF THE PLAN..............................................................61
1. Fair and Equitable Test......................................................................61
2. Feasibility..................................................................................62
3. "Best Interests" Test........................................................................62
XIII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN...........................................................64
A. LIQUIDATION UNDER CHAPTER 7............................................................................64
B. ALTERNATIVE PLAN OF REORGANIZATION.....................................................................65
XIV. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN...................................................................66
A. INTRODUCTION...........................................................................................66
B. CONSEQUENCES TO HOLDERS OF CLAIMS......................................................................66
1. Realization and Recognition of Gain or Loss in General.......................................66
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2. Holders of Allowed Administrative Expense Claims (Unclassified), Professional Compensation
and Reimbursement Claims (Unclassified) and Other Priority Claims (Class 1)..................67
3. Holders of Secured Bank Claims (Class 2).....................................................68
4. Holders of Other Secured Claims (Class 3)....................................................68
5. Holders of Old Senior Notes (Class 4)........................................................68
6. Holders of Old Senior Subordinated Notes Claims (Class 5)....................................70
7. Holders of Allowed General Unsecured Claims (Class 6)........................................72
8. Holders of Old KCS Common Stock Equity Interests (Class 7)...................................72
9. Holders of Old KCS Warrants Equity Interests and Old Employee and Director Stock Option
Plan Equity Interests (Class 8)..............................................................73
10. Withholding..................................................................................73
C. CONSEQUENCES TO DEBTORS OR REORGANIZED DEBTORS.........................................................73
1. Discharge-of-Indebtedness Income Generally...................................................73
2. Attribute Reduction..........................................................................74
3. Utilization of Net Operating Loss Carryovers.................................................74
4. Consolidated Return Items....................................................................76
5. Alternative Minimum Tax......................................................................76
XV. CONCLUSION AND RECOMMENDATION..........................................................................................77
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I
INTRODUCTION
On January 5, 2000, certain entities filed an involuntary petition
for relief against KCS Energy, Inc. ("KCS") under Chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). On January 18, 2000 (the
"Commencement Date"), the Bankruptcy Court entered an order for relief under
Chapter 11 of the Bankruptcy Code against KCS. Also on the Commencement Date,
Proliq, Inc.; KCS Energy Marketing, Inc.; KCS Resources, Inc. a/k/a KCS Mountain
Resources, Inc.; KCS Medallion Resources, Inc.; Medallion California Properties,
Inc.; Medallion Gas Services, Inc.; KCS Energy Services, Inc.; KCS Michigan
Resources, Inc., and National Enerdrill Corporation (collectively, together with
KCS, the "Debtors") filed separate voluntary petitions under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases are being jointly
administered under Case No. 00-0028 (PJW) and Case Nos. 00-0310 (PJW) through
00-0318 (PJW). Since the Commencement Date, the Debtors have continued to
operate their businesses as debtors-in-possession pursuant to sections 1107 and
1108 of the Bankruptcy Code.
The Official Committee of Unsecured Creditors (the "Creditors'
Committee") and Credit Suisse First Boston Corporation ("CSFB," and together
with the Creditors' Committee, the "Proponents") are the proponents of the Plan,
a copy of which is attached hereto as Exhibit A. By order dated October 25,
2000, the Bankruptcy Court approved this Disclosure Statement as containing
adequate information to enable holders of Claims against or Equity Interests in
the Debtors whose votes are being solicited to make an informed judgment whether
to accept or reject the Plan. Unless otherwise defined herein, capitalized terms
used herein will have the same meanings ascribed to them in the Plan.
II.
NOTICE TO HOLDERS OF CLAIMS AND EQUITY INTERESTS
A. GENERAL
The purpose of this Disclosure Statement is to enable the holders of
Claims against or Equity Interests in the Debtors authorized to vote on the Plan
to make informed decisions in voting whether to accept or reject the Plan. All
holders of Claims and Equity Interests should read this Disclosure Statement in
its entirety. No solicitation of votes on the Plan may be made except pursuant
to this Disclosure Statement and section 1125 of the Bankruptcy Code. In
considering how to vote, no holder of a Claim or Equity Interest or any other
party should rely on any information relating to the Debtors and their
businesses, other than that contained in this Disclosure Statement, the Plan,
and the Plan Supplement, except as otherwise approved by the Bankruptcy Court.
All persons receiving this Disclosure Statement and the Plan attached
hereto are urged to review fully the provisions of the Plan and all other
exhibits attached hereto, in addition to reviewing the text of this Disclosure
Statement. This Disclosure Statement is not intended to
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replace careful review and analysis of the Plan. Rather, it is submitted as an
aid in your review of the Plan and in an effort to explain the terms and
implications of the Plan. Every effort has been made to explain fully the
various aspects of the Plan as it affects all holders of Claims and Equity
Interests. However, to the extent any questions arise, the Proponents urge you
to seek independent legal advice.
In reviewing this Disclosure Statement, please keep in mind the
following:
1. The approval by the Bankruptcy Court of this Disclosure
Statement does not constitute an endorsement by the Bankruptcy Court of the
Plan or a guarantee of the accuracy and completeness of the information
contained herein.
2. The Proponents have not independently examined the
information contained in this Disclosure Statement. The Proponents expect to
obtain expert opinions regarding the liquidation value of the Debtors' assets
and the reorganization value of the Debtors' business. The information contained
herein has been derived principally from information directly or indirectly
provided by the Debtors in proposed disclosure statements previously filed by
the Debtors in this Bankruptcy Court, as well as documents filed by the Debtors
with the Securities and Exchange Commission, and the Proponents have had no
opportunity to independently confirm the accuracy of such information. The
Proponents are not presently aware of any inaccuracies in this Disclosure
Statement or any facts that would make this Disclosure Statement materially
misleading, and will file documents with the Bankruptcy Court in the event that
any such inaccuracies or facts become known by the Proponents. The Proponents
and their respective legal and financial advisors cannot and do not warrant or
represent that the information contained in this Disclosure Statement, , is
accurate or complete.
3. The statements contained in this Disclosure Statement that
are not historical facts are forward-looking statements. Forward-looking
statements are based on the Proponents' beliefs as well as assumptions made by,
and information currently available to, the Proponents. Because such statements
are based on expectations as to future performance and are not statements of
fact, actual results may differ materially from those projected. While the
Proponents believe these forward looking statements to be reasonable, there can
be no assurance that such statements will be reflective of actual outcomes. You
should carefully review and consider Section X of this Disclosure Statement,
entitled "Certain Factors to be Considered," before voting to accept or reject
the Plan.
4. This Disclosure Statement has not been approved or
disapproved by the Securities and Exchange Commission or any securities
regulatory authority of any state, nor has the Securities and Exchange
Commission or any securities regulatory authority of any state passed upon the
accuracy or adequacy of the statements contained herein.
5. The description herein of the Plan is a summary only.
Holders of Claims and Equity Interests authorized to vote on the Plan are urged
to review the entire Plan, the exhibits thereto and the Plan Supplement before
casting their votes. In the event that any inconsistency or conflict exists
between this Disclosure Statement and the Plan, the terms of the Plan will
control.
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6. You should not rely on any information relating to the
Debtors, their assets, past or future business operations, or the Plan other
than that contained in this Disclosure Statement and the exhibits thereto,
except as otherwise approved by the Bankruptcy Court. Any representations made
to secure acceptance or rejection of the Plan other than as contained in this
Disclosure Statement should be reported to counsel for the Proponents.
B. VOTING
Only holders of Claims or Equity Interests in Classes 4, 5 and 7 are
authorized to vote on the Plan. Pursuant to the provisions of the Bankruptcy
Code, generally only those classes of claims or equity interests that are (i)
"impaired" by a plan of reorganization and (ii) entitled to receive a
distribution under such a plan are entitled to vote on a Chapter 11 plan. In
these Chapter 11 Cases, Claims and Equity Interests in Classes 4, 5 and 7 are
impaired by and entitled to receive a distribution under the Plan, and therefore
are entitled to vote on the Plan. Classes 1, 2, 3 and 6, and the holders of
Claims in such Classes, are conclusively presumed to have accepted the Plan and
are thus not entitled to vote on the Plan. The holders of Equity Interests in
Class 8 are deemed to have rejected the Plan and thus are not entitled to vote
on the Plan.
C. VOTING RECORD DATE
The record date for determining the holders of Claims and Equity
Interests that may vote on the Plan is October 20, 2000 (the "Voting Record
Date").
D. BALLOTS
In certain instances, accompanying this Disclosure Statement is a
ballot ("Ballot") for casting your vote(s) on the Plan. A pre-addressed envelope
for the return of the Ballot may also be enclosed. As noted above, Ballots for
acceptance or rejection of the Plan are being provided only to holders of claims
or equity interests in Classes 4, 5 and 7 because they are the only holders of
Claims or Equity Interests that may vote to accept or reject the Plan. If you
are the holder of a Claim or Equity Interest in Class 4, 5 or 7 and did not
receive a Ballot, received a damaged or illegible Ballot, or lost your Ballot,
or if you have any questions regarding the voting procedures in respect of the
Plan, please contact the Voting Agent at The Altman Group, Inc., 60 East 42nd
Street, Suite 1241, New York, New York 10165; telephone: (212) 681-9600;
telecopy: (212) 681-1383.
After carefully reviewing this Disclosure Statement and the exhibits
attached hereto, please indicate your vote with respect to the Plan on the
enclosed Ballot and return it pursuant to the instructions provided on the
Ballot.
E. VOTING DEADLINE
In order to be counted, Ballots must be received by The Altman Group,
60 East 42nd Street, Suite 1241, New York, New York 10165, by 10:00 p.m.
(Eastern Time) on January 5, 2001 (the "Voting Deadline"). Beneficial owners of
securities that receive a return envelope addressed to their bank or broker (or
its agent) must return their Ballot in sufficient time for the bank, broker or
agent to process it and submit the vote to The Altman Group before the Voting
Deadline. Any Ballots that are not executed, that are not received timely, or
that do not indicate
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an acceptance or rejection shall be deemed to constitute neither an acceptance
nor a rejection of the Plan. Further information regarding voting and election
procedures is contained in Section XI of this Disclosure Statement.
F. CONFIRMATION HEARING AND OBJECTION DEADLINE
By order dated October 25, 2000, the Bankruptcy Court fixed January
30, 2001, at 9:30 a.m. (Eastern Time), in the United States Bankruptcy Court for
the District of Delaware, 824 North Market Street, Sixth Floor, Wilmington,
Delaware 19801, as the date, time and place of the hearing to consider
confirmation of the Plan, and January 5, 2001 at 4:00 p.m. (Eastern Time), as
the deadline for filing objections to confirmation of the Plan. The hearing on
confirmation of the Plan may be adjourned from time to time without further
notice except for the announcement of the adjourned date and time at the hearing
on confirmation or any adjournment thereof.
III.
OVERVIEW OF PLAN
The following is a brief overview of the material provisions of the
Plan and is qualified in its entirety by reference to the full text of the Plan.
For a more detailed description of the terms and provisions of the Plan, see
Section VI below. The Plan is a joint plan of reorganization for each of the
Debtors.
The Plan provides that the Reorganized Debtors will remain in
business with a reorganized capital structure. Funding for the Reorganized
Debtors will be provided pursuant to the New Credit Facility. The Secured Bank
Claims under the Resource Facility and the Medallion Facility will be paid in
full from funds made available from the New Credit Facility. Allowed Other
Secured Claims will be paid in full or reinstated. Allowed General Unsecured
Claims will be paid in full in the ordinary course of business. Allowed
Administrative Expense Claims, Allowed Professional Compensation and
Reimbursement Claims and Allowed Priority Tax Claims will be paid in full.
The Proponents believe that the Debtors will have insufficient cash
to pay the Old Senior Notes upon maturity, and the maturity date of the debt
represented by the Old Senior Notes must be extended for at least two years in
order to allow the Debtors to either amass the cash necessary to retire such
debt or establish the stability that will be required if the Debtors are to
refinance such debt at an affordable interest rate. Such maturity extension
operates to impair the claims of holders of the Old Senior Notes, and therefore
the distribution to such holders is structured to provide them with property of
a value, as of the Effective Date, that is equal to the allowed amount of their
Claims. Holders of the Old Senior Notes will receive (a) Cash sufficient to pay
all accrued and unpaid interest (at the non-default rate) on the Old Senior
Notes, plus interest on accrued and unpaid interest pursuant to the Old Senior
Indenture to the extent permitted by law, in each case as of the Effective Date;
(b) the New Notes; and (c) 750,405 shares of Series A Common Stock. Terms and
conditions of the New Notes are more fully set forth in Section VI.A.8 below.
The 750,405 shares of Series A Common Stock issued to the
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holders of Old Senior Notes shall constitute approximately 2.5% of the New KCS
common Stock issued and outstanding after full consummation of the Plan.
Holders of the Old Senior Subordinated Notes will receive the number
of shares of Series B Common Stock that is equal to (i) 29,265,810, minus (ii)
the number of shares of Series A Common Stock delivered to Class 7 as of the
Effective Date. The Series B Common Stock shall be subject to redemption by
Reorganized KCS from the proceeds of the exercise of the New KCS Subscription
Warrants, with a call therefor on the fifth (5th) day after the Exercise
Deadline Date, and any such shares called shall be redeemed at the Subscription
and Redemption Price by payment from such proceeds on the twentieth (20th) day
after the Exercise Deadline Date, without interest from the date of the call, as
more specifically provided for in Section VI.A.11. Any shares of Series B Common
Stock that are not called for redemption shall automatically be converted into
an equal number of shares of Series A Common Stock on the twentieth (20th) day
after the Exercise Deadline Date. After the issuance of the shares of Series A
Common Stock pursuant to the exercise of the New KCS Subscription Warrants, the
redemption of a corresponding number of shares of Series B Common Stock and the
conversion of the unredeemed shares of Series B Common Stock into an equal
number of shares of Series A Common Stock, the number of shares of New KCS
Common Stock outstanding will be 30,016,215, all of which shall be Series A
Common Stock.
Holders of Old KCS Common Stock will receive, in accordance with the
elections made by such holders on the Class 7 Election Form, either (i) 0.0513
shares of Series A Common Stock for each share of Old KCS Common Stock held by
such holder on the Distribution Record Date; or (ii) New KCS Subscription
Warrants evidencing the right to subscribe for one (1) share of Series A Common
Stock for each share of Old KCS Common Stock held by such holder on the
Distribution Record Date (without oversubscription rights), at a price per share
equal to the Subscription and Redemption Price. The Subscription and Redemption
Price shall be stated to the nearest one-tenth of a cent and shall be equal to
(i) the outstanding principal and interest (at the non-default rate) on the
Subordinated Notes as of the Exercise Deadline Date (plus interest on interest
to the extent allowed by law) divided by (ii) (A) 29,265,810 minus (B) the
number of shares of Series A Common Stock delivered to Class 7 as of the
Effective Date as set forth in Section 4.7 of the Plan. Assuming that the
Exercise Deadline Date occurs on April 15, 2001, and that the recovery of
interest on interest is permitted, the Subscription and Redemption Price shall
be between $5.194 and $5.475 per share, depending upon the number of holders in
Class 7 who elect to receive the New KCS Subscription Warrants in lieu of Series
A Common Stock..
On the fifth (5th) day after the Exercise Deadline Date, to the
extent funds are available pursuant to the exercise of the New KCS Subscription
Warrants, Reorganized KCS shall call for redemption shares of Series B Common
Stock at the Subscription and Redemption Price, without interest from the date
of the call. In the event that less than all of the shares of Series B Common
Stock are called for redemption, such call shall be exercised on a pro rata
basis among all holders of Series B Common Stock, or in such proportions as
necessary to redeem odd lots of Series B Common Stock (i.e., less than 100
shares), or in any other equitable manner, as determined in good faith by the
Board of Directors of Reorganized KCS. On the twentieth (20th) day after the
Exercise Deadline Date, Reorganized KCS shall make available the funds to pay
for the shares of Series B Common Stock called for redemption. Any shares of
Series B Common Stock not called for redemption by Reorganized KCS shall
automatically be converted
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<PAGE> 15
into an equal number of shares of Series A Common Stock on the twentieth (20th)
day after the Exercise Deadline Date.
The value of the distributions to Classes 4 (Old Senior Notes), 5
(Old Senior Subordinated Notes) and 7 (Old KCS Common Stock) are based, in part,
on the Proponents' opinion of the reorganization value of the Reorganized
Debtors, which reorganization value is summarized on Exhibit F attached hereto.
The Proponents' opinion of the reorganization value of the Reorganized Debtors
is based on the information available to the Proponents at this time, and may be
adjusted prior to confirmation based upon information that subsequently becomes
available to the Proponents. Additionally, the Proponents reserve the right to
challenge any information provided to the Proponents by the Debtors or their
professionals, upon which information the valuation is partially based.
Additionally, Exhibit F is based on reserve reports prepared by Netherland,
Sewell & Associates and provided by the Debtors. The Proponents do not make any
representation that such reserve reports are accurate, and the Proponents have
employed independent experts to review such reports. The Proponents reserve the
right to contest the validity or accuracy of such reserve reports at the
Confirmation Hearing, and to the extent that the Bankruptcy Court may determine
that such reserve reports are inaccurate or incomplete, Exhibit F may be
amended. Subject to the foregoing, based upon the reorganization valuation
attached hereto as Exhibit F, the Proponents believe that the New KCS Common
Stock (Series A and Series B) to be delivered to Classes 4, 5 and 7 under the
Plan has an implied value of approximately $2.409 per share to $3.742 per share,
based on a total of 30,016,215 shares issued and outstanding as of the Effective
Date. Additionally, the valuation attached hereto as Exhibit F indicates an the
implied per-share value of the New KCS Common Stock that does not exceed the
strike price under the New KCS Subscription Warrants (i.e., the Subscription and
Redemption Price), and that the New KCS Subscription Warrants have time value,
but no inherent value (as in the case of an out-of-the-money option or warrant).
The Debtors have filed a valuation for Reorganized KCS that would indicate that
the value of the New KCS Common Stock exceeds the Subscription and Redemption
Price. Although the Proponents disagree with the Debtors' valuation and intend
to dispute such valuation at confirmation, there can be no assurance as to the
actual post-Effective Date trading value of the New KCS Common Stock. The
Debtors' valuation would suggest that the New KCS Subscription Warrants have
positive value even when the time value of such warrants is ignored.
All outstanding warrants and options to acquire shares of Old KCS
Common Stock will be cancelled and the holders thereof will receive no
consideration with respect to such warrants and options.
IV.
GENERAL INFORMATION
A. OVERVIEW OF THE DEBTORS' BUSINESS
The Debtors are an independent oil and gas enterprise engaged in the
acquisition, exploration, exploitation and production of domestic oil and
natural gas properties. The Debtors' operations are focused primarily in the
Mid-Continent, Onshore Gulf Coast, Rocky Mountain and Gulf of Mexico regions.
The Debtors augment their working interest ownership of
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<PAGE> 16
properties through their Volumetric Production Payment Program ("VPP Program"),
which is currently concentrated in properties located in the Gulf of Mexico.
Certain information about the Debtors is set forth below. Such
information was provided by the Debtors in various public filings, including
filings and proposed filings with the Bankruptcy Court. The Proponents have not
completed their analysis and verification of such information, and accordingly
reserve the right to dispute any such information in connection with the
Confirmation Hearing, or to amend their pleadings to account for any new
information uncovered during the confirmation process. Additional information
concerning the Debtors, including their business, financial condition and
results of operations, is set forth in the KCS Energy, Inc. Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (the "1999 10-K"), and the
KCS Energy, Inc. Quarterly Report on Form 10-Q for the Quarter ended June 30,
2000 (the "June 30, 2000 10-Q"), annexed hereto as Exhibits C and D,
respectively.
B. ORGANIZATIONAL STRUCTURE OF THE DEBTORS
KCS is a publicly owned parent company. KCS has nine direct and
indirect wholly owned subsidiaries, each of which is a Debtor in the jointly
administered Chapter 11 Cases.
The following chart illustrates the corporate structure of the
Debtors:
[CHART]
Holding Companies. In addition to KCS, Proliq, Inc. and KCS Medallion
Resources, Inc. are holding companies.
Exploration and Production Companies. KCS Resources, Inc. a/k/a KCS
Mountain Resources, Inc.; KCS Medallion Resources, Inc.; Medallion California
Properties, Inc.; and KCS Michigan Resources, Inc. are engaged in the
acquisition, exploration, exploitation and production of domestic oil and
natural gas properties.
Volumetric Production Payment Companies. KCS Energy Services, Inc.
and KCS Energy Marketing, Inc. are engaged in the acquisition of proved oil and
gas properties through the VPP Program. On December 31, 1999, two of the four
VPPs owned by KCS Energy Marketing, Inc. expired and it is not anticipated that
KCS Energy
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<PAGE> 17
Marketing, Inc. will participate in future purchases of volumetric production
payments.
Marketing Companies. Medallion Gas Services, Inc. markets the oil and
gas production of KCS Medallion Resources, Inc., Medallion California Properties
Company, KCS Michigan Recourses, Inc. and certain third parties. KCS Energy
Services, Inc. and KCS Energy Marketing, Inc. market oil and gas production for
KCS Resources, Inc., the VPP Program and other Debtors. KCS Energy Marketing,
Inc. also has obligations under certain long-term natural gas storage and
transportation contracts that will expire in 2006.
C. OIL AND GAS EXPLORATION AND PRODUCTION
1. Development and Production Activities
All of the Debtors' exploration and production activities
are located within the United States. During the three-year period ended
December 31, 1999, the Debtors participated in drilling 275 gross wells, of
which 74% were successful. During the twelve months ended December 31, 1999, the
Debtors participated in 62 gross (31.1 net) development wells and 13 gross (7.2
net) exploratory wells, with completion success rates of 87% and 77%,
respectively. In the first six months of 2000, the Debtors participated in 21
gross (10.2 net) development wells and 8 gross (2.2 net) exploration wells with
completion successes of 85% and 62%, respectively. As of June 30, 2000, the
Debtors' proved reserves were approximately 267.8 Bcfe (billion cubic feet
equivalent). Approximately 81% of the Debtors' proved reserves are natural gas.
2. Volumetric Production Payment Program
The Debtors augment their working interest ownership of
properties with a VPP Program, a method of acquiring oil and gas reserves
scheduled to be delivered in the future at a discount to the current market
price in exchange for an up-front cash payment. A VPP entitles the Debtors to a
priority right to a specified volume of oil and gas reserves scheduled to be
produced and delivered over a stated time period. Although specific terms of the
Debtors' VPP contracts vary, the Debtors are generally entitled to receive
delivery of their scheduled oil and gas volumes at agreed delivery points, free
of drilling and lease operating costs and, in all but one case, free of state
severance taxes. After delivery of the oil and gas volumes, the Debtors arrange
for further downstream transportation and sell such volumes to available
markets.
The Debtors have expressed a belief that the VPP Program
diversifies their reserve base and achieves attractive rates of return while
minimizing the Debtors' exposure to certain development, operating and reserve
volume risks. According to the Debtors, the estimated proved reserves of the
properties underlying a VPP are substantially greater than the specified reserve
volumes required to be delivered pursuant to the VPP contracts. However, the VPP
Program subjects the Debtors to other risks, including the risk that the other
party to the VPP will default on the agreement, and the risk of market price
fluctuation.
Since the inception of the VPP Program in August 1994
through June 30, 2000, the Debtors have invested $212.2 million under the VPP
Program in 29 separate transactions. Through these transactions, the Debtors
acquired proved reserves of 119.9 Bcfe, consisting of 110.3 billion cubic feet
(Bcf) of natural gas and 1.6 million barrels (MMbbls) of oil. As of June
8
<PAGE> 18
30, 2000, the Debtors have recovered approximately $223 million in revenue from
the sale of oil and gas acquired under the program, with $24.9 Bcfe of natural
gas and oil scheduled for future deliveries. The properties involved in the VPP
Program are principally located in the Gulf of Mexico. No assurance can be given
that VPP programs will continue to be available in the future, or that pricing
of such programs will be favorable to the Debtors.
D. OIL AND GAS PROPERTIES
The following tables set forth the Debtors' oil and gas reserve data
as of December 31, 1999. The text following the table provides a region by
region discussion of the properties through December 31, 1999.
<TABLE>
<CAPTION>
Estimated Proved Reserves
----------------------------------------
Gross Natural
Producing Oil Gas Total
Location Wells (Mbbls) (MMcf) (MMcfe)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mid-Continent/West Texas Region:
Sawyer Canyon/Sonora Field, Texas 364 23 35,341 35,477
Hartland Area, Michigan - 701 12,960 17,168
Elm Grove Field, Louisiana 35 22 16,683 16,814
Newhall-Potrero Field, California 44 1,695 1,086 11,257
Mayfield/Hayes Properties, Michigan 7 397 6,425 8,805
Wilburton Field, Oklahoma 9 - 3,889 3,889
Shugart, W. Field, New Mexico 10 546 526 3,802
Mills Ranch Field, Texas 24 47 3,478 3,761
Pittsburg Field, Texas 31 541 124 3,373
Others 333 1,484 36,032 44,933
--------- -------- -------- --------
Total 857 5,456 116,544 149,279
Gulf Coast Region:
Langham Creek Area, Texas 20 194 18,538 19,701
Provident City Field, Texas 48 104 6,340 6,963
Clara, N. Field, Mississippi 1 202 1,058 2,268
Others 250 469 26,277 29,093
--------- -------- -------- --------
Total 319 969 52,213 58,025
Rocky Mountain Region:
Manderson Field, Wyoming 60 574 16,099 19,544
Battle Creek Field, Montana 76 - 4,143 4,143
Others 514 1,396 9,354 17,728
--------- -------- -------- --------
Total 650 1,970 29,596 41,415
Gulf of Mexico:
Working Interest Offshore 41 212 5,730 7,003
Conventional VPP's n/a 15 12,003 12,097
--------- -------- -------- --------
Total 41 227 17,733 19,100
Total Company 1,867 8,622 216,086 267,819
========= ======== ======== ========
</TABLE>
The present value of future net revenues discounted at 10% (PV-10 ) from the
above reserves was approximately $526 million at June 30, 2000 after giving
effect to oil and gas hedges compared to $293 million at December 31, 1999. Oil
prices used to calculate the above reserves and PV-10 are based on the June 30,
2000 West Texas Intermediate posted price of $29.75 per
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<PAGE> 19
barrel ($22.75 per barrel at December 31, 1999), adjusted by lease for gravity,
transportation fees and regional posted price differentials. Gas prices are
based on either a contract price or a June 30, 2000 NYMEX price of $4.48 ($2.329
at December 31, 1999) per MMbtu, adjusted by lease for BTU content,
transportation fees and regional price differentials. These prices are subject
to change and variation and there is no assurance that they are sustainable.
Mid-Continent Region.
The Mid-Continent Region is primarily comprised of producing
properties in the Anadarko, Arklatex, Arkoma, Michigan and Permian Basins. As of
December 31, 1999, the Debtors owned leasehold interests within the
Mid-Continent Region covering approximately 220,000 gross (139,000 net) acres.
The new wells drilled in this region are generally stepout and extension-type
wells with moderate reserve exposure. In 1999, the Debtors participated in 54
gross (28.4 net) development wells and 3 gross (1.6 net) exploratory wells with
completion success rates of 87% and 67%, respectively, in the Mid-Continent
Region. . During the first six months of 2000, the Debtors drilled 4 gross (1.5
net) exploration and 15 gross (8.5 net) development wells with completion
success rates of 75% and 93%, respectively. Estimated proved reserves in the
Mid-Continent Region were 149.3 Bcfe as of June 30, 2000, which represented
approximately 56% of the Debtors' total proved reserves.
Onshore Gulf Coast Region.
The Onshore Gulf Coast Region is primarily comprised of producing
properties in south Texas, coastal Louisiana and the Mississippi Salt Basin. As
of December 31, 1999, the Debtors owned or controlled approximately 135,000
gross (42,000 net) acres in the Onshore Gulf Coast Region. The Debtors conduct
development programs and pursue moderate risk, higher exposure exploration
drilling programs. During 1999, the Debtors participated in 8 gross (2.7 net)
development wells and 10 gross (5.6 net) exploratory wells with completion
success rates of 87% and 80%, respectively, in the Onshore Gulf Coast Region.
During the first six months of 2000, the Debtors drilled 4 gross (0.7 net)
exploration wells and 6 gross (1.7 net) development wells with completion
success rates of 50% and 67%, respectively. Estimated proved reserves in the
region were 58.0 Bcfe as of June 30, 2000, which represented approximately 22%
of the Debtors' total proved reserves.
Rocky Mountain Region.
In the Rocky Mountain Region, the Debtors' operations are focused
primarily in the Big Horn Basin in Wyoming. As of December 31, 1999, the Debtors
owned working interests covering approximately 260,000 gross (208,000 net) acres
in the area, primarily in the Big Horn Basin. No wells were drilled in this
region in 1999 or the first six months of 2000. Estimated proved reserves in the
Rocky Mountain Region were 41.4.7 Bcfe as of June 30, 2000, representing
approximately 15% of the Debtors' total proved reserves.
Gulf of Mexico Region.
The Gulf of Mexico Region includes assets that can be characterized
in two categories: 1) minor working interest properties obtained primarily
through the Medallion Acquisition (discussed in Section V.A. below); and 2)
proved reserves acquired through VPP transactions.
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<PAGE> 20
Proved reserves for these properties were estimated by the Debtors as of June
30, 2000, to be 19.1 Bcfe, which represented approximately 7% of the Debtors'
total proved reserves.
Additional information regarding the Debtors' oil and gas properties
is contained in the 1999 10-K annexed hereto as Exhibit C and the June 30, 2000
10-Q annexed hereto as Exhibit D.
E. Volatility of and Increases In Oil and Gas Prices Since Commencement
Date.
Since the Commencement Date, the prices of gas and oil have risen.
The Debtors have taken the position that the recent increases in spot and
forward prices for oil and gas have enhanced the value of the Debtors'
enterprise, such that the reorganization value of the Debtors exceeds the
aggregate amount of debt. The Debtors' reasons for taking this position are
explained on pages 12 and 13 of the Debtors' Third Amended Disclosure Statement
for Debtors Fourth Amended Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code (the "Debtors' Disclosure Statement"), and Exhibit G thereto.
The Proponents disagree with the Debtors' position in this regard, and intend to
prove in connection with the Confirmation Hearing that the Debtors'
reorganization value is less than the aggregate amount of the Debtors' debt,
notwithstanding the recent spike in oil and gas prices. See Exhibit F hereto
(Proponents' Reorganization Value for the Debtors).
As of September 20, 2000, the spot price of natural gas has increased
to $5.22 from $2.27 per MMbtu (as of the Commencement Date) for deliveries in
the Gulf Coast. On the Commencement Date, a one-year forward average price for
gas was $2.51 per MMbtu. On September 20, it was $4.90.
Storage inventories of natural gas in the U.S. have decreased. On the
Commencement Date, the U.S. had 2,017 Bcf of gas in storage to meet winter peak
demand, about 100 Bcf less than the same time last year. On September 15, there
was 2,325 Bcf in storage, 421 Bcf less than last year.
Supplies and daily deliverability of natural gas in North America are
down. In 1998 there were an average of 562 rigs drilling each day for gas.
Reports indicate that in 1999 there were 496 rigs. In the first quarter of 2000,
gas production was down .9 Bcf per day (Bcfd) or about 1.3% from the previous
year. However, increased drilling activity as a result of higher prices (there
were 776 rigs drilling for natural gas during the week of September 15, 2000)
would tend to increase deliverability, which may reduce prices during calendar
year 2001.
The combination of incremental storage demand (9.1 Bcfd), growth in
total gas demand (1.75 Bcfd) and less short-term supply (0.9 Bcfd), may have
contributed to the recent increases in natural gas prices.
Oil prices have also risen. On the Commencement Date, the NYMEX price
for the nearby oil contract was $28.85 per barrel and the field postings for WTI
was $26.00 per barrel. One year prior, the same WTI posting was $9.50 per
barrel. On September 20, 2000, the NYMEX price for the October Crude Contract
settled at $37.20 per barrel, and the posted price for WTI oil was $34.25 per
barrel.
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<PAGE> 21
The price of oil is determined by the world markets and not just by
activities in North America. A worldwide demand rebound of 2 million barrels per
day in the first quarter of 2000, accompanied by the cut in production by OPEC
in the second half of 1999, has reduced inventories of hydrocarbon stocks to 24
year lows. The 12 month forward average price on September 20 for crude on the
NYMEX was $32.20 per barrel, as compared to the 12 month forward average price
on the Commencement Date of $24.77 per barrel.
At June 30, 2000, using SEC guidelines for determining proved reserve
value discounted at 10% (PV-10), the Debtors had a proved reserve value of $526
million compared to $293 million at December 31, 1999. Although the Proponents
do not believe that the SEC guidelines bear any relation to actual value, the
increase in SEC PV-10 value tends to suggest that the value of the Debtors'
proved reserves have increased to some extent since the Commencement Date. The
Debtors' actual reserves of oil and gas, however, have not increased since the
Commencement Date. The Proponents believe that the increase in SEC PV-10 volume
is solely the result of increases in commodity prices, which, as discussed
below, are necessarily volatile. Moreover, whereas the SEC guidelines provide
for the use of spot pricing in calculating PV-10 value, the value of the Debtors
as a reorganized enterprise will depend on future oil and gas prices, of which
current spot prices are not necessarily indicative. The PV-10 values should not
be construed as the current market value of the estimated oil and gas reserves
attributable to the Company's properties. In accordance with applicable
requirements of the SEC, PV-10 is generally based on prices and costs as of the
date of the estimate, whereas actual future prices and costs may be materially
higher or lower. Actual future net cash flows will be affected by factors such
as the amount and timing of actual production, supply and demand for oil and
gas, curtailments or increases in consumption by natural gas purchasers and
changes in governmental regulations or taxation. The timing of actual future net
cash flows from proved reserves, and thus their actual present value, will be
affected by the timing of both the production and the incurrence of expenses in
connection with development and production of oil and gas properties. In
addition, the 10% discount factor, which is required by the SEC to be used to
calculate PV-10 for reporting purposes, is not necessarily the most appropriate
discount factor based on interest rates in effect from time to time and risks
associated with the Company and its properties or the oil and gas industry in
general.
The Company's future financial condition and results of operations
are also highly dependent on the demand and prices received for the Company's
oil and gas production and on the costs of acquiring, developing and producing
reserves. Oil and gas prices have historically been volatile. Prices for oil and
gas are subject to wide fluctuation in response to relatively minor changes in
the supply of and demand for oil and gas, market uncertainty and a variety of
additional factors that are beyond the Company's control. These factors include
political conditions in the Middle East and elsewhere, domestic and foreign
supply of oil and gas, the level of consumer demand, weather conditions,
domestic and foreign government regulations and taxes, the price and
availability of alternative fuels and overall economic conditions. A decline in
oil or gas prices may adversely affect the Company's cash flow, liquidity and
profitability. Lower oil or gas prices also may reduce the amount of the
Company's oil and gas that can be produced economically. It is impossible to
predict future oil and gas price movements with any certainty. Additionally, the
Debtors' future performance and profitability is highly dependent upon the
extent to which the Debtors are able to limit the "finding cost" of
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<PAGE> 22
additional reserves (i.e., the average overall cost of finding additional oil
and gas reserves) and their overall operating costs. There can be no assurance
regarding the Debtors' ability to improve upon or maintain their historical
finding and operating costs.
E. HEDGING ACTIVITIES
The Debtors seek to manage the price risk related to future
production of natural gas and oil by entering into various commodity price
swaps, futures contracts and options on futures contracts. For the period July
2000 through August 2005, a total of approximately 12,100,000 MMbtu of natural
gas acquired as part of the Medallion Acquisition is hedged at an average price
of $2.055 per MMbtu. This hedge would represent approximately 9% of natural gas
production during that period based on current production rates. In addition,
the Debtors have entered into a series of "cost free collars" relating to a
portion of their natural gas production, wherein the Debtors have been
guaranteed a floor price for that portion of their gas in return for capping the
price they will receive during the period of the collars. During the period of
July 2000 through March 2001, the Debtors are guaranteed to receive minimum
prices ranging from $2.70 to $3.53 per MMbtu, and will receive market price for
that portion of their production up to maximum prices ranging from $4.00 to
$5.50 per MMbtu. A total of 9.0 Bcf of natural gas production has been placed
under such collars, which would represent approximately 30% of natural gas
production during that period based upon current production rates. On August 31,
2000, the Debtor entered into a hedge arrangement for 30,000 MMbtu per month,
October 2000 through March 2001, locking in a natural gas price of $5.04 per
MMbtu. Pursuant to this hedge, the Counter Party has the right to extend this
hedge for another six months beginning at April 1, 2001 at a $5.04 per MMbtu
price. Additional information regarding the Debtors' hedging activities is
contained in the 1999 10-K and June 30, 2000 10-Q annexed hereto as Exhibits C
and D, respectively.
F. SELECTED FINANCIAL INFORMATION
For the twelve-month period ended December 31, 1999, on a
consolidated basis, the Debtors' operations generated revenues of $136,491,000.
As of December 31, 1999, the Debtors' consolidated books and records reflected
historical assets totaling approximately $284,932,000 and liabilities totaling
approximately $434,775,000. For the year ended December 31, 1999, the Debtors'
consolidated net income was $4,340,000.
For the twelve-month period ended June 30, 2000, on a consolidated
basis, the Debtors' operations generated revenues of $150,762,000. For the three
months ended June 30, 2000, the Debtors' operations generated revenues of
$44,624,000, EBITDAR (earnings before interest, taxes, DD&A and reorganization
items) of $35,403,000 and net income of $14,837,000. For the six months ended
June 30, 2000, the Debtors' operations generated revenues of $80,631,000,
EBITDAR of $62,261,000 and income before reorganization items of $23,551,000.
Reorganization items of $9,361,000 ($6,132,000 of which was non-cash) reduced
this to net income of $14,190,000. As of June 30, 2000, the Debtors'
consolidated books and records reflected historical assets totaling
approximately $299,551,000 and liabilities totaling approximately $435,204,000.
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<PAGE> 23
Additional financial information regarding the Debtors is contained
in the 1999 10-K annexed hereto as Exhibit C and the June 30, 2000 10-Q annexed
hereto as Exhibit D.
G. THE DEBTORS' SIGNIFICANT DEBT OBLIGATIONS
The significant debt of the Debtors generally consists of obligations
under (i) the Resources Facility, (ii) the Medallion Facility, (iii) the Old
Senior Notes and (iv) the Old Senior Subordinated Notes.
1. The Resources Facility
In September 1996, the Debtors consolidated two separate
credit agreements creating one revolving credit facility (the "Resources
Facility"), which is due to mature on September 30, 2000. As of the Commencement
Date, KCS, KCS Resources, Inc., KCS Energy Marketing, Inc., KCS Michigan
Resources, Inc. (including KCS as guarantor) were indebted under the Resources
Facility in the aggregate principal amount of $57,594,200.60 plus interest,
costs and expenses. The indebtedness under the Resources Facility is secured by
substantially all of the Debtors' oil and gas assets other than those securing
the Medallion Facility (see below).
2. The Medallion Facility
In January 1997, KCS entered into a revolving credit
agreement (the "Medallion Facility") with a group of banks that is due to mature
on September 30, 2000. As of the Commencement Date, KCS, Medallion Gas Services,
Inc., KCS Energy Services, Inc. and KCS Medallion Resources, Inc. were indebted
under the Medallion Facility in the aggregate principal amount of
$49,500,688.30, plus interest, costs and expenses. The indebtedness under the
Medallion Facility is secured by substantially all of the oil and gas assets
acquired in the Medallion Acquisition, KCS Energy Services' oil and gas reserves
and a pledge of certain related common stock.
3. The Old Senior Notes
On or about January 15, 1996 KCS issued the Old Senior
Notes in the aggregate principal amount of $150 million, due January 15, 2003.
The Old Senior Notes bear interest at an annual rate of 11%, payable
semi-annually. KCS's obligations under the Old Senior Notes are guaranteed on a
senior basis by each of the other Debtors. As of the Commencement Date, the
outstanding amount owed on the Old Senior Notes, including principal and all
interest accrued and payable aggregated approximately $166,500,000.
4. The Old Senior Subordinated Notes
On or about January 15, 1998 KCS issued the Old Senior
Subordinated Notes in the aggregate principal amount of $125 million, due
January 15, 2008. The Old Senior Subordinated Notes bear interest at an annual
rate of 8.875%, payable semi-annually. KCS's obligations under the Old Senior
Subordinated Notes are guaranteed on a subordinated basis by each of the other
Debtors. As of the Commencement Date, the outstanding amount owed on the Old
Senior Subordinated Notes, including principal and all interest accrued and
payable aggregated approximately $136,094,000.
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<PAGE> 24
V.
THE DEBTORS' CHAPTER 11 CASES
A. EVENTS PRECEDING THE FILING OF THE CHAPTER 11
1. Brief History of Debtors' Operations
KCS was formed in 1988 in connection with the spin-off of
the non-utility operations of NUI Corporation, a New Jersey-based natural gas
distribution company that had been engaged in the oil and gas exploration and
production business since the 1960s. From 1992 through 1996, a substantial
portion of the Debtors' natural gas was sold from the Bob West Field in south
Texas pursuant to the Tennessee Gas Contract, which was an above-market,
take-or-pay contract that had been the subject of several lawsuits. On December
23, 1996, KCS and Tennessee Gas entered into a comprehensive settlement covering
all claims and litigation between them related to the Tennessee Gas Contract. As
part of the settlement, the Tennessee Gas Contract was terminated effective
January 1, 1997, approximately two years prior to its expiration date.
During the first quarter of 1997, the Debtors decided to
discontinue their natural gas transportation and marketing operations in order
to focus on the core oil and gas exploration and production operations. Later
that year, the Debtors sold their Texas intrastate natural gas pipeline system
and their third-party natural gas marketing operations, realizing proceeds of
$28.5 million.
The Debtors have grown primarily through acquisitions of
oil and gas properties. As of December 31, 1996, the Debtors completed the
arrangements for the acquisition of all the outstanding stock of InterCoast Oil
and Gas Company (formerly Medallion Production Company), GED Energy Services,
Inc. and InterCoast Gas Services Company (collectively referred to as
"Medallion"), indirect wholly owned subsidiaries of MidAmerican Energy Holdings
Company ("MidAmerican"), for a purchase price of approximately $199.1 million
(adjusted for an effective date of June 30, 1996), consisting of a cash payment
of $194.1 million and warrants to purchase 870,000 shares of KCS common stock at
an exercise price of $22.50 per share with a four-year term (the "Medallion
Acquisition").
Medallion's principal assets as of December 31, 1996, were
proved oil and gas reserves of 187.5 Bcfe consisting of 140.3 Bcf of natural gas
and 7.9 Mmbbls of oil and liquids. The Debtors also acquired a natural gas
gathering system as well as oil and gas equipment and supplies. The Medallion
Acquisition essentially doubled the Debtors' reserve and production base at
December 31, 1996.
These developments transformed the Debtors from an
enterprise heavily dependent on the Bob West Field and the Tennessee Gas
Contract, with gas transportation and marketing operations, to an enterprise
focused on exploration and production, with a portfolio of properties in four
distinct areas. Production from the Bob West Field, which in 1995 accounted for
36% of total production and 72% of the Debtors' oil and gas revenues, accounted
for less than 3% of total oil and gas revenue in 1998 and 1999
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Additional historical information regarding the Debtors and
their operations are contained in the 1999 10-K annexed hereto as Exhibit C and
the June 30, 2000 10-Q annexed hereto as Exhibit D.
2. Disappointing Results in Manderson Field and Drop in Oil
and Gas Prices Led to Defaults Under the Credit Facilities
In 1996, KCS made what it believed was a very significant
oil discovery in the Phosphoria formation in the Manderson Field in Wyoming,
with additional behind pipe potential from several zones. Based on initial
results and analyses by the Debtors' geologists and engineers, as well as third
party independent consultants, the Debtors invested significant capital for
leases, wells, pipeline, storage facilities and a processing plant. While KCS
believed that initial results were good, these results did not hold up after the
processing plant was completed and the wells were brought on-line. Meanwhile, in
late 1997, oil and gas prices began dropping precipitously.
By 1998, the combination of disappointing results in the
Manderson Field and the impact of lower oil and gas prices resulted in
significant losses and reduced cash flow to the Debtors. These events caused the
Debtors to become in default of certain covenants in the Medallion Facility and
the Resources Facility (collectively, the "Credit Facilities"). While the
defaults continue, the Debtors cannot borrow under either of the Credit
Facilities.
In late 1998, the Debtors began efforts to raise additional
private equity and were unsuccessful.
3. Forbearance Agreements with Old Bank Lenders
On May 18, 1999, KCS and the Old Bank Lenders entered into
forbearance agreements (the "Initial Forbearance Agreements") with respect to
the Credit Facilities. Under the Initial Forbearance Agreements, the Debtors
committed 50% of monthly cash flow to payments of principal with a minimum of $2
million monthly. In addition, a portion of the proceeds from the sale of any of
the Debtors' oil and gas properties were dedicated to payment of principal under
the Credit Facilities. On July 7, 1999 the Old Bank Lenders reset KCS's
borrowing base (which had been $165 million at December 31, 1998) to $91
million. At that time, the principal amount outstanding under the Credit
Facilities was approximately $126.7 million, or $35.7 million greater than the
new borrowing base. Because KCS did not make this $35.7 million additional
lump-sum payment, a payment default occurred. The Old Bank Lenders then declared
due and payable all amounts outstanding under the Credit Facilities, demanded
payment of these amounts and declared in effect the default rate of interest.
The Old Bank Lenders also delivered a payment blockage notice to the indenture
trustee of the Old Senior Subordinated Notes. Following the payment blockage
notice, KCS did not make the scheduled July 15, 1999 interest payments on either
the Old Senior Subordinated Notes or the Old Senior Notes. As a result of these
payment defaults, the holders of the requisite percentage of the Old Senior
Notes and Old Senior Subordinated Notes (and the indenture trustees of those
notes) had the right to declare the principal amount of the notes immediately
due and payable. As a result of the above factors, there was substantial doubt
about the Debtors' abilities to continue as going concerns unless the Debtors'
debt obligations were restructured.
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<PAGE> 26
On July 26, 1999, KCS and the Old Bank Lenders entered into
new forbearance agreements (the "New Forbearance Agreements") which provided
that the Old Bank Lenders would refrain from exercising their rights and
remedies not previously exercised until October 5, 1999 (subsequently extended
through March 2, 2000). The Old Bank Lenders did not waive the payment default
under the Credit Facilities but rescinded their declaration that all amounts
outstanding under the Credit Facilities were immediately due and payable and
effectively waived the default rate of interest.
Under the terms of the New Forbearance Agreements, KCS
committed to make monthly principal payments of $2.5 million under the Credit
Facilities to the Old Bank Lenders. In addition, KCS agreed to continue
dedicating a portion of the proceeds from the sale of any of the Debtors' oil
and gas properties to payment of principal under the Credit Facilities. The New
Forbearance Agreements also precluded KCS from making principal or interest
payments on the Old Senior Notes and the Old Senior Subordinated Notes. From the
time that the Initial Forbearance Agreements were entered into, KCS has made
principal repayments to the Old Bank Group of approximately $47.9 million,
reducing the total outstanding amount under the Credit Facilities to $102.1
million as of February 29, 2000. The New Forbearance Agreements expired on March
2, 2000.
4. Efforts to Negotiate a Restructuring
In 1999, the Debtors began working with their financial
advisors to pursue a restructuring of their debt obligations that would result
in deleveraging of the Debtors' balance sheets. With the assistance of their
financial advisors, the Debtors engaged in discussions with certain
institutional entities holding Old Senior Notes and Old Senior Subordinated
Notes in an effort to pursue a consensual restructuring transaction.
Pursuant to these discussions, certain institutional
creditors and the Debtors entered into that certain Agreement in Respect of
Restructuring of KCS Energy, Inc. and Affiliates' Public Notes, dated December
27, 1999 (the "Noteholder Agreement") which provides for, among other things,
the support by such institutional creditors for a restructuring of the Debtors'
obligations pursuant to the terms of a plan of reorganization incorporating the
terms of the Proposed Restructuring Term Sheet attached as Exhibit "A" to the
Noteholder Agreement. A copy of the Noteholder Agreement is annexed hereto as
Exhibit B. The Noteholder Agreement was entered into by six (6) holders of Old
Senior Notes holding such notes in an aggregate principal amount of $80.75
million (out of an aggregate principal amount outstanding of $150 million) and
five (5) holders of Old Senior Subordinated Notes holding such notes in an
aggregate principal amount of $84.28 million (out of an aggregate principal
amount outstanding of $125 million). Pursuant to the Noteholder Agreement, the
Debtors were obligated to commence Chapter 11 cases and file a joint plan of
reorganization and disclosure statement with the Bankruptcy Court on or before
January 18, 2000. The Noteholder Agreement was subject to the requirement that
an order confirming the Debtors' plan be entered on or before April 30, 2000.
The Noteholder Agreement was terminated by CSFB on April 12, 2000.
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<PAGE> 27
B. EVENTS DURING THE CHAPTER 11 CASES
1. Creditors' Committee
Pursuant to section 1102 of the Bankruptcy Code, the United
States Trustee is required to appoint a committee of Creditors holding unsecured
claims. On February 2, 2000, the United States Trustee for the District of
Delaware appointed the following entities to serve on the Creditors' Committee:
a. U.S. Bank Trust National Association
b. Turnberry Capital Management, L.P.
c. Lord Abbett & Co.
d. Van Kampen High Income Corporate Bond Fund
e. Offitbank
f. DDJ Capital Management LLC
g. Halliburton Energy Services, Inc. ("Halliburton")
Halliburton resigned from the Creditors' Committee
effective February 29, 2000. On or about March 1, 2000, the United States
Trustee appointed the Wiser Oil Company to replace Halliburton. Wiser Oil
Company and Turnberry Capital Management, L.P. resigned from the Creditors'
Committee effective April 10, 2000 and May 11, 2000, respectively.
With the approval of the Bankruptcy Court, the Creditors'
Committee has retained Gibson, Dunn & Crutcher LLP and Saul, Ewing, Remick &
Saul LLP as its attorneys, and Petrie Parkman & Co., Inc. as its financial
advisor.
2. Commencement of the Chapter 11 Cases, "First Day" Motions
and Orders, and Proceedings on the Debtors' Plan
On January 5, 2000, three institutional creditors holding
Old Senior Notes of the Debtors filed in the Bankruptcy Court an involuntary
petition for an order for relief against KCS under Chapter 11 of the Bankruptcy
Code. On January 18, 2000, the Bankruptcy Court entered an order for relief
under Chapter 11 against KCS. On the same date, each of the other Debtors filed
with the Bankruptcy Court petitions for relief under Chapter 11 of the
Bankruptcy Code. Also on the same date, and from time to time thereafter, the
Debtors requested the Bankruptcy Court to enter certain orders designed to
minimize any disruption of the Debtors' business operations and to facilitate
their reorganization. Certain of these orders and the bases for the relief
requested, as well as certain other orders and rulings entered by the Bankruptcy
Court with respect to the Debtors' plan, are described below.
(a) Use of Cash Collateral. As of the Commencement
Date, the Debtors were indebted to the Old Bank Lenders in the aggregate
principal amount of approximately $107.1
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<PAGE> 28
million, plus interest and other costs and expenses provided for under the
applicable loan documents relating to the Resources Facility and the Medallion
Facility. The Old Bank Lenders have liens on substantially all of the Debtors'
real and personal property. Pursuant to section 363 of the Bankruptcy Code, the
proceeds of any disposition of the pre-petition collateral constitutes cash
collateral of the Old Bank Lenders that the Debtors may not use without the
consent of the Old Bank Lenders or an order of the Bankruptcy Court. The Debtors
require access to the cash collateral to continue to operate their business and
maximize the value attributable to their creditors. Accordingly, the Debtors
entered into an agreed order with the Old Bank Lenders authorizing the Debtors
to use cash collateral under certain terms and conditions, including the
following: (i) the Debtors will operate their businesses in accordance with
monthly budgets approved by the Old Bank Lenders; (ii) as adequate protection
for the Debtors' use of cash collateral, the Old Bank Lenders are granted liens
to secure (a) any diminution in the value of their collateral resulting from the
Debtors' use of that collateral and (b) the existing indebtedness owed to the
Old Bank Lenders; (iii) adequate protection claims of the Old Bank Lenders will
have a higher priority than any other administrative or priority claim, except
for allowed professional fees and expenses of the Debtors and Creditors'
Committee; and (iv) the Debtors will pay to the Old Bank Lenders all excess cash
collateral (as defined in the order) on a monthly basis and all proceeds from
the sale of pre-petition collateral outside the ordinary course of business.
(b) Payment of Prepetition Employee Compensation,
Benefits, Expenses and Related Items. As is customary with most large Chapter 11
cases, the Debtors sought, and the Bankruptcy Court entered, an order
authorizing the Debtors to pay certain obligations to employees that arose prior
to the Commencement Date. The basis for the requested relief was the Debtors'
belief that the payment of such employee obligations are necessary in order to
maintain employee morale, and that the overwhelming majority of such obligations
would be entitled to priority treatment under a plan of reorganization.
(c) Payment of Certain Prepetition Claims in the
Ordinary Course. The Debtors took the position that due to the nature of their
business, it was necessary for them to pay in the ordinary course of business
certain obligations unique to the oil and gas industry that arose prior to the
Commencement Date. On the Commencement Date, the Bankruptcy Court entered an
order authorizing the Debtors to pay the following types of prepetition
obligations: (i) royalty, revenue, and similar obligations under oil and gas
leases, (ii) obligations relating to Volumetric Production Payment contracts,
(iii) obligations owing to working interest owners under joint operating
agreements, and (iv) obligations in respect of severance taxes owing to state
and other government taxing authorities. On February 4, 2000, the Bankruptcy
Court entered an order authorizing the Debtors to pay certain additional
prepetition claims, including (i) certain claims arising from work in progress,
(ii) plugging and abandonment obligations, (iii) certain specifically identified
lease operating expenses, and (iv) certain specifically identified miscellaneous
claims. The Debtors have estimated that the prepetition claims that they are
authorized to pay under these orders will total less than $18 million.
(d) Cash Management. In order to assist the Debtors'
orderly entry into bankruptcy and to avoid many of the disruptions and
distractions that could divert the Debtors' attention from more pressing matters
during the initial days of the Chapter 11 Cases, the Bankruptcy Court entered an
order (a) authorizing the Debtors to continue the use of their pre-
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<PAGE> 29
petition centralized cash management system, (b) waiving certain operating
guidelines relating to bank accounts, checks and business forms set forth in
certain guidelines issued by the Office of the United States Trustee for the
District of Delaware and (c) permitting the continuation of the Debtors'
pre-petition and current practice of depositing excess funds into a Salomon
Smith Barney investment account. Such relief was sought in order to allow the
Debtors to continue funding more easily certain of their day to day obligations
such as payroll, vendor obligations, taxes, employee benefits and insurance and
to allocate such costs to the various Debtors.
(e) Retention of Professionals. In order to assist
the Debtors with the Chapter 11 Cases, the Debtors sought the Bankruptcy Court's
approval of the Debtors' retention of various professionals. To this end, the
Bankruptcy Court entered orders authorizing the Debtors to retain the following
professionals:
<TABLE>
<CAPTION>
PROFESSIONAL FIRM ROLE
<S> <C>
Weil, Gotshal & Manges LLP Chapter 11 Co-Counsel
The Bayard Firm Chapter 11 Co-Counsel
Mayor, Day Caldwell & Keeton, L.L.P. Special Counsel (Oil and Gas,
Litigation and Related Matters)
Arthur Andersen LLP Accountants
</TABLE>
In addition to the foregoing, the Bankruptcy Court has
entered an order authorizing the Debtors to continue to employ and compensate a
number of professionals in the ordinary course of business up to specified
limits set forth in the order. Furthermore, on March 16, 2000, the Bankruptcy
Court approved the retention of: (a) Orloff, Lowenbach, Stifelman & Siegel, P.A.
as special counsel to the Debtors for certain corporate, securities and
consulting matters delineated in the order approving their retention, (b)
Houlihan Lokey Howard & Zukin as financial advisors to the Debtors, and (c) the
Altman Group, Inc. as Voting Agent for the Debtors.
(f) Joint Administration of the Chapter 11 Cases. As
is customary with Chapter 11 cases involving several affiliated debtors, the
Debtors sought, and the Bankruptcy Court entered, an order procedurally
consolidating the Chapter 11 Cases for joint administration.
(g) Extension of Time to File Statements of Financial
Affairs and Schedules of Assets, Liabilities, Executory Contracts and Unexpired
Leases. The Debtors requested, and the Court entered, two orders extending the
period for filing such statements and schedules. The initial order granted an
additional forty days to a period fifty-five days after the Commencement Date.
The second order, granted March 16, 2000, extended the period for filing such
statements and schedules through April 28, 2000. The Debtors actually filed such
statements and schedules with the Bankruptcy Court on or about April 28, 2000.
(h) Extension of Time to Assume or Reject Non-
Residential Real Property Leases. Absent an extension, the Debtors must elect to
assume or reject each non-residential real property lease within a 60 day period
as set forth in the Bankruptcy Code. On March 16, 2000,
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<PAGE> 30
the Bankruptcy Court granted the Debtors an extension of time to assume or
reject their non-residential real property leases through the earlier of the
Confirmation Date or July 15, 2000.
(i) Interim Compensation and Reimbursement of Chapter
11 Professionals and Committee Members. As is customary with major Chapter 11
cases, the Debtors requested, and the Bankruptcy Court entered, an order
establishing procedures for interim compensation and expense reimbursement of
professionals retained and Creditors' Committee members appointed in these
Chapter 11 Cases. These procedures generally provide a mechanism by which
Chapter 11 professionals may file interim compensation and reimbursement
applications on a monthly basis. A notice and objection procedure is
established, and all professionals must file final applications for compensation
and reimbursement in accordance with the Bankruptcy Court, the Bankruptcy Rules
and local rules and orders. In addition, Creditors' Committee members may submit
requests for reimbursement of expenses on a monthly basis.
(j) The Impairment Motion. The Debtors filed an
initial plan and disclosure statement on the Commencement Date. In connection
with that plan, the signatories to the Noteholder Agreement had consented to and
approved an Old Senior Indenture Third Supplement, and claimed with the Debtors
that the Old Senior Indenture Third Supplement thereby became binding and
effective to amend the Old Senior Indenture as of December 28, 1999.
Accordingly, on or about February 4, 2000, the Debtors filed their Motion for
Order Confirming Class 4 is Unimpaired Under KCS' Proposed Chapter 11 Plan (the
"Impairment Motion") with the Bankruptcy Court. The Impairment Motion argued
that the treatment of Class 4 (Old Senior Notes Claims) in the Debtors' plan was
proper because such treatment was fully in accordance with the respective
rights, powers, and obligations of the Debtors and the Old Senior Notes
noteholders under the Old Senior Indenture, as amended by the Old Senior
Indenture Third Supplement, and was not based on any power (and any limitation
on any such power) granted to a plan proponent by Bankruptcy Code sections 1124
through 1129. Accordingly, it was argued that nothing in the earlier version of
the Debtors' plan altered the rights of the Old Senior Notes noteholders and
they were, therefore, unimpaired under Bankruptcy Code section 1124.
A group of holders of Old Senior Notes who are not
signatories of the Noteholder Agreement (the "Minority Noteholders") filed an
objection (the "Impairment Objection") to the Impairment Motion on or about
February 21, 2000. The Impairment Objection argued that the Old Senior Indenture
Third Supplement was ineffective to change the terms of the Old Senior Notes and
Old Senior Indenture. Therefore, according to the Minority Noteholders, because
the Old Senior Indenture Third Supplement was ineffective to modify the terms of
the Old Senior Indenture, the Debtors' plan modified their "legal, equitable,
and contractual rights," with the result that they were impaired under such
plan. In particular, the Minority Noteholders argued that the Debtors' plan
could not be confirmed because it violated the subordination provisions of the
Old Senior Subordinated Notes by providing for distributions to be made in
respect of the Old Senior Subordinated Notes Claims without the payment in full
of the Old Senior Notes Claims.
On February 25, 2000, the Bankruptcy Court held a hearing
and denied the Impairment Motion on the ground that Old Senior Indenture Third
Supplement was not a binding prepetition modification of the Old Senior
Indenture, and that the proposed distribution to the
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<PAGE> 31
holders of the Old Senior Subordinated Notes violated the subordination
provisions of the Old Senior Indenture. After denial of the Impairment Motion,
the Debtors amended their plan to, among other things, provide for reinstatement
of the Old Senior Notes without amendment of the Old Senior Indenture by the Old
Senior Indenture Third Supplement (the "Debtors' First Amended Plan"). The
Debtors' First Amended Plan, in accordance with Section 10.20 of the Old Senior
Indenture, contemplated the signatories of the Noteholder Agreement would grant
a waiver of Section 10.15 of the Old Senior Indenture to allow the Reorganized
Debtors to enter into a new, secured credit facility. With this waiver and the
Debtors' ability to satisfy the conditions under Sections 10.10 and 10.12 of the
Old Senior Indenture for making payments on the Old Senior Subordinated Notes,
the Debtors believed that the treatment under the Debtors' First Amended Plan
was proper because they considered such treatment to be fully in accordance with
the respective rights, powers and obligations of the Debtors and the Old Senior
Notes noteholders under the Old Senior Indenture and not based on any power (and
any limitation on any such power) granted to a plan proponent by Bankruptcy Code
sections 1124 through 1129.
(k) The Second Impairment Motion. On March 8, 2000,
the Minority Noteholders filed a motion for an order determining that Class 4
was impaired by the Debtors' First Amended Plan (the "Second Impairment
Motion"). The Second Impairment Motion asserted that the Debtors' First Amended
Plan modified the "legal, equitable, and contractual rights" of the holders of
Old Senior Notes with the result that Class 4 would be impaired by the Debtors'
First Amended Plan. Among other things, the Second Impairment Motion argued that
the Debtors' First Amended Plan could not be confirmed because it violated the
subordination provisions of the Old Senior Subordinated Notes by providing for
distributions to be made in respect of the Old Senior Subordinated Notes Claims
without the prior payment in full of the Old Senior Notes Claims. The Second
Impairment Motion also asserted that the proposed waiver by holders of Old
Senior Notes of certain provisions of the Old Senior Indenture in order to
authorize a lien securing the New Credit Facility is improper. Further, the
Second Impairment Motion asserted that holders of Old Senior Notes Claims would
be impaired under the Debtors' First Amended Plan unless they received interest
payments on unpaid and past due interest under the Old Senior Notes.
On March 14, 2000, the Debtors filed a response to the
Second Impairment Motion. In their response, the Debtors argued that the
Debtors' First Amended Plan did not impair Class 4 because, among other things,
the Debtors' First Amended Plan did not deprive holders of Old Senior Notes of
their contractual subordination rights and the New Credit Facility can be
secured with a lien authorized by a waiver of the relevant provisions of the Old
Senior Indenture. In addition, the Debtors revised their First Amended Plan to
provide that the Debtors would pay interest on unpaid and past due interest owed
on the Old Senior Notes through the Effective Date if the Bankruptcy Court
determined that such additional interest is required in order to leave the
holders of Old Senior Notes unimpaired under the First Amended Plan.
On March 16, 2000, the Bankruptcy Court held a hearing and
granted the Second Impairment Motion, i.e., ruled in favor of the Minority
Noteholders, on the ground that the subordination provisions of the Old Senior
Subordinated Indenture preclude any distribution of cash to the holders of the
Old Senior Subordinated Notes unless the Old Senior Notes have been paid in
full, and that the new subordinated notes to be distributed to the holders of
the Old Senior Subordinated Notes violated these subordination provisions,
because the new notes were subject
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<PAGE> 32
to a mandatory call by the Debtors immediately after the Effective Date. After
the Bankruptcy Court granted the Second Impairment Motion, the Debtors amended
their First Amended Plan and filed their Third Amended Disclosure Statement and
Second Amended Plan. The Debtors' Second Amended Plan provided that the holders
of the Old Senior Subordinated Notes would receive, in respect of their Claims,
two series of preferred stock of reorganized KCS, each of which would be
redeemable for cash, and each of which would be automatically converted to
common stock in reorganized KCS if not redeemed by stated deadlines.
(l) The Third Impairment Motion. On April 5, 2000,
the Minority Noteholders filed a Motion for an Order determining that Class 4
was impaired by the Debtors' Second Amended Plan (the "Third Impairment
Motion"). Among other things, the Third Impairment Motion argued that the
Debtors' Second Amended Plan was structured to accomplish the same result as the
prior plans filed by the Debtors, that the Debtors intended to exercise the call
rights under the preferred stock in a manner that would accomplish that result,
and that the Debtors' Second Amended Plan created strong incentives for the
Debtors that ensured that they would exercise their rights in such a manner.
On or about April 10, 2000, the Debtors filed an Answer in
opposition to the Third Impairment Motion. In their Answer, the Debtors argued,
among other things, that the Debtors' Second Amended Plan complied with the
Court's prior rulings because the Debtors' call rights on the preferred stock
were optional, not mandatory. In light of the Court's prior ruling on the
Debtors' First Amended Plan, the Debtors urged that the Debtors' decision
whether to call some or all of the preferred stock would not be linked to the
reorganization and therefore would not violate the subordination provisions in
favor of the holders of the Old Senior Notes.
On April 28, 2000, the Bankruptcy Court issued a Memorandum
Opinion granting the Third Impairment Motion and determining that Class 4 was
impaired by the Debtors' Second Amended Plan. Among other things, the Bankruptcy
Court held that it was clear from all the circumstances, including the strong
incentives created by the Second Amended Plan itself, that the Debtors intended
to redeem one series of preferred stock immediately or shortly after the
Effective Date, while allowing the other series to convert to common stock, and
that such redemption and conversion would accomplish the same result as the
prior plans filed by the Debtors. The Bankruptcy Court therefore held that the
Second Amended Plan was different from the First Amended Plan in form only, and
that Class 4 remained impaired. The Debtors have appealed the Bankruptcy Court's
decision, and the appeal is presently pending before the U.S. District Court for
the District of Delaware.
(m) The Termination Motion and the Extension Motion.
On April 3, 2000, before the Bankruptcy Court had ruled
upon the Third Impairment Motion, the Creditors' Committee filed a motion
seeking the termination of the Debtors' exclusive periods for filing a plan of
reorganization and soliciting acceptances thereof (the "Termination Motion").
The Termination Motion argued that the Debtors had used their exclusive periods
to force their creditors to accede to the Debtors' plan, and that no consensual
plan could or would be negotiated while the exclusive periods were in place. On
April 6, 2000, the Minority Noteholders joined in the Termination Motion.
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<PAGE> 33
On or about April 7, 2000 the Debtors filed a combined (i)
response to the Termination Motion and (ii) motion to extend the exclusive
periods (the "Extension Motion"). Therein, the Debtors argued that termination
of the exclusive periods would effectively punish the Debtors for diligently
proposing three plans during the first few months of the Debtors' chapter 11
cases, and that the exclusive periods were not being used to force creditors to
accept the Debtors' plan, because that plan sought to pay all creditors in full.
The Debtors further argued that the exclusive periods should be extended, since
the Debtors had progressed toward reorganization, were paying their debts as
they come due, and met the other legal tests for an extension of the exclusive
periods.
On May 2, 2000, CSFB and certain of the other holders of the
Debtors' publicly-traded notes who were signatories to the Noteholder Agreement
(collectively, the "Working Noteholders"), filed an objection to the Extension
Motion. Therein, the Working Noteholders stated that they were withdrawing their
support of the Debtors' plan, and that in light of such withdrawal, the only way
to confirm a plan in the Debtors' cases is to terminate the exclusive periods
and allow the Working Noteholders and the Minority Noteholders to propose and
file their own plan.
At a hearing on May 4, 2000, the Bankruptcy Court, after hearing
argument from all parties concerned, granted the Termination Motion and denied
the Extension Motion.
3. Exit Facility.
The Proponents believe that they will acquire an Exit Facility
Commitment on terms substantially similar to those provided in the Resources
Facility and Medallion Facility. The New Credit Facility will be fully secured
by perfected first priority liens, deeds of trust, security interests, and
financing statements on substantially all of the Reorganized Debtors' assets.
4. No Bar Date Fixed in These Chapter 11 Cases
No bar date has been established as the last date by which proofs
of claim against the Debtors must be filed. The Debtors will rely upon the
respective Indenture Trustees to identify the holders of Old Senior Notes and
Old Senior Subordinated Notes as of the Distribution Record Date, and upon the
stock transfer ledgers of the transfer agent for the Old KCS Common Stock to
identify holders of Old KCS Common Stock as of such date, for purposes of
distribution.
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<PAGE> 34
VI.
THE PLAN OF REORGANIZATION
THE PLAN IS ANNEXED HERETO AS EXHIBIT A AND IS AN INTEGRAL PART OF THIS
DISCLOSURE STATEMENT. THE SUMMARY OF THE PLAN SET FORTH BELOW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE PLAN. IN
THE EVENT OF ANY INCONSISTENCY BETWEEN THE PROVISIONS OF THE PLAN AND THE
SUMMARY CONTAINED HEREIN, THE TERMS OF THE PLAN WILL GOVERN.
A. CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS UNDER THE
PLAN
1. Classification
The Plan divides the Claims against, and Equity Interests in, the
Debtors into the following classes:
Unclassified - Administrative Expense Claims
Unclassified - Professional Compensation and Reimbursement
Claims
Unclassified - Priority Tax Claims
Class 1 - Other Priority Claims
Class 2 - Secured Bank Claims
Class 3 - Other Secured Claims
Class 4 - Old Senior Notes Claims
Class 5 - Old Senior Subordinated Notes Claims
Class 6 - General Unsecured Claims
Class 7 - Old KCS Common Stock Equity Interests
Class 8 - Old KCS Warrants Equity Interests and Old
Employee and Director Stock Option Plan
Equity Interests
2. Administrative Expense Claims
Administrative Expense Claims are costs or expenses of
administration of the Debtors' Chapter 11 Cases incurred prior to the Effective
Date and Allowed under sections 503(b) and 507(a)(1) of the Bankruptcy Code,
including, without limitation (i) any actual and
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<PAGE> 35
necessary costs and expenses of preserving the Debtors' estates or operating the
Debtors' business, (ii) indebtedness or obligations incurred or assumed by the
Debtors during the Chapter 11 Cases in connection with the conduct of their
businesses, including, without limitation, for the acquisition or lease of
property or an interest in property or the rendition of services, all
compensation and reimbursement of expenses to the extent Allowed by Final Orders
under section 330 or 503(b) of the Bankruptcy Code, and (iii) fees or charges
assessed against the Debtors' estates under section 1930, chapter 123, title 28,
United States Code.
Except to the extent any entity entitled to payment of any Allowed
Administrative Expense Claim agrees to a different treatment, each holder of an
Allowed Administrative Expense Claim will receive Cash in an amount equal to
such Allowed Administrative Expense Claim on the later of the Effective Date and
the date such Administrative Expense Claim becomes an Allowed Administrative
Expense Claim, or as soon thereafter as is practicable; provided, however, that
Allowed Administrative Expense Claims representing liabilities incurred in the
ordinary course of business by the Debtors in Possession or liabilities arising
under loans or advances to or other obligations incurred by the Debtors in
Possession will be paid in full and performed by the Reorganized Debtors in the
ordinary course of business in accordance with the terms and subject to the
conditions of any agreements governing, instruments evidencing or other
documents relating to such transactions.
3. Professional Compensation and Reimbursement Claims
Professional Compensation and Reimbursement Claims are allowances
of compensation for professionals and reimbursement of expenses to the extent
Allowed by Final Orders under section 330 or 503(b) of the Bankruptcy Code. All
entities seeking an award by the Bankruptcy Court of compensation for services
rendered or reimbursement of expenses incurred through and including the
Confirmation Date under section 503(b)(2), 503(b)(3), 503(b)(4) or 503(b)(5) of
the Bankruptcy Code (a) must file their respective applications for final
allowances of compensation for services rendered and reimbursement of expenses
incurred through the Confirmation Date by no later than the date that is 30 days
after the Effective Date or such other date as may be fixed by the Bankruptcy
Court and (b) if granted such an award by the Bankruptcy Court, will be paid in
full in such amounts as are Allowed by the Bankruptcy Court (i) on the date such
Professional Compensation and Reimbursement Claim becomes an Allowed
Professional Compensation and Reimbursement Claim by final order, or as soon
thereafter as is practicable, or (ii) upon such other terms as may be mutually
agreed upon between such holder of a Professional Compensation and Reimbursement
Claim and the Reorganized Debtors.
4. Priority Tax Claims
Priority Tax Claims are Claims of a governmental unit against the
Debtors that are entitled to a certain priority in payment pursuant to section
507(a)(7) of the Bankruptcy Code. Except to the extent a holder of an Allowed
Priority Tax Claim has been paid by the Debtors prior to the Effective Date or
agrees to a different treatment, each holder of an Allowed Priority Tax Claim
will receive, at the sole option of the Reorganized Debtors, (a) Cash in an
amount equal to such Allowed Priority Tax Claim on the later of the Effective
Date and the date such Priority Tax Claim becomes an Allowed Priority Tax Claim,
or as soon thereafter as is practicable, or (b) equal annual Cash payments in an
aggregate amount equal to such Allowed
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Priority Tax Claim, together with interest at a fixed annual rate equal to 8%,
or such other rate as may be determined by the Bankruptcy Court, over a period
through the sixth anniversary of the date of assessment of such Allowed Priority
Tax Claim, or upon such other terms determined by the Bankruptcy Court to
provide the holder of such Allowed Priority Tax Claim deferred Cash payments
having a value, as of the Effective Date, equal to such Allowed Priority Tax
Claim.
5. Other Priority Claims (Class 1)
Other Priority Claims are Unsecured Claims, other than
Administrative Expense Claims and Priority Tax Claims, entitled to a priority in
payment pursuant to section 507 of the Bankruptcy Code. On the Effective Date,
except to the extent a holder of an Allowed Other Priority Claim agrees to a
different treatment of such Allowed Other Priority Claim, each Allowed Other
Priority Claim will be unimpaired in accordance with section 1124 of the
Bankruptcy Code. All Allowed Other Priority Claims that are not due and payable
on or before the Effective Date will be paid in the ordinary course of business
in accordance with the terms thereof.
6. Secured Bank Claims (Class 2)
The Secured Bank Claims are Secured Claims held by the Old Bank
Lenders pursuant to the Resources Facility and the Medallion Facility. The
Secured Bank Claims will be deemed Allowed Claims solely for the purposes of the
Plan in the aggregate principal amount of $107,094,888.90, plus interest
accrued, and fees and other charges incurred, but unpaid, since the Commencement
Date, minus payments made to the Old Bank Lenders pursuant to interim and final
orders authorizing and restricting the Debtors' use of cash collateral and
granting the Old Bank Lenders adequate protection. On the Effective Date, the
Reorganized Debtors will distribute to the agents of the holders of the Secured
Bank Claims, Cash in an amount necessary to satisfy all of the Secured Bank
Claims in full, inclusive of all unpaid principal, interests, fees, and charges
outstanding as of the Effective Date.
7. Other Secured Claims (Class 3)
On the Effective Date, any Allowed Other Secured Claim will either
be (i) paid in full by the Reorganized Debtors without consideration to any
penalty or accelerated amount, or (ii) reinstated.
8. Old Senior Notes Claims (Class 4)
Old Senior Notes Claims are Claims arising from the Debtors'
obligations under the Old Senior Notes. The Old Senior Notes Claims will be
deemed Allowed Claims solely for purposes of the Plan in the aggregate amount of
$166,500,000. On the Effective Date, the Debtors will distribute to the Old
Senior Indenture Trustee for the holders of Old Senior Notes, in full
satisfaction of the Old Senior Notes Claims and the subordination rights of the
holders of such Claims, (a) Cash sufficient to pay all accrued and unpaid
interest (at the non-default rate) on the Old Senior Notes, plus interest on
accrued and unpaid interest in accordance with the Old Senior Indenture to the
extent permitted by law, in each case as of the Effective Date; (b) the New
Notes; and (c) 750,405 shares of Series A Common Stock.
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The distribution to holders of Allowed Claims in Class 4 is
intended to provide such holders with property of a value, as of the Effective
Date, equal to the Allowed amount of their Claims.
The New Notes will be substantially in the form contained in the
Plan Supplement. The New Notes will bear interest at the rate of 12% per annum,
will mature on June 15, 2005, and will be guaranteed on a senior basis by all of
the Reorganized Debtors other than Reorganized KCS. Reorganized KCS may redeem,
at its option, up to 100% in aggregate principal amount of the outstanding New
Notes by paying to the holders thereof 102% of the stated principal amount of
the New Notes from the Effective Date through June 15, 2001; 101.5% of the
stated principal amount from June 16, 2001 through June 15, 2002; 101% of the
stated principal amount from June 16, 2002 through June 15, 2003; 100.5% of the
stated principal amount from June 16, 2003 through June 15, 2004; and 100% of
the stated principal amount from June 16, 2004 through the maturity date; plus,
in all cases, accrued and unpaid interest to the redemption date.
In accordance with the New Indenture, the New Notes shall be
secured by a Lien on substantially all of the assets of the Reorganized Debtors,
subject in priority only to the Liens of the lenders under the New Credit
Facility, or any refinancing thereof.
After the issuance of the shares of Series A Common Stock pursuant
to the exercise of the New KCS Subscription Warrants, the redemption of a
corresponding number of shares of Series B Common Stock and the conversion of
the unredeemed shares of Series B Common Stock into an equal number of shares of
Series A Common Stock, the number of shares of New KCS Common stock outstanding
will be 30,016,215, all of which shall be Series A Common Stock.
9. Old Senior Subordinated Notes Claims (Class 5)
Old Senior Subordinated Notes Claims are Claims arising from the
Debtors' obligations under the Old Senior Subordinated Notes. The Old Senior
Subordinated Notes Claims will be deemed Allowed Claims solely for purposes of
the Plan in the aggregate amount of $136,094,000. On the Effective Date, the
Debtors will distribute to the Old Senior Subordinated Indenture Trustee for the
holders of Old Senior Subordinated Notes, in full satisfaction of the Old Senior
Subordinated Notes Claims and the subordination rights of the holders of such
Claims, the number of shares of Series B Common Stock that is equal to (i)
29,265,810, minus (ii) the number of shares of Series A Common Stock delivered
to Class 7 as of the Effective Date as set forth in Section VI.A.11 below. The
Proponents believe that the New KCS Common Stock issued to holders of Class 5
Claims is worth less than the amount of such Claims. To the extent that the New
KCS Subscription Warrants are issued and exercised by holders of Equity
Interests in Class 7, the holders of Allowed Claims in Class 5 will receive, on
account of their Claims, property of a value that is less than the Allowed
Amount of their Claims and that is equal to either (i) the outstanding principal
amount, without interest, of the Old Senior Subordinated Notes (if the Effective
Date occurs on or prior to November 5, 2000); or (ii) such outstanding principal
amount plus some, but not all, of the interest accrued on such Notes.
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The shares of the Series B Common Stock that are delivered to the
Old Senior Subordinated Indenture Trustee will be issued in the names of the
respective holders of the Old Senior Subordinated Notes, or as otherwise
directed by such holders. The Series B Common Stock shall be subject to
redemption by Reorganized KCS from the proceeds of the exercise of the New KCS
Subscription Warrants, with a call therefor on the fifth (5th) day after the
Exercise Deadline Date, and any such shares called shall be redeemed at the
Subscription and Redemption Price by payment from such proceeds on the twentieth
(20th) day after the Exercise Deadline Date, without interest from the date of
the call, as more specifically provided for in Section VI.A.11. Any shares of
Series B Common Stock that are not called for redemption shall automatically be
converted into an equal number of shares of Series A Common Stock on the
twentieth (20th) day after the Exercise Deadline Date.
After the issuance of the shares of Series A Common Stock
pursuant to the exercise of the New KCS Subscription Warrants, the redemption of
a corresponding number of shares of Series B Common Stock and the conversion of
the unredeemed shares of Series B Common Stock into an equal number of shares of
Series A Common Stock, the number of shares of New KCS Common stock outstanding
will be 30,016,215, all of which shall be Series A Common Stock.
The proposed distribution to Class 7 is based upon the Proponent's
belief that the reorganization value of the Debtors does not exceed the Debtors'
aggregate debt. Attached hereto as Exhibit F is the Proponents' analysis of the
Debtors' reorganization value. Exhibit F is based on the information available
to the Proponents at this time, including estimates of the Debtors' oil and gas
reserves prepared by consultants engaged by the Debtors. The Proponents have
retained professionals to analyze the Debtors' reserves, and are currently
seeking additional information from the Debtors which may have a bearing on the
reorganization value of Reorganized KCS. Accordingly, the Proponents reserve the
right to amend their analysis of the reorganization value of Reorganized KCS and
to challenge any other information upon which the information contained in
Exhibit F is based, in light of the information available to the Proponents
prior to the Confirmation Hearing.
10. General Unsecured Claims (Class 6)
General Unsecured Claims are Unsecured Claims other than an Old
Senior Note Claim or an Old Senior Subordinated Note Claim. On the Effective
Date, except to the extent a holder of an Allowed General Unsecured Claim agrees
to a different treatment, each shall be unimpaired in accordance with section
1124 of the Bankruptcy Code. All Allowed General Unsecured Claims that are not
due and payable on or before the Effective Date shall be paid in the ordinary
course of business in accordance with the terms thereof.
11. Old KCS Common Stock Equity Interests (Class 7)
Old KCS Common Stock Equity Interests are interests in KCS
represented by any one of the approximately 29,265,810 authorized, issued and
outstanding shares of common stock of KCS. As soon as practicable following the
Distribution Record Date, the Debtors or their agent will distribute to each
holder of Old KCS Common Stock as of the Distribution Record Date, the Class 7
Election Form, by which such holder will be allowed to elect to receive, in
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respect of their equity interests, either (i) 0.0513 shares of Series A Common
Stock for each share of Old KCS Common Stock held by such holder on the
Distribution Record Date; or (ii) New KCS Subscription Warrants evidencing the
right to subscribe for one (1) share of Series A Common Stock for each share of
Old KCS Common Stock held by such holder on the Distribution Record Date
(without oversubscription rights), at a price equal to the Subscription and
Redemption Price. Any Class 7 Election Form that is not executed, that is not
received timely or that fails to indicate an election shall be deemed to
constitute an election for 0.0513 shares of New KCS Common Stock per share of
Old KCS Common Stock, in lieu of the New KCS Subscription Warrants. In the event
that the Effective Date does not occur on or before May 15, 2001, the New KCS
Subscription Warrants shall not be issued, and all holders of Equity Interests
in Class 7 entitled to a distribution shall receive 0.0513 shares of New KCS
Common Stock per share of Old KCS Common Stock.
As soon as practicable following the close of the election period
as specified in the Class 7 Election Form, which may be as early as ten days
following the Distribution Record Date, the Debtors will distribute to the
holders of Old KCS Common Stock, in accordance with the elections made by such
holders on the Class 7 Election Form, either (i) 0.0513 shares of Series A
Common Stock for each share of Old KCS Common Stock held by such holder on the
Distribution Record Date; or (ii) New KCS Subscription Warrants evidencing the
right to subscribe for one (1) share of Series A Common Stock for each share of
Old KCS Common Stock held by such holder on the Distribution Record Date
(without oversubscription rights), at a price per share equal to the
Subscription and Redemption Price. The Subscription and Redemption Price shall
be stated to the nearest one-tenth of a cent and shall be equal to (i) the
outstanding principal and interest (at the non-default rate) on the Subordinated
Notes as of the Exercise Deadline Date (plus interest on interest to the extent
allowed by law) divided by (ii) (A) 29,265,810 minus (B) the number of shares of
Series A Common Stock delivered to Class 7 as of the Effective Date as set forth
in Section 4.7 of the Plan. Assuming that the Exercise Deadline Date occurs on
April 15, 2001, and that the recovery of interest on interest is permitted, the
Subscription and Redemption Price shall be between $5.194 and $5.475 per share,
depending upon the number of holders in Class 7 who elect to receive the New KCS
Subscription Warrants in lieu of Series A Common Stock.
The New KCS Subscription Warrants shall be substantially in the
form contained in the Plan Supplement. The New KCS Subscription Warrants may be
exercised at any time prior to the close of business on the Exercise Deadline
Date, at which time they shall expire. Prior to the Exercise Deadline Date, the
New KCS Subscription Warrants shall not be subject to dilution other than in
connection with the New Employee and Director Stock Option Plan.
On the fifth (5th) day after the Exercise Deadline Date, to the
extent funds are available pursuant to the exercise of the New KCS Subscription
Warrants, Reorganized KCS shall call for redemption shares of Series B Common
Stock at the Subscription and Redemption Price, without interest from the date
of the call. In the event that less than all of the shares of Series B Common
Stock are called for redemption, such call shall be exercised on a pro rata
basis among all holders of Series B Common Stock, or in such proportions as
necessary to redeem odd lots of Series B Common Stock (i.e., less than 100
shares) or in any other equitable manner, as determined in good faith by the
Board of Directors of Reorganized KCS. On the twentieth (20th) day after the
Exercise Deadline Date, Reorganized KCS shall make available the funds to pay
for the shares of Series B Common Stock called for redemption. Any shares of
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Series B Common Stock not called for redemption by Reorganized KCS shall
automatically be converted into an equal number of shares of Series A Common
Stock on the twentieth (20th) day after the Exercise Deadline Date.
As provided in Section VI.C.6 below, in the event that Class 7
rejects the Plan and the Plan is confirmed pursuant to Section 1129(b) of the
Bankruptcy Code, the holders of Equity Interests in Class 7 shall not receive or
retain any property on account of their Equity Interests, to the extent
permitted by law.
12. Old KCS Warrants Equity Interests; and Old Employee and Director
Stock Option Plan Equity Interests (Class 8)
Old KCS Warrants Equity Interests and Old Employee and Director
Stock Option Plan Equity Interests are Equity Interests arising from warrants
and options to acquire shares of Old KCS Common Stock. On the Effective Date,
the Old KCS Warrants Equity Interests and Old Employee and Director Stock Option
Plan Equity Interests and each issued and unexercised option issued under the
Old Employee and Director Stock Option Plans shall be cancelled, and each holder
of Old KCS Warrants Equity Interests and each holder of Old Employee and
Director Stock Option Plan Equity Interests shall not receive or retain any
property or interest in property on account of such Old KCS Warrants or Old
Employee and Director Stock Option Plan options.
B. IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS IMPAIRED; ACCEPTANCE OR
REJECTION OF PLAN OF REORGANIZATION
Each of Class 1 (Other Priority Claims), Class 2 (Secured Bank Claims),
Class 3 (Other Secured Claims) and Class 6 (General Unsecured Claims) is
unimpaired by the Plan. Holders of Claims in such Classes are conclusively
presumed to have accepted the Plan and are not entitled to vote to accept or
reject the Plan.
Each of Class 4 (Old Senior Notes Claims), Class 5 (Old Senior
Subordinated Notes Claims) and Class 7 (Old KCS Common Stock Equity Interests)
is impaired by the Plan and the holders of Claims in Classes 4 and 5 and Equity
Interests in Class 7 are entitled to vote to accept or reject the Plan.
Class 8 (Old KCS Warrants Equity Interests and Old Employee and Director
Stock Option Plan Equity Interests) is impaired by the Plan and the holders of
Equity Interests in such Class will not receive any distribution or retain any
property on account of such Equity Interests. Accordingly, holders of Equity
Interests in Class 8 are deemed to reject the Plan and are not entitled to vote
on the Plan.
C. MEANS OF IMPLEMENTING PLAN
1. New Credit Facility
On the Effective Date, the New Credit Facility and documents
referred to therein will be executed and delivered and the New Credit Facility
funds will be made available for use by the Reorganized Debtors in accordance
with the terms thereof.
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2. Authorization of New Securities
The Reorganized KCS Certificate of Incorporation, which will be
adopted on the Effective Date pursuant to the Plan, will authorize at least
30,016,215 shares of Series A Common Stock and a maximum of 29,265,810 shares of
Series B Common Stock, which shall be a sufficient number of shares of New KCS
Common Stock for issuance pursuant to the Plan and the New KCS Subscription
Warrants, plus such additional shares of Series A Common Stock as may be issued
pursuant to the New Employee and Director Stock Option Plan.
3. Issuance of New Securities
The issuance of the New Notes, the New KCS Common Stock and the
New KCS Subscription Warrants by Reorganized KCS, as well as the guarantee of
the New Notes by all of the Reorganized Debtors other than Reorganized KCS, will
be authorized, upon confirmation of the Plan, without the need for any further
corporate action. The New KCS Common Stock to be issued on the Effective Date,
pursuant to the New KCS Subscription Warrants, and pursuant to the New Employee
and Director Stock Option Plan, shall be authorized upon confirmation of the
Plan for issuance in accordance with the terms of the Plan, the New KCS
Subscription Warrants and the New Employee and Director Stock Option Plan.
4. Cancellation of Existing Securities and Agreements
On the Effective Date, without need for further corporate action,
the Old Senior Notes, the Old Senior Subordinated Notes, the Old KCS Warrants,
the Old KCS Employee and Director Stock Option Plan, the Old KCS Common Stock,
and the options issued and unexercised under the Old KCS Employee and Director
Stock Option Plan shall be cancelled and will have no further force or effect.
Except for purposes of effectuating the distributions under the Plan, on the
Effective Date the Old Indentures shall be cancelled and will have no further
force or effect; provided, however, that the rights of the Old Indenture
Trustees set forth in Section 6.6 of the respective Old Indentures shall not be
terminated until such time as such Trustee shall have no further obligations
under either such Indenture or the Plan and shall have been paid in full for all
of its fees and expenses, including those of their respective counsel. On and
after the Effective Date, the Old Senior Trustee and the Old Senior Subordinated
Trustee shall have no further obligations to the Debtors or the holders of any
of the Old Senior Notes or the Old Senior Subordinated Notes except those
expressly set forth in the Plan.
5. Corporate Action
(a) Board of Directors of Reorganized Debtors
On the Effective Date, the operation of the Reorganized Debtors
will become the general responsibility of their Boards of Directors, subject to,
and in accordance with, the Reorganized Debtors' Certificates of Incorporation
and the Reorganized Debtors' By-laws. The Proponents will file with the
Bankruptcy Court and serve on all parties receiving a copy of this Disclosure
Statement, no later than twenty-five days prior to the Voting Deadline, a list
of the initial Board of Directors of Reorganized KCS, their respective
biographies, and their respective annual compensation.
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(b) Officers of the Reorganized Debtors
The current senior managers of KCS, and the current salaries of
such senior managers, are set forth in Section VII.B below. The Proponents
anticipate offering to certain of such senior managers compensation packages no
less favorable to the Debtors than the compensation packages that are currently
in place. The Proponents will file with the Bankruptcy Court and serve on all
parties receiving a copy of this Disclosure Statement, no later than twenty-five
days prior to the Voting Deadline, a list of the initial senior management team
of Reorganized KCS, their respective biographies, and their respective annual
compensation.
(c) Liquidity Provisions
The Reorganized Debtors will make all reasonable efforts
necessary to ensure an active and fully-valued public market for the
trading of the New Notes and the New KCS Common Stock including, but not
limited to, issuing appropriate releases of information and otherwise
complying with the requirements of paragraph (c) of Rule 144 under the
Securities Act of 1933, as amended, conducting informational meetings
with potential investors and research analysts, and registering the New
Notes and the New KCS Common Stock under the Securities Exchange Act of
1934, as amended, so that Reorganized KCS will remain a public reporting
Company on the New York Stock Exchange (or other nationally recognized
exchange), in all events subject to applicable laws, rules and
regulations. Pursuant to the terms of the Registration Rights Agreement,
certain claimants, including those who would be deemed after the
Effective Date to be an "affiliate" of KCS by reason of their equity
holdings in KCS after consummation of the Plan, would be granted demand
and piggyback registration rights for the New Notes and the shares of New
KCS Common Stock, providing for the registration of the securities of
such claimants at the expense of Reorganized KCS, as provided in the
Registration Rights Agreement.
(d) Trust Indenture Act
The Proponents and the Reorganized Debtors will take all
steps necessary to qualify the New Notes under the Trust Indenture Act,
and will use their best efforts to file the application for qualification
on form T-3 prior to the solicitation of votes on the Plan.
6. Confirmation Under Section 1129(b) of the Bankruptcy Code
If any impaired class rejects the Plan, the Proponents may
request confirmation of the Plan pursuant to Bankruptcy Code Section 1129(b).
The Proponents reserve the right to modify the Plan to the extent permitted
under the Bankruptcy Code prior to requesting confirmation under section
1129(b); provided, however, that such right shall not in any manner adversely
affect, limit or modify the rights or distributions of holders of Claims in
Classes 4 and 5. In the event that Class 7 votes to reject the Plan and the Plan
is confirmed pursuant to Section 1129(b), Class 7 shall not receive any
distribution or retain any property on account of such Equity Interests, to the
extent permitted by law.
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D. SUMMARY OF CERTAIN OTHER PROVISIONS OF THE PLAN
1. Provisions Governing Distributions
(a) Date of Distributions
Unless otherwise provided in the Plan, any distributions
and deliveries to be made under the Plan will be made on the first
Business Day after the Effective Date or as soon as practicable
thereafter and deemed made on the first Business Day after the Effective
Date. If any payment or act under the Plan is required to be made or
performed on a date that is not a Business Day, then the making of such
payment or the performance of such act may be completed on the next
succeeding Business Day, but shall be deemed to have been completed as of
the required date.
(b) Distribution Record Date for Holders of Old Senior Notes,
Old Senior Subordinated Notes Claims, and Old KCS Common
Stock
The Distribution Record Date will be the date for
determining the holders of Old Senior Notes, Old Senior Subordinated
Notes, and Old KCS Common Stock entitled to receive the distributions
provided under the Plan. As of the close of business on the Distribution
Record Date, the Reorganized Debtors and the Old Indenture Trustees or
transfer agents will have no obligations to recognize any transfer of Old
Senior Notes, Old Senior Subordinated Notes, or Old KCS Common Stock
occurring after the Distribution Record Date for purposes of
distributions under the Plan. The Reorganized Debtors and the Old
Indenture Trustees or transfer agents will be entitled to recognize and
deal for all purposes herein with only those holders of record stated on
the transfer ledger maintained by the Old Indenture Trustees or transfer
agents for the Old Senior Notes and Old Senior Subordinated Notes and the
stock transfer ledgers of the transfer agent for the Old KCS Common Stock
as of the close of business on the Distribution Record Date.
(c) Surrender of Instruments
As a condition to receiving any distribution under the
Plan, each holder of Old Notes or Old KCS Common Stock must surrender
such Old Notes or Old KCS Common Stock to the Reorganized Debtors or
their designee. Any holder of Old Notes or Old KCS Common Stock who fails
to (a) surrender such Old Notes or Old KCS Common Stock, or (b) execute
and deliver an affidavit of loss and/or indemnity reasonably satisfactory
to the Reorganized Debtors and furnish a bond in form, substance, and
amount reasonably satisfactory to the Reorganized Debtors before the
first anniversary of the Effective Date shall be deemed to have forfeited
all rights and claims and may not participate in any distribution under
the Plan.
(d) Compensation of Professionals and the Old Indenture
Trustees' Fees
Each person retained or requesting compensation in the
Chapter 11 Cases pursuant to section 330 or 503(b) of the Bankruptcy Code
must file an application for allowance of final compensation and
reimbursement of expenses in the Chapter 11 Cases
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on or before a date to be determined by the Bankruptcy Court in the
Confirmation Order or any other order of the Bankruptcy Court. Objections
to any application made under this section must be filed on or before a
date to be fixed and determined by the Bankruptcy Court in the
Confirmation Order or such other order. To the extent allowed by law, the
fees of the Old Indenture Trustees and their professionals will
conclusively be deemed to be fair and reasonable and will be paid by the
Debtors pursuant to the Confirmation Order. Upon payment of the fees and
expenses of the Old Indenture Trustees, the Old Indenture Trustees and
their professionals will be deemed to have released their liens securing
payment of their fees and expenses for all fees and expenses payable
through the Effective Date. The Proponents anticipate supporting
applications for reasonable compensation for services rendered by Andrews
& Kurth L.L.P., Akin, Gump, Strauss, Hauer & Feld, LLP, Young, Conaway,
Stargatt & Taylor, LLP, and Klett, Rooney, Lieber & Schorling in making
substantial contributions in these Chapter 11 cases, because each of such
parties has provided substantial services on behalf of the Minority
Noteholders and the Working Noteholders, which together constitute the
holders of 84% of the Old Senior Notes Claims and 67% of the Old Senior
Subordinated Notes Claims, and have added significant value to the
estates by compromising their own interests in order to achieve an
efficient and expedited result, thereby benefiting all Classes of
creditors and Equity Interest holders.
(e) Delivery of Distributions
Subject to Bankruptcy Rule 9010, all distributions to any
holder of an Allowed Claim will be made at the address of such holder as
set forth on the Schedules filed with the Bankruptcy Court or on the
books and records of the Debtors or its agents, unless the Debtors or the
Reorganized Debtors, as applicable, have been notified in writing of a
change of address, including, without limitation, by the filing of a
proof of claim or interest by such holder that contains an address for
such holder different from the address reflected on such Schedules for
such holder. If any distribution to any holder is returned as
undeliverable, the Debtors shall use reasonable efforts to determine the
current address of such holder, but no distribution to such holder shall
be made unless and until the Debtors have determined the then current
address of such holder, at which time such distribution shall be made to
such holder, without interest from the date on which the initial
distribution was returned as undeliverable; provided that such
distributions shall be deemed unclaimed property under section 347(b) of
the Bankruptcy Code at the expiration of one year from the Effective
Date. After such date, all unclaimed property or interest in property
shall revert to the Reorganized Debtors, and the claim of any other
holder to such property or interest in property shall be discharged and
forever barred.
At the option of the Debtors, distributions to holders of
Old Senior Notes and Old Senior Subordinated Notes will be made by a
distribution agent or the Debtors. The Debtors shall make such
distribution directly to the Old Senior Indenture Trustee or the Old
Senior Subordinated Indenture Trustee for the benefit of the holders of
Old Senior Notes and Old Senior Subordinated Notes, respectively. The
shares of the New KCS Common Stock that are delivered to the Old Senior
Indenture Trustee and the Old Senior Subordinated Indenture Trustee will
be issued in the names of the respective
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holders of the Old Senior Notes and the Old Senior Subordinated Notes,
respectively, or as otherwise directed by such holders. At the option of
the Debtors, distributions to holders of shares of Old KCS Common Stock
shall be made by a distribution agent or the Debtors. The shares of New
KCS Common Stock or New KCS Subscription Warrants to which holders of Old
KCS Common Stock shall be entitled in accordance with the Plan will be
registered and issued in the names of such holders or as otherwise
directed by such holders pursuant to such form of instruction as the
Debtors shall approve.
(f) Manner of Payment Under the Plan
At the option of the Debtors, any Cash payment to be made
under the Plan may be made by a check or wire transfer or as otherwise
required or provided in applicable agreements.
(g) Fractional Shares
No fractional shares of New KCS Common Stock or Cash in
lieu thereof, will be distributed. For purposes of distribution,
fractional shares of New KCS Common Stock will be rounded down to the
next whole number.
(h) Distributions After Effective Date
Distributions made after the Effective Date to holders of
Disputed Claims that are not Allowed Claims as of the Effective Date but
which later become Allowed Claims will be deemed to have been made on
the Effective Date.
(i) Exculpation
The Debtors, the Reorganized Debtors, CSFB, the Creditors'
Committee, each member of the Creditors' Committee, the Working
Noteholders, the Minority Noteholders, the Old Indenture Trustees and
each of their respective members, partners, officers, directors,
employees, advisors, agents, affiliates, and representatives (including
any attorneys, accountants, financial advisors, investment bankers and
other professionals retained by such persons or entities) shall have no
liability to any holder of any Claim or Equity Interest for any act or
omission in connection with, or arising out of, the Disclosure
Statement, the Plan, the solicitation of votes for and the pursuit of
confirmation of the Plan, the consummation of the Plan, or the
administration of the Plan or the property to be distributed under the
Plan, except for willful misconduct or gross negligence as determined by
a Final Order of the Bankruptcy Court and, in all respects, shall be
entitled to rely upon the advice of counsel with respect to their duties
and responsibilities under the Plan.
(j) Retention of Causes of Action
The Reorganized Debtors will not release or abandon any of
their causes of action except as expressly set forth in the Plan.
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2. Procedures for Treating Disputed Claims Under Plan of
Reorganization
(a) Disputed Claims
(1) Process
Holders of General Unsecured Claims scheduled on
the Debtors' schedules as not contingent as to liability, not
disputed and liquidated need not file proofs of claim. If the
Debtors dispute any Claim, such Disputed Claim shall be
determined, resolved, or adjudicated, as the case may be, in a
manner as if the Chapter 11 Cases had not been commenced and
shall survive the Effective Date as if the Chapter 11 Cases had
not been commenced and, upon the determination, resolution, or
adjudication thereof as provided herein, shall be deemed to be an
Allowed Claim as of the date of, and in the amount established
by, such determination, resolution, or adjudication; provided,
however, that (a) the Debtors may elect, at their sole option, to
object under section 502 of the Bankruptcy Code with respect to
any proof of claim filed by or on behalf of a holder of a Claim,
and (b) any Claim arising out of the exercise by the Debtors, as
Debtors in Possession, of any rejection, avoidance, recovery,
subordination, or other power (or defense) available to them
under applicable provisions of the Bankruptcy Code shall be
determined in accordance with applicable bankruptcy law as well
as any applicable nonbankruptcy law. As used in this section, the
phrase "date of ... determination, resolution, or adjudication"
means the date on which the liability, if any, of a Debtor on a
Disputed Claim is established by a final, nonappealable order of
a court or other tribunal of competent jurisdiction or date of
the execution of an agreement between the Debtor and the claimant
with respect to such Claim such that the Debtors, under
applicable nonbankruptcy law, would be required to pay such Claim
on that date. To effectuate the foregoing, the entry of an order
confirming the Plan shall, effective as of the Effective Date,
constitute a modification of any stay or injunction under the
Bankruptcy Code that would otherwise preclude the determination,
resolution, or adjudication of a Disputed Claim, except for any
Disputed Claim arising out of the exercise by the Debtors, as
Debtors in Possession, of any rejection, avoidance, recovery,
subordination, or other power (or defense) available to them
under applicable provisions of the Bankruptcy Code. Upon the
determination, resolution or allowance of a Disputed Claim as
provided herein, the Disputed Claim shall become an Allowed
Claim, and shall be enforceable against the Reorganized Debtors
only as provided in the Plan.
(2) Tort Claims
All Tort Claims are Disputed Claims. Any
unliquidated Tort Claim that is not otherwise settled or resolved
pursuant to subsection 8.1(a) of the Plan will be determined and
liquidated in the administrative or judicial tribunal in which it
is pending on the Confirmation Date or, if no such action was
pending on the Confirmation Date, in any administrative or
judicial tribunal of appropriate jurisdiction. Any Tort Claim
determined and liquidated pursuant to a judgment
37
<PAGE> 47
obtained in accordance with subsection 8.1(a) of the Plan and
applicable non-bankruptcy law that is no longer subject to appeal
or other review shall be deemed to be an Allowed Claim in Class 6
in such liquidated amount and satisfied in accordance with the
Plan. Nothing contained in subsection 8.1(b) of the Plan will
constitute or be deemed a waiver of any claim, right or cause of
action that the Debtors or the Reorganized Debtors may have
against any person in connection with or arising out of any Tort
Claim, including, without limitation, any rights under section
157(b) of title 28, United States Code.
(b) Objections to Claims
Except insofar as a proof of claim filed in respect of a
Claim is allowed under the Plan, the Reorganized Debtors will be
entitled to object to such proof of claim. Any objections to a proof of
claim shall be served and filed on or before such date as may be fixed
by the Bankruptcy Court, or, if no such date is fixed, the latest of (a)
one hundred and twenty (120) days after the Effective Date, or (b)
forty-five (45) days after the proof of claim is filed with the
Bankruptcy Court.
(c) No Distributions Pending Allowance
Notwithstanding any other provision of the Plan, if any
portion of a Claim is a Disputed Claim, no payment or distribution
provided under the Plan will be made on account of such disputed portion
of such Claim unless and until such Disputed Claim becomes an Allowed
Claim.
(d) Distributions After Allowance
To the extent that a Disputed Claim ultimately becomes an
Allowed Claim, a distribution will be made to the holder of such Allowed
Claim in accordance with the provisions of the Plan. As soon as
practicable after the date on which a Disputed Claim becomes an Allowed
Claim, the Reorganized Debtor or Reorganized Debtors obligated on such
Claim will provide to the holder of such Claim the distribution to which
such holder is entitled under the Plan.
3. Provisions Governing Executory Contracts and Unexpired Leases
On the Effective Date, all executory contracts and unexpired
leases of the Debtors will be assumed other than those executory contracts and
unexpired leases that (i) the Debtors will have previously rejected or (ii) the
Proponents will have listed on a schedule filed with the Bankruptcy Court prior
to or at the commencement of the Confirmation Hearing. Entry of the Confirmation
Order will constitute approval, pursuant to subsection 365(a) of the Bankruptcy
Code, of such assumptions pursuant to the Plan.
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<PAGE> 48
4. Conditions Precedent to Effective Date
(a) Conditions Precedent to Effective Date of Plan
The occurrence of the Effective Date of the Plan is
subject to satisfaction of the following conditions precedent:
(i) Confirmation Order
The Clerk of the Bankruptcy Court will have entered
the Confirmation Order, in form and substance acceptable to the
Debtors, and there will not be a stay or injunction in effect
with respect thereto.
(ii) Exit Facility
Closing and funding of the New Credit Facility will
have begun.
(iii) Regulatory Approvals
All authorizations, consents and regulatory
approvals required (if any) in connection with the effectiveness
of the Plan will have been obtained.
(b) Waiver of Conditions Precedent
Each of the conditions precedent in section 10.1 of the
Plan may be waived, in whole or in part, by the Proponents in their
absolute discretion.
5. Effect of Confirmation
(a) Vesting of Assets
On the Effective Date, the Debtors, their respective
properties, respective interests in properties and their respective
operations will be released from the custody and jurisdiction of the
Bankruptcy Court, and the estates of each of the Debtors will vest in
the applicable Reorganized Debtors. From and after the Effective Date,
the Reorganized Debtors may operate their businesses and may use,
acquire and dispose of properties free of any restrictions of the
Bankruptcy Code or the Bankruptcy Rules, subject to the terms and
conditions of the Plan and the Confirmation Order.
(b) Binding Effect
Except as otherwise provided in section 1141(d)(3) of the
Bankruptcy Code and subject to the occurrence of the Effective Date, on
and after the Confirmation Date, the provisions of the Plan shall bind
any holder of a Claim against, or Equity Interest in, the Debtors and
such holder's respective successors and assigns, whether or not the
Claim or Equity Interest of such holder is impaired under the Plan and
whether or not such holder has accepted the Plan.
39
<PAGE> 49
(c) Discharge of Debtors
Except as otherwise provided in the Plan, pursuant to
Bankruptcy Code section 1141(d)(1), upon the Effective Date, all Claims
against and Equity Interests in any of the Debtors will be satisfied,
discharged and released. Except as otherwise provided in the Plan, on
the Effective Date, as to every discharged debt, Claim, or Equity
Interest, all persons, entities, and governmental units (including,
without limitation, any creditor or holder of a Claim or Equity
Interest) shall be precluded from asserting against the Debtors or the
Reorganized Debtors, or against the Debtors' or Reorganized Debtors'
assets or properties, all such debts, Claims, or Equity Interests and
any other or further Claim based upon any document, instrument, or act,
omission, transaction or other activity of any kind or nature that
occurred prior to the Confirmation Date.
(d) Term of Injunctions or Stays
Unless otherwise provided, all injunctions or stays
arising under or entered during the Chapter 11 Cases under section 105
or 362 of the Bankruptcy Code, or otherwise, and in existence on the
Confirmation Date, shall remain in full force and effect until the
Effective Date.
(e) Indemnification Obligations
Subject to the occurrence of the Effective Date, the
obligations of the Debtors as of the Commencement Date to indemnify,
defend, reimburse, or limit the liability of directors, officers, or
employees who were directors, officers, or employees of the Debtors,
respectively, against any claims or causes of action as provided in the
Debtors' certificates of incorporation, bylaws, or applicable state or
federal law, will survive confirmation of the Plan, remain unaffected
thereby, and not be discharged, irrespective of whether such
indemnification, defense, reimbursement, or limitation is owed in
connection with an event occurring before or after the Commencement
Date. The Debtors' indemnification obligations are limited to those
authorized or permitted under state or federal law as the same is now or
may become applicable at the time any claim for indemnification is made.
Among other things, applicable state and federal law may limit the
ability of officers, directors, and employees to enforce indemnification
provisions in connection with violations of federal or state securities
laws. The Proponents believe that there are no indemnification claims
currently pending against any of the Debtors and the Debtors have
claimed that they are not aware of any claims against their officers,
directors, or employees that could result in the assertion of claims for
indemnification against any of the Debtors.
(f) Limited Release
On the Effective Date, the Debtors will release the
officers and directors of the Debtors holding office at any time prior
to the Effective Date, the Debtors' attorneys, accountants and
investment advisors, CSFB, the Creditors' Committee, each member of the
Creditors' Committee, the Working Noteholders, the Minority Noteholders,
the lenders under the DIP Cash Collateral Agreement, signatories of the
40
<PAGE> 50
Noteholder Agreement, each holder of Old KCS Common Stock Equity
Interests, the Old Indenture Trustees and each of their respective
members, partners, officers, directors, employees, advisors, agents,
affiliates, and representatives (including any attorneys, accountants,
financial advisors, investment bankers and other professionals retained
by such persons or entities) for any act or omission in connection with,
or arising out of, the Disclosure Statement, the Plan, the solicitation
of votes for and the pursuit of confirmation of the Plan, the
consummation of the Plan, or the administration of the Plan or the
property to be distributed under the Plan, except for willful misconduct
or gross negligence as determined by a Final Order of the Bankruptcy
Court and, in all respects, shall be entitled to rely upon the advice of
counsel with respect to their duties and responsibilities under the
Plan.
6. Retention of Jurisdiction
The Bankruptcy Court has exclusive jurisdiction of all matters
arising out of, or related to, these Chapter 11 Cases and the Plan pursuant to,
and for the purposes of, sections 105(a) and 1142 of the Bankruptcy Code and
for, among other things, the purposes set forth in Article XII of the Plan, and
retains exclusive jurisdiction where it exists.
7. Miscellaneous Provisions
(a) Payment of Statutory Fees
All fees payable under section 1930, chapter 123, title
28, United States Code, as determined by the Bankruptcy Court at the
Confirmation Hearing, will be paid on the Effective Date. Any such fees
accrued after the Effective Date will constitute an Allowed
Administrative Expense Claim and be treated in accordance with section
2.1 of the Plan.
(b) Retiree Benefits
On and after the Effective Date, pursuant to section
1129(a)(13) of the Bankruptcy Code, the Reorganized Debtors will
continue to pay all retiree benefits (within the meaning of section 1114
of the Bankruptcy Code), at the level established in accordance with
section 1114 of the Bankruptcy Code, at any time prior to the
Confirmation Date, for the duration of the period for which the Debtors
have obligated themselves to provide such benefits.
(c) Benefit Plans
Subject to the occurrence of the Effective Date, all
Benefit Plans will survive confirmation of the Plan to the extent
required under the Bankruptcy Code.
(d) Administrative Expenses Incurred After the Confirmation
Date
Administrative expenses incurred by the Debtors or the
Reorganized Debtors after the Confirmation Date, including (without
limitation) claims for professionals' fees and expenses, will not be
subject to application and may be paid by
41
<PAGE> 51
the Debtors or the Reorganized Debtors, as the case may be, in the
ordinary course of business and without further Bankruptcy Court
approval; provided, however, that no claims for professional fees and
expenses incurred after the Confirmation Date will be paid until after
the occurrence of the Effective Date.
(e) Compliance with Tax Requirements
In connection with the consummation of the Plan, the
Debtors will comply with all withholding and reporting requirements
imposed by any taxing authority, and all distributions under the Plan
will be subject to such withholding and reporting requirements.
(f) Severability of Plan Provisions
If, prior to the Confirmation Date, any term or provision
of the Plan is held by the Bankruptcy Court to be invalid, void or
unenforceable, the Bankruptcy Court will have the power to alter and
interpret such term or provision to make it valid or enforceable to the
maximum extent practicable, consistent with the original purpose of the
term or provision held to be invalid, void or unenforceable, and such
term or provision will then be applicable as altered or interpreted.
Notwithstanding any such holding, alteration or interpretation, the
remainder of the terms and provisions hereof will remain in full force
and effect and will in no way be affected, impaired or invalidated by
such holding, alteration or interpretation. The Confirmation Order will
constitute a judicial determination and will provide that each term and
provision of the Plan, as it may have been altered or interpreted in
accordance with the foregoing, is valid and enforceable in accordance
with its terms.
(g) Governing Law
Except to the extent that the Bankruptcy Code or other
federal law is applicable, or to the extent an Exhibit thereto provides
otherwise, the rights, duties and obligations arising under the Plan
shall be governed by, and construed and enforced in accordance with, the
laws of the State of New York without giving effect to the principles of
conflict of laws thereof.
(h) Notices
All notices, requests, and demands to be effective shall
be in writing (including by facsimile transmission) and, unless
otherwise expressly provided therein, will be deemed to have been duly
given or made when actually delivered or, in the case of notice by
facsimile transmission, when received and telephonically confirmed,
addressed as follows:
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<PAGE> 52
IF TO THE DEBTORS:
KCS Energy, Inc.
5555 San Felipe
Suite 1200
Houston, Texas 77056
Attn: Frederick Dwyer, Secretary
Telephone: (713) 877-8006
Telecopier: (713) 877-1372
and
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attn: Martin J. Bienenstock
Telephone: (212) 310-8000
Telecopier: (212) 310-8007
and
The Bayard Firm
222 Delaware Avenue, Suite 900
Wilmington, Delaware 19899
Attn: Neil B. Glassman
Telephone: (302) 655-5000
Telecopier: (302) 658-6395
IF TO THE PROPONENTS:
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, New York 10116
Attn: D.J. Baker
Telephone: (212) 351-4000
Telecopier: (212) 351-4035
and
Gibson, Dunn & Crutcher LLP
2100 McKinney Avenue, Suite 1100
Dallas, Texas 75201
Attn: Michael A. Rosenthal
James M. Schober
Telephone: (214) 698-3100
Telecopier: (214) 698-3400
and
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<PAGE> 53
Andrews & Kurth LLP
850 Third Avenue, 7th Floor
New York, New York 10022
Attn: Peter Goodman
Telephone: (212) 850-2800
Telecopier: (212) 850-2929
VII.
DIRECTORS, OFFICERS AND OWNERSHIP OF REORGANIZED DEBTORS
A. BOARDS OF DIRECTORS OF REORGANIZED DEBTORS
1. Identities and Compensation
After the Effective Date, the terms and manner of selection of
the directors of the Reorganized Debtors will be as provided in the Reorganized
Debtors' Certificates of Incorporation and the Reorganized Debtors' Bylaws, as
the same may be amended.
The Proponents will file with the Bankruptcy Court and send to
all persons receiving a copy of this Disclosure Statement, no later than
twenty-five days prior to the Voting Deadline, a list of the initial Board of
Directors of Reorganized KCS, their respective biographies, and their respective
annual compensation.
On the Effective Date, it is anticipated that the Board of
Directors of Reorganized KCS will replace James Christmas as President and Chief
Executive Officer of KCS. With respect to the other members of the Debtors'
senior management, it is anticipated that the Proponents will reach a
satisfactory employment arrangement with each such senior manager, on terms no
less favorable to the Reorganized Debtors than those current in place. There can
be no assurance that the Proponents will be able to reach agreements with any or
all of the existing senior management; however the Proponents believe that in
the event such agreements cannot be reached, the Proponents will be able to find
suitable and qualified replacements. No later than ten (10) days prior to the
Confirmation Hearing, the Proponents will file a list of the senior managers
whom they propose to engage to manage Reorganized KCS.
B. MANAGEMENT
1. Identities and Compensation
The current senior managers of KCS, and the current salaries of
such senior managers, are set forth below. The Proponents anticipate offering to
certain of such senior managers compensation packages no less favorable to the
Debtors than the compensation packages that are currently in place. The
Proponents will file with the Bankruptcy Court and send to all persons receiving
a copy of this Disclosure Statement, no later than twenty-five days prior to the
Voting Deadline, a list of the initial senior management team of Reorganized
KCS, their respective biographies, and their respective annual compensation. The
selection of officers of Reorganized Debtors after the Effective Date shall be
as provided in the Reorganized Debtors'
44
<PAGE> 54
Certificate of Incorporation and the Reorganized Debtors' By-laws, and an annual
meeting of shareholders for Reorganized KCS shall take place as set forth in the
Reorganized KCS By-laws.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
NAME POSITION WITH CURRENT BASE
THE COMPANY ANNUAL SALARY
---------------------------------------------------------------------------------------------
<S> <C> <C>
James W. Christmas President, Chief Executive Officer and $ 338,000
Director
---------------------------------------------------------------------------------------------
William N. Hahne Senior Vice President and Chief $ 250,000
Operating Officer
---------------------------------------------------------------------------------------------
J. Chris Jacobsen Vice President Engineering and Portfolio $ 165,000
Development
---------------------------------------------------------------------------------------------
Frederick Dwyer Vice President, Controller and Secretary $ 120,000
---------------------------------------------------------------------------------------------
</TABLE>
2. Biographies of Current Senior Management
James W. Christmas has served as President and Chief Executive
Officer and as a director of KCS since KCS's inception in 1988. Prior to joining
the Debtors, Mr. Christmas spent ten years with NUI Corporation, serving in a
variety of officer capacities and as President of several of its subsidiaries.
While Mr. Christmas was Vice President of Planning of NUI Corporation, he was in
charge of the spin-off of its non-regulated businesses that resulted in the
formation of KCS. Mr. Christmas began his career with Arthur Anderson & Co.
William N. Hahne has served as Senior Vice President and Chief
Operating Officer since April 1998. He is a Registered Petroleum Engineer and
has 27 years experience with various major independent E&P companies including
Unocal Corporation, Union Texas Petroleum Corporation, NERCO, The Louisiana Land
and Exploration Company ("LL&E") and Burlington Resources Inc. Prior to joining
KCS, Mr. Hahne was Worldwide Operations Vice President for LL&E from October
1993 to October 1997 and Vice President of International & Onshore for
Burlington Resources Inc. from October 1997 to April 1998.
J. Chris Jacobsen has served as Vice President, Engineering and
Portfolio Development since May 1998 and Senior Vice President, Exploration,
Development and Reserves of KCS Medallion Resources, Inc. since 1994. From 1982
to 1994 he was Senior Vice President of Netherland, Sewell & Associates. From
1977 to 1982 he was employed by Exxon Company U.S.A. holding various engineering
and supervisory positions.
Frederick Dwyer was appointed Vice President and Controller of
the Company in March 1997 and was appointed Secretary in May 1998. He served as
Assistant Vice President and Controller from May 1996 to March 1997. He joined
the Debtors upon KCS's formation in 1988, holding various management and
supervisory positions. He is a certified public accountant and began his career
with Peat, Marwick, Mitchell & Co.
C. SECURITY OWNERSHIP
As of the Commencement Date, KCS's officers and directors beneficially
owned approximately 15.2% of KCS's outstanding common stock (calculated in
accordance with SEC
45
<PAGE> 55
guidelines). The table below sets forth the approximate percentage ownership of
KCS's outstanding stock by officers and directors:
<TABLE>
<CAPTION>
% OF
OUTSTANDING
OFFICERS & DIRECTORS SHARES
<S> <C>
Stewart B. Kean 9.5%
James W. Christmas 3.9%
Joel D. Siegel 0.7%
Harry Lee Stout 0.5%
Christopher A. Viggiano 0.2%
William N. Hahne 0.2%
James E. Murphy, Jr. 0.1%
J. Christian Jacobsen 0.1%
Robert G. Raynolds 0.1%
G. Stanton Geary Less than 0.1%
Frederick Dwyer Less than 0.1%
Gene C. Daley Less than 0.1%
Charles W. Latch Less than 0.1%
----
TOTAL OFFICERS & DIRECTORS 15.2%
-----
</TABLE>
In addition, as of December 31, 1999, the following entities were
believed to directly or indirectly own, control or hold, with power to vote, 5%
or more of the outstanding common stock of KCS:
<TABLE>
<CAPTION>
% OF
ENTITY OUTSTANDING SHARES
------ ------------------
<S> <C>
State Street Research & Management 10.32%
Company
Dimensional Fund Advisors, Inc. 5.28%
</TABLE>
D. NEW EMPLOYEE AND DIRECTOR STOCK OPTIONS
As of the Effective Date, the Board of Directors of KCS will have
adopted the New Employee and Director Stock Option Plan. A copy of the New
Employee and Director Stock Option Plan is included in the Plan Supplement. The
New Employee and Director Stock Option Plan is intended to provide incentives
that will retain and motivate employees and non-employee directors of the
Reorganized Debtors. The New Employee and Director Stock Option Plan will become
effective on the Effective Date, and no options under the Plan will be granted
prior to the Effective Date.
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<PAGE> 56
VIII.
SECURITIES TO BE ISSUED PURSUANT TO PLAN
A. NEW NOTES
The Reorganized Debtors will issue New Notes to the holders of Old
Senior Notes. The New Notes will bear interest at 12% per annum payable
semi-annually in cash and will mature on June 15, 2005. Additional terms and
conditions of the New Notes are described in Section VI.A.8. above. The New
Notes will be substantially in the form contained in the Plan Supplement.
B. NEW KCS COMMON STOCK
On or as soon as practicable after the Effective Date, Reorganized KCS
will issue and distribute 750,405 shares of Series A Common Stock to the Old
Senior Indenture Trustee and an additional 29,265,810 shares of New KCS Common
Stock, in such proportions as determined by the elections of Class 7 pursuant to
the Class 7 Election Form, to the transfer agent for Old KCS Common Stock (who
shall receive Series A Common Stock) and to the Old Senior Subordinated
Indenture Trustee (who shall receive Series B Common Stock). Such Series B
Common Stock shall be subject to redemption by Reorganized KCS from the proceeds
of the exercise of the New KCS Subscription Warrants, with a call therefor on
the fifth (5th) day after the Exercise Deadline Date, and any such shares called
shall be redeemed at the Subscription and Redemption Price by payment from such
proceeds on the twentieth (20th) day after the Exercise Deadline Date, without
interest from the date of the call. Any shares of Series B Common Stock that are
not called for redemption shall automatically be converted into an equal number
of shares of Series A Common Stock on the twentieth (20th) day after the
Exercise Deadline Date. The Series B Common Stock is identical to the Series A
Common Stock except that it shall be subject to redemption out of the proceeds
of the exercise of the New KCS Subscription Warrants. The shares of Series B
Common Stock will be subject to dilution only from the Series A Common Stock
issued upon the exercise of the New Employee and Director Stock Option Plan
options.
On the fifth (5th) day after the Exercise Deadline Date, Reorganized KCS
will issue and distribute one share of Series A Common Stock for each New KCS
Subscription Warrant exercised by the holders of the Old KCS Common Stock
Equity. The funds received pursuant to the exercise of each New KCS Subscription
Warrant shall be used to redeem one share of Series B Common Stock.
Additional terms of the Series A Common Stock and Series B Common Stock
are described in Section VI.A.11. above. The terms of the Series A Common Stock
and Series B Common Stock will be more particularly set forth in the Reorganized
KCS Certificate of Incorporation.
C. NEW KCS SUBSCRIPTION WARRANTS
Holders of Old KCS Common Stock Equity Interests who make the
appropriate election on the Class 7 Election Form will receive the New KCS
Subscription Warrants, evidencing the right to subscribe for one (1) share of
Series A Common Stock for each share of Old KCS
47
<PAGE> 57
Common Stock held by such holder on the Distribution Record Date, at a price
equal to the Subscription and Redemption Price. The New KCS Subscription
Warrants may be exercised at any time prior to the close of business on the
Exercise Deadline Date, at which time they shall expire. The delivery of the
shares subscribed for shall be effected in the manner described in Section
VIII.B above.
D. NEW EMPLOYEE AND DIRECTOR STOCK OPTIONS
Reorganized KCS will be authorized to issue and distribute stock
options, stock and other stock rights, pursuant to the terms of the New Employee
and Director Stock Option Plan. The New Employee and Director Stock Option Plan
will be substantially in the form contained in the Plan Supplement.
IX.
SECURITIES LAW MATTERS
A. OWNERSHIP AND RESALE OF NEW SECURITIES.
In reliance upon an exemption from the registration requirements of the
Securities Act and equivalent state securities laws afforded by section 1145 of
the Bankruptcy Code, the New Notes, the Series A Common Stock, the Series B
Common Stock and the New KCS Subscription Warrants to be issued on the Effective
Date as provided in the Plan will be exempt from the registration requirements
of the Securities Act and equivalent state securities laws. Section 1145 of the
Bankruptcy Code generally exempts from such registration the offer or sale of
securities of a debtor or of an affiliate of, or a successor to, a debtor under
a Chapter 11 plan if such securities are offered or sold in exchange for a claim
against, or interest in, or an administrative expense claim against, such
debtor, or principally in such exchange and partly for cash or property. Section
1145 also exempts from registration the offer of any security through any
warrant that was sold in the manner specified in the preceding sentence.
The Proponents believe that the exchange of New Notes, Series A Common
Stock, Series B Common Stock and New KCS Subscription Warrants for Claims under
the circumstances provided in the Plan and the issuance of Series A Common Stock
upon the exercise of New KCS Subscription Warrants would satisfy the
requirements of section 1145(a) of the Bankruptcy Code. Thus, the New Notes, the
Series A Common Stock, the Series B Common Stock and the New KCS Subscription
Warrants issued pursuant to the Plan on the Effective Date, and the shares of
Series A Common Stock issued upon any exercise of the New KCS Subscription
Warrants, would be deemed to have been issued in a public offering in compliance
with the requirements of the Securities Act and, therefore, could be resold by
any holder thereof without registration under the Securities Act, unless the
holder is an "underwriter" with respect to such securities, as that term is
defined in section 1145(b)(1) of the Bankruptcy Code (a "statutory
underwriter"). In addition, such securities generally could be resold by the
recipients thereof without registration under state securities or "blue sky"
laws pursuant to various exemptions provided by the respective laws of the
several states. However, recipients of securities issued under the Plan are
advised to consult with their own counsel as to the availability of any such
48
<PAGE> 58
exemption from registration under state securities laws in any given instance
and as to any applicable requirements or conditions to the availability thereof.
Section 1145(b) of the Bankruptcy Code defines "underwriter" for
purposes of the Securities Act as one who, except with respect to "ordinary
trading transaction" of an entity that is not an "issuer," (a) purchases a claim
with a view to distribution of any security to be received in exchange for the
claim, or (b) offers to sell securities issued under a plan for the holders of
such securities, or (c) offers to buy securities issued under a plan from
persons receiving such securities, if the offer to buy is made with a view to
distribution of such securities, or (d) is an issuer (e.g., Reorganized KCS) of
the securities within the meaning of Section 2(l1) of the Securities Act.
The term "issuer" is defined in Section 2(4) of the Securities Act;
however, the reference (contained in section 1145(b)(1)(D) of the Bankruptcy
Code) to Section 2(l1) of the Securities Act purports to include as statutory
underwriters all persons who, directly or indirectly, through one or more
intermediaries, control, are controlled by, or are under common control with, an
issuer of securities. "Control" (as defined in Rule 405 promulgated under the
Securities Act) means the possession, direct or indirect, of the power to direct
or cause the direction of the policies of a person, whether through the
ownership of voting securities, by contract, or otherwise. Accordingly, an
officer or director of a reorganized debtor or its successor, under a plan of
reorganization (e.g., Reorganized KCS) may be deemed to be a "control person" of
such debtor or successor, particularly if the management position or
directorship is coupled with ownership of a significant percentage of the
reorganized debtor's or its successor's voting securities. Moreover, the
legislative history of section 1145 of the Bankruptcy Code suggests that a
creditor who owns at least ten (10%) of the voting securities of a reorganized
debtor is a presumptive "control person" of KCS.
To the extent that persons deemed to be control persons and thus
"underwriters" receive New Notes, Series A Common Stock, Series B Common Stock
or New KCS Subscription Warrants pursuant to the Plan, or Series A Common Stock
issued upon the exercise of the New KCS Subscription Warrants, resales by such
persons would not be exempted by section 1145 of the Bankruptcy Code from
registration under the Securities Act or other applicable law. However, entities
deemed to be statutory underwriters for purposes of section 1145 of the
Bankruptcy Code may be able to sell securities without registration pursuant to
the resale provisions of Rule 144 promulgated under the Securities Act.
Rule 144 permits the resale of securities received pursuant to the Plan
by statutory underwriters subject to applicable holding period requirements,
volume limitations, notice and manner of sale requirements, availability of
current information about the issuer and certain other conditions. Generally,
Rule 144 provides that if such conditions are met, specified persons who resell
"restricted securities" or who resell securities that are not restricted but who
are "affiliates" of the issuer of the securities sought to be resold, will not
be deemed to be "underwriters" as defined in Section 2(l1) of the Securities
Act. Under Rule 144(k), a person who is not deemed to have been an affiliate of
the issuer at any time during the 90 days preceding a sale, and who has
beneficially owned the securities proposed to be sold for at least two years, is
entitled to sell such securities without having to comply with the manner of
sale, public information, volume limitation or notice filing provisions of Rule
144.
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Whether or not any particular person would be deemed to be an
"underwriter" of the New Notes, the Series A Common Stock, the Series B Common
Stock or the New KCS Subscription Warrants to be issued pursuant to the Plan, or
the Series A Common Stock issued upon any exercise of the New KCS Subscription
Warrants, or an "affiliate" of Reorganized KCS, would depend upon various facts
and circumstances applicable to that person. Accordingly, the Proponents express
no view as to whether any person would be such an "underwriter" or an
"affiliate."
IN VIEW OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A
PARTICULAR PERSON MAY BE AN UNDERWRITER OR AN AFFILIATE OF REORGANIZED KCS, THE
PROPONENTS MAKE NO REPRESENTATIONS OR AGREEMENTS CONCERNING THE RIGHT OF ANY
PERSON TO TRADE IN NEW NOTES, SERIES A COMMON STOCK, SERIES B COMMON STOCK OR
NEW KCS SUBSCRIPTION WARRANTS TO BE DISTRIBUTED PURSUANT TO THE PLAN, OR SERIES
A COMMON STOCK ISSUED UPON ANY EXERCISE OF NEW KCS SUBSCRIPTION WARRANTS.
ACCORDINGLY, THE PROPONENTS RECOMMEND THAT POTENTIAL RECIPIENTS OF SECURITIES
CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH
SECURITIES.
Pursuant to the Plan, New Notes and certificates evidencing shares of
New KCS Common Stock or New KCS Subscription Warrants received by holders of
five percent (5%) or more of the outstanding New KCS Common Stock calculated on
a fully diluted basis or by holders that do not certify that they are not
underwriters within the meaning of section 1145 of the Bankruptcy Code will bear
a legend substantially in the form below:
THE [NEW NOTES] [SHARES OF COMMON STOCK EVIDENCED BY THIS
CERTIFICATE] [WARRANTS EVIDENCED BY THIS CERTIFICATE] HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND
MAY NOT BE SOLD, OFFERED FOR SALE OR OTHERWISE TRANSFERRED UNLESS
REGISTERED OR QUALIFIED UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR UNLESS KCS ENERGY, INC. RECEIVES AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH REGISTRATION OR
QUALIFICATION IS NOT REQUIRED.
Any Entity that would receive legend securities as provided above may
instead receive New Notes or certificates evidencing New KCS Common Stock or New
KCS Subscription Warrants without such legend if, prior to the Effective Date,
such Entity delivers to Reorganized KCS (i) an opinion of counsel reasonably
satisfactory to Reorganized KCS to the effect that the New Notes, shares of New
KCS Common Stock, or New KCS Subscription Warrants to be received by such Entity
are not subject to the restrictions applicable to "underwriters" under section
1145 of the Bankruptcy Code and may be sold without registration under the
Securities
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Act, (ii) a certification that it is not an "underwriter" within the meaning of
section 1145 of the Bankruptcy Code and (iii) a waiver of registration rights.
Any holder of a New Note or a certificate evidencing shares of New KCS
Common Stock or New KCS Subscription Warrants bearing such legend may present
such note or certificate to the transfer agent for such notes or shares for
exchange for one or more new notes or certificates not bearing such legend or
for transfer to a new holder without such legend at such time as (a) such notes,
shares or warrants are sold pursuant to an effective registration statement
under the Securities Act or (b) such holder delivers to Reorganized KCS an
opinion of counsel reasonably satisfactory to Reorganized KCS to the effect that
such notes, shares or warrants are no longer subject to the restrictions
applicable to "underwriters" under section 1145 of the Bankruptcy Code and may
be sold without registration under the Securities Act or to the effect that such
transfer is exempt from registration under the Securities Act, in which event
the note or certificate issued to the transferee will not bear such legend,
unless otherwise specified in such opinion.
Forms of the Amended By-laws of each of the Reorganized Debtors, Amended
Certificate of Incorporation of each of the Reorganized Debtors, the documents
evidencing the Exit Facility Commitment, New Credit Facility, Amended Indenture,
New Notes, New KCS Common Stock, New KCS Subscription Warrants and the
definitive documentation with respect to the New Employee and Director Stock
Option Plan will be contained in the Plan Supplement and will be filed with the
Bankruptcy Court at least fifteen (15) days prior to the Confirmation Hearing,
or on such other date as the Bankruptcy Court may establish. The Plan Supplement
may be inspected in the office of the Clerk of the Bankruptcy Court during hours
established therefor. In addition, holders of Claims and Equity Interests may
obtain a copy of the Plan Supplement by contacting Ruth Clark at Gibson, Dunn &
Crutcher LLP, 2100 McKinney Avenue, Suite 1100, Dallas, Texas 75201, telephone:
(214) 698-3218, telecopy: (214) 698-3400.
B. REGISTRATION RIGHTS.
Certain claimants, including those who would be deemed after the
Effective Date to be an "affiliate" of Reorganized KCS by reason of their equity
holdings in Reorganized KCS after consummation of the Plan, will be granted
demand and piggyback registration rights for the New Notes and the shares of New
KCS Common Stock, providing for the registration of the securities of such
claimants at the expense of Reorganized KCS, as provided in the Registration
Rights Agreement.
X.
CERTAIN FACTORS TO BE CONSIDERED
HOLDERS OF CLAIMS AGAINST AND EQUITY INTERESTS IN THE DEBTORS SHOULD READ AND
CONSIDER CAREFULLY THE FACTORS SET FORTH BELOW, AS WELL AS OTHER INFORMATION SET
FORTH IN THIS DISCLOSURE STATEMENT AND THE DOCUMENTS DELIVERED TOGETHER HEREWITH
AND/OR INCORPORATED BY REFERENCE HEREIN, PRIOR TO VOTING TO ACCEPT OR REJECT THE
PLAN.
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A. VARIANCES FROM PROJECTIONS
Attached hereto as Exhibit G are the Proponents' projections of future
cash flow for the Reorganized Debtors. The information contained in Exhibit G is
based on the information available to the Proponents at this time. The
Proponents have retained professionals to review the information currently
available to the Proponents and are currently seeking additional information
from the Debtors through discovery. Accordingly, the Proponents reserve the
right to revise their projections of future cash flow or to challenge any
information upon which the information contained in Exhibit G is based, in light
of the information available to the Proponents prior to the Confirmation
Hearing.
Based upon the analysis contained in Exhibit G, the Proponents believe,
and intend to prove at the Confirmation Hearing, that the Reorganized Debtors
will:
(i) have cash flow sufficient to pay their operating expenses in the
ordinary course of business;
(ii) have cash flow sufficient to pay, prior to the maturity thereof,
all payments on account of the New Credit Facility and the New
Notes required to be made prior to their respective maturities;
and
(iii) have cash flow, borrowing capacity, and assets sufficient to
satisfy in full the New Credit Facility and the New Notes at
their respective maturities.
These conclusions reflect numerous assumptions concerning the
anticipated future performance of Reorganized Debtors and with respect to
prevailing market and economic conditions, which are beyond the control of
Reorganized Debtors and which may not materialize, including, among other items,
assumptions concerning the general economy, the ability to make necessary
capital expenditures, future oil and gas prices, the ability to replace oil and
gas reserves lost to production, drilling success, and the ability to fund
future capital and operating expenses. The Proponents believe that these
assumptions are reasonable. However, unanticipated events and circumstances
occurring subsequent to the preparation of this Disclosure Statement will affect
the actual financial results of the Reorganized Debtors, possibly materially and
adversely. Therefore, the actual results achieved will vary from the projected
results, which variations may be material and adverse.
B. VOLATILE NATURE OF OIL AND GAS MARKETS; FLUCTUATIONS IN PRICES
The Debtors' future financial condition and results of operations are
highly dependent on the demand and prices received for the Debtors' oil and gas
production and on the costs of acquiring, developing and producing reserves. Oil
and gas prices have historically been volatile and are expected to continue to
be volatile in the future. Prices for oil and gas are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for oil and gas, market uncertainty and a variety of additional factors that are
beyond the Debtors' control. These factors include political conditions in the
Middle East and elsewhere, domestic and foreign supply of oil and gas, the level
of consumer demand, weather conditions, domestic and foreign
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government regulations and taxes, the price and availability of alternative
fuels and overall economic conditions. From time to time, oil and gas prices
have been depressed by excess domestic and imported supplies. There can be no
assurance that current price levels will be sustained, and it is impossible to
predict future oil and gas price movements with any certainty. A decline in oil
and gas prices will adversely affect the Debtors' cash flow, liquidity and
profitability. Lower oil and gas prices also may reduce the volume of the
Debtors' oil and gas that can be produced economically. Additionally,
substantially all of the Debtors' sales of oil and gas are made in the spot
market and not pursuant to long-term fixed price contracts. The Debtors have
from time to time entered into hedging transactions with respect to a portion of
their expected future production. There can be no assurance that such hedging
transactions will reduce risk or mitigate the effect of any substantial or
extended decline in oil or gas prices. Any substantial or extended decline in
the prices of oil or gas would have a material adverse effect on the Debtors'
financial condition and results of operations.
C. DEPENDENCE ON ACQUIRING AND FINDING ADDITIONAL RESERVES
The Debtors feel that their prospects for future growth and
profitability will depend predominately on their ability to replace existing
reserves through acquisitions and development and exploratory drilling. The
decision to acquire a business or to purchase, explore or develop an interest in
a property will depend in part on the evaluation of data obtained through
geophysical and geological analyses and engineering studies, the results of
which are often inconclusive or subject to varying interpretations. Acquisitions
may not be available at attractive prices, and there can be no assurance that
the Debtors' acquisition and exploration activities or planned development
projects will result in significant additional reserves or that the Debtors will
have anticipated or sustained success at drilling economically productive wells.
There can be no assurance that the Debtors will be successful in economically
acquiring or developing additional reserves.
D. SUBSTANTIAL CAPITAL REQUIREMENTS
The Debtors have made, and likely will continue to make, substantial
capital expenditures in connection with the acquisition, development and
exploration of oil and gas properties. Historically, the Debtors have funded the
capital expenditures with cash flow from operations, asset divestitures, and
funds from long-term debt financing, including bank financing secured by their
oil and gas assets. The Debtors anticipate that cash flow from operations and
proceeds from asset divestitures will be sufficient to fund the capital
expenditures currently budgeted for drilling and acquisition activities in 2000.
Future cash flows and the availability of financing are subject to a number of
variables, such as the level of production from existing wells, prices of oil
and gas and the Debtors' success in locating and producing new reserves. If
revenues were to decrease as a result of lower oil and gas prices, decreased
production or otherwise, and the Debtors had no availability under the New
Credit Facility, the Debtors could be limited in their ability to replace their
reserves or to maintain production at current levels, resulting in a decrease in
production and revenue over time. If the Debtors' cash flow from operations and
proceeds from asset divestitures are not sufficient to satisfy their capital
expenditure requirements, there can be no assurance that additional debt or
equity financing will be available to meet these requirements.
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E. UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES AND FUTURE NET CASH
FLOWS
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves, including many factors beyond the Debtors' control.
In preparing this Disclosure Statement, the Proponents have relied upon
estimates provided by the Debtors of oil and gas reserves. Reserve engineering
is a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact manner. Estimates of economically
recoverable oil and gas reserves and of future net cash flow necessarily depend
upon a number of variable factors and assumptions, such as historical production
from the area, reservoir pressure, geological mapping, the assumed effects of
regulation by governmental agencies and assumptions concerning future oil and
gas prices, operating costs, severance and excise taxes, development costs and
workover and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of oil and gas attributable to any particular group of properties,
classifications of such reserves based on risk of recovery and estimates of the
future net cash flows expected therefrom prepared by different engineers or by
the same engineers at different times may vary significantly. Actual production,
revenues and expenditures with respect to the Debtors' reserves likely will vary
from estimates, and such variances may be material. The Debtors' properties may
also be susceptible to hydrocarbon drainage from production by other operators
of adjacent properties. In addition, the Debtors' reserves and future cash flows
may be subject to revisions, based upon production history, results of future
development, oil and gas prices, performance of counterparties under agreements
to which the Debtors are a party, operating and development costs and other
factors.
A portion of the Debtors' total proved reserves are undeveloped, which
are by their nature less certain. Recovery of such reserves will require
substantial capital expenditures by the Debtors and the successful completion of
drilling operations or other operations. The Debtors' reserve data assume that
substantial capital expenditures by the Debtors will be required to develop such
reserves. Although the Debtors claim that cost and reserve estimates
attributable to the Debtors' reserves have been prepared in accordance with
industry standards, no assurance can be given that the estimated costs are
accurate, that development will occur as scheduled or that the results will be
as estimated.
PV-10 values referred to in this Disclosure Statement and the attached
exhibits should not be construed as the current market value of the estimated
oil and gas reserves attributable to the Debtors' properties. In accordance with
applicable requirements of the Securities and Exchange Commission, PV-10 is
generally based on prices and costs as of the date of the estimate, whereas
actual future prices and costs may be materially higher or lower. Actual future
net cash flows also will be affected by factors such as the amount and timing of
actual production, supply and demand for oil and gas, curtailments or increases
in consumption by natural gas purchasers and changes in government regulations
or taxation. The present value will be affected by the timing of both the
production and the incurrence of expenses in connection with development and
production of oil and gas properties. In addition, the 10% discount factor,
which is required by the Securities and Exchange Commission to be used to
calculate present value for reporting purposes, is not necessarily the most
appropriate discount factor based on interest rates in effect from time to time
and risks associated with the Debtors and their properties or the oil and gas
industry in general.
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F. NEW MANAGEMENT
On the Effective Date, the Proponents expect the Boards of Directors of
one or more of the Reorganized Debtors to make certain changes to their senior
management, including those changes set forth in section VI.A, above. The
Proponents expect such changes to enhance the overall performance and
profitability of the Reorganized Debtors in both the short term and the long
term. The Debtors have asserted that such changes to senior management may
create inefficiencies and a temporary decline in performance as the newly
appointed senior managers develop familiarity with the Reorganized Debtors
operations, internal personnel and liaisons from other entities through which
the Debtors conduct business. The Proponents disagree with this assertion.
However, there can be no guarantee that the new senior management named upon or
shortly after the Effective Date will be able to manage the Reorganized Debtors
as well or better than the Debtors' current senior management during or after
the aforementioned transition period.
G. FINANCING REQUIREMENTS AND RESTRICTIONS
If the Plan is consummated, the Debtors will have substantial
indebtedness and other obligations as of the Effective Date. The Debtors' level
of indebtedness will have several important effects on their future operations.
A significant portion of the Debtors' cash flow from operations must be
dedicated to the payment of interest on their indebtedness and will not be
available for other purposes. The interest rate under the New Notes will be
greater than the interest rate under the Old Senior Notes. Currently, the
Medallion Facility and the Resources Facility are secured by a first lien on
substantially all of the Debtors' assets and the Old Senior Notes are unsecured.
The New Notes will be secured by a second lien on all of the Reorganized
Debtors' assets. Although the Proponents do not anticipate that such second lien
will have any material impact on the Reorganized Debtors' ability to borrow
additional funds, it is possible that such second lien may inhibit or limit the
Reorganized Debtors' flexibility to do so. The covenants contained in the New
Credit Facility and the New Indenture require the Debtors to meet certain
financial tests. Other restrictions will also limit the Debtors' ability to
borrow additional funds and may affect their flexibility in planning for and
reacting to changes in its business, including possible acquisition activities.
The Debtors' ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may also be restricted. There can be no assurance that the Debtors will
be able to remain in compliance with the financial ratios prescribed under the
New Credit Facility or the New Indenture. Failure to do so may result in a
default and could lead to the acceleration of the Debtors' indebtedness under
the New Credit Facility and the New Indenture. Moreover, if the Debtors'
borrowing base under the New Credit Facility were recalculated as a result of
lower oil and gas prices, decreases in the Debtors' reserves or otherwise, such
borrowing base could be reduced and could restrict the Debtors' future growth
and could result in requirements for repayment of outstanding debt thereunder.
H. RISKS OF HEDGING TRANSACTIONS
In order to manage their exposure to price risks in the marketing of its
oil and gas, the Debtors have in the past entered into, and may continue to
enter into, oil and gas price hedging arrangements with respect to a portion of
their expected production. The Debtors have indicated
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that these arrangements may include futures contracts and options sold on the
New York Mercantile Exchange ("NYMEX") and privately-negotiated forwards, swaps
and options. While intended to reduce the effects of volatility of oil and gas
prices, such transactions may limit potential gains by the Debtors if oil and
gas prices were to rise over the prices established by hedging. In addition,
such transactions may expose the Debtors to the risk of financial loss in
certain circumstances, including instances in which (i) production is less than
expected, (ii) there is a widening of price differentials between delivery
points for the Debtors' production and the differential assumed in hedging
arrangements, (iii) the counterparties to the Debtors' future contracts fail to
perform, (iv) the Debtors fail to make timely deliveries or (v) a sudden,
unexpected event materially impacts oil or gas prices.
I. EXPLORATION AND DEVELOPMENT RISKS
Exploratory drilling and development drilling are subject to many risks,
including the risk that no commercially productive reservoirs will be
encountered, and there can be no assurance that new wells drilled by the Debtors
will be productive or that the Debtors will recover all or any portion of their
investment. Drilling for oil and gas may involve unprofitable efforts, not only
from non-productive wells, but from wells that are productive but do not produce
sufficient net revenues to return a profit. The cost of drilling, completing and
operating wells is often uncertain. The Debtors' drilling operations may be
curtailed, delayed or canceled as a result of numerous factors, many of which
are beyond the Debtors' control, including title problems, weather conditions,
compliance with governmental requirements and shortages or delays in the
delivery of equipment and services.
J. MARKETING RISKS
The Debtors' ability to market oil and gas at commercially acceptable
prices is dependent upon the availability, and capacity, of gas gathering
systems, pipelines and processing facilities. The unavailability or lack of
capacity thereof could result in the shut-in of producing wells or the delay or
discontinuance of development plans for properties. Federal and state regulation
of oil and gas production and transportation, general economic conditions and
changes in supply and demand all could adversely affect the Debtors' ability to
produce and market their oil and gas. If market factors were to change
dramatically, the financial impact on the Debtors could be substantial. The
availability of markets and the volatility of product prices are beyond the
control of the Debtors and represent a significant risk.
K. ACQUISITION RISKS
The Debtors have stated that acquisitions of oil and gas businesses,
working interests in properties and volumetric production payments are each an
important element of the success of the Debtors after the Effective Date. Even
though the Debtors perform a review of the major properties they seek to acquire
that they believe is consistent with industry practices (including a limited
review of title and other records), such reviews are inherently incomplete and
it is generally not feasible for the Debtors to review in-depth every property
and all records. Even an in-depth review may not reveal existing or potential
problems or permit the Debtors to become familiar enough with the properties to
assess fully their deficiencies and capabilities, and the
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Debtors may assume environmental and other liabilities in connection with
acquired businesses and properties.
L. OPERATING RISKS
The Debtors' operations are subject to numerous risks inherent in the
oil and gas industry, including the risks of fire, explosions, blow-outs, pipe
failure, abnormally pressured formations and environmental accidents such as oil
spills, natural gas leaks, ruptures or discharges of toxic gases, the occurrence
of any of which could result in substantial losses to the Debtors due to injury
or loss of life, severe damage to or destruction of property, natural resources
and equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. The Debtors' operations may be materially curtailed, delayed or
canceled as a result of numerous factors, including the presence of
unanticipated pressure or irregularities in formations, hydrogen sulfide gas
("sour gas"), title problems, weather conditions, accidents, compliance with
governmental requirements and shortages or delays in the delivery of equipment.
In accordance with customary industry practice, the Debtors maintain insurance
against some, but not all, of the risks described above. There can be no
assurance that the levels of insurance maintained by the Debtors will be
adequate to cover any losses or liabilities. Neither the Proponents nor the
Debtors can predict the continued availability of insurance, or availability at
commercially acceptable premium levels. In addition, in the future, the Debtors
may shut in wells due to the production of excess quantities of sour gas, a risk
against which it does not maintain insurance.
M. COMPETITIVE INDUSTRY
The oil and gas industry is highly competitive. The Debtors compete for
oil and gas business and property acquisitions and for the exploration,
development, production, transportation and marketing of oil and gas, as well as
for equipment and personnel, with major oil and gas companies, other independent
oil and gas concerns and individual producers and operators. Many of these
competitors have financial and other resources which substantially exceed those
available to the Debtors.
N. GOVERNMENTAL REGULATIONS
The Debtors' business is affected by numerous governmental laws and
regulations, including energy, environmental, conservation, tax and other laws
and regulations relating to the energy industry. Legislative proposals are
frequently introduced in Congress and state legislatures which, if enacted,
might significantly affect the oil and gas industry. Changes in applicable laws
and regulations could have a material adverse effect on the Debtors' business.
The Debtors believe that their operations comply in all material respects with
all current applicable laws and regulations and that the existence and
enforcement of such laws and regulations have no more a restrictive effect on
the Debtors' method of operations than on other similar companies in the energy
industry. Nevertheless, in view of the many uncertainties with respect to
current and future laws and regulations the Debtors cannot predict the overall
effect of such laws and regulations on its future operations.
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A more thorough discussion of certain laws and regulations that may
impact the Debtors' operations is contained in the 1999 10-K attached hereto as
Exhibit C.
O. ABSENCE OF PUBLIC MARKET
The New Notes, the Series A Common Stock, the Series B Common Stock and
the New KCS Subscription Warrants each will constitute a new issue of securities
for which there is no established trading market. Reorganized KCS does not
intend to list either the New Notes or the New KCS Subscription Warrants on any
national securities exchange or to seek the admission of the New Notes or New
KCS Subscription Warrants for quotation through the National Association of
Securities Dealers Automated Quotation System. Reorganized KCS can provide no
assurance as to the development or liquidity of any market for the New Notes or
the New KCS Subscription Warrants, the ability of the holders of the New Notes
or the New KCS Subscription Warrants to sell their New Notes or their New KCS
Subscription Warrants or the price at which the holders would be able to sell
their New Notes or their New KCS Subscription Warrants. Future trading prices of
the New Notes, the New KCS Common Stock and the New KCS Subscription Warrants
will depend on many factors, including, among other things, prevailing interest
rates, operating results and prospects of Reorganized KCS and the market for
similar securities and securities of similar issuers.
P. EFFECTIVE SUBORDINATION OF THE NEW NOTES
Reorganized KCS's obligations under the New Credit Facility will be
secured by first priority mortgages on substantially all of its assets.
Therefore, in the event of a bankruptcy, liquidation or reorganization of
Reorganized KCS, the assets of Reorganized KCS would be available to pay
obligations on the New Notes only after all indebtedness outstanding under the
New Credit Facility has been paid in full, and in such event there may not be
sufficient assets remaining to pay amounts due on any or all of the New Notes
then outstanding. The indebtedness under the New Credit Facility will become due
prior to the time the principal obligations under the New Notes become due. In
addition, the New Credit Facility may require that the indenture trustee for the
New Notes enter into an Intercreditor Agreement respecting the first priority
lien position of the New Credit Facility. This agreement may restrict the
circumstances under which the lien of the New Notes may be foreclosed while the
New Credit Facility or certain refinancings thereof are outstanding.
Q. ISSUES RELATING TO GUARANTEES
The New Notes will be guaranteed on a senior basis by all of the
Reorganized Debtors other than Reorganized KCS. Existing or future creditors of
any guarantor could avoid or subordinate such guarantor's guarantee under the
fraudulent conveyance laws.
R. PENDING LITIGATION AND OTHER LEGAL PROCEEDINGS
Please refer to the 1999 10-K attached hereto as Exhibit C for a
discussion of pending litigation and legal proceedings involving the Debtors.
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S. CERTAIN TAX MATTERS
For a summary of the federal income tax consequences of the Plan to
holders of Certain Claims and holders of Equity Interests, and to the Debtors,
see Section XIV below.
XI.
VOTING PROCEDURES AND REQUIREMENTS
A. CLASSES ENTITLED TO VOTE UNDER THE PLAN
Only holders of Claims in Class 4 (Old Senior Note Claims), Class 5 (Old
Senior Subordinated Notes), and holders of Equity Interests in Class 7 (Old KCS
Equity Interest Claims) as of the Record Date are authorized to vote to accept
or reject the Plan. Each of these Classes is impaired under the Plan and the
holders of Claims and Equity Interests in Classes 4, 5 and 7 are entitled by the
Bankruptcy Code to vote on the Plan.
B. VOTING REQUIREMENTS
IT IS IMPORTANT THAT HOLDERS OF CLAIMS AND EQUITY INTERESTS ENTITLED TO
VOTE ON THE PLAN EXERCISE THEIR RIGHT TO VOTE TO ACCEPT OR REJECT THE PLAN. All
known holders of Claims and Equity Interests entitled to vote on the Plan have
been sent a Ballot together with this Disclosure Statement. Such holders should
read the Ballot carefully and follow the instructions contained therein. Please
use only the Ballot (or Ballots) that accompanies this Disclosure Statement.
By Order dated October 25, 2000, The Altman Group, Inc. was authorized
to act as the Voting Agent to assist in the transmission of voting materials and
the tabulation of votes with respect to the Plan. FOR YOUR VOTE TO COUNT, YOUR
BALLOT MUST BE RECEIVED BY THE ALTMAN GROUP, INC., 60 EAST 42ND STREET, SUITE
1241, NEW YORK, NEW YORK 10165, NO LATER THAN 10:00P.M., EASTERN TIME, ON
JANUARY 5, 2001. If you return your Ballot to your bank or broker, or the agent
of either, you must return your Ballot to them in sufficient time for them to
process it and return it to The Altman Group, Inc. by the voting deadline.
Any Ballot that is executed and received timely but which does not
indicate an acceptance or rejection of the Plan will be deemed to constitute an
acceptance of the Plan. If your Ballot is damaged or lost, or if you need an
additional copy of the Disclosure Statement, you may contact The Altman Group,
Inc. at the address specified above or by telephoning (212) 681-9600.
C. ACCEPTANCE BY CLASSES OF CLAIMS OR EQUITY INTERESTS
Under the Bankruptcy Code, acceptance of a plan of reorganization by an
impaired class of claims occurs when holders of at least two-thirds in dollar
amount and more than one half in number of the allowed claims of that class that
cast ballots for acceptance or rejection of the plan of reorganization vote to
accept the plan. Thus, acceptance of the Plan by Class 4 (Old Senior Notes
Claims) and Class 5 (Old Senior Subordinated Notes Claims) will occur only if at
least
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two-thirds in dollar amount and a majority in number of the holders of Claims in
each such Class that timely return their Ballots vote in favor of acceptance.
Under the Bankruptcy Code, acceptance of a plan of reorganization by an
impaired class of equity interests occurs when holders of at least two-thirds in
amount of interests of the allowed equity interests of that class that cast
ballots for acceptance or rejection of the plan of reorganization vote to accept
the plan. Thus acceptance of the Plan by Class 7 (Old KCS Common Stock Equity
Interests) will occur only if at least two-thirds in amount of the holders of
Old KCS Common Stock Equity Interests that timely return their Ballots vote in
favor of acceptance.
A vote may be disregarded if the Bankruptcy Court determines, after
notice and a hearing, that such acceptance or rejection was not solicited or
procured in good faith or in accordance with the provisions of the Bankruptcy
Code.
The Proponents may seek to confirm the Plan even if one or more classes
of claims or interests do not accept the Plan.
XII.
CONFIRMATION OF THE PLAN
Under the Bankruptcy Code, the following steps must be taken to confirm
the Plan.
A. CONFIRMATION HEARING
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court,
after notice, to hold a hearing on confirmation of a plan. By order of the
Bankruptcy Court, the Confirmation Hearing has been scheduled for January 30 and
31, 2001, at 9:00 a.m., Eastern Time, in the United States Bankruptcy Court for
the District of Delaware, 8241 North Market Street, Wilmington, Delaware 19801.
The Confirmation Hearing may be adjourned from time to time by the Bankruptcy
Court without further notice except for an announcement made at the Confirmation
Hearing or any adjournment thereof.
Section 1128(b) of the Bankruptcy Code provides that any party in
interest may object to confirmation of a plan. Any objection to confirmation of
the Plan must be in writing, conform to the Federal Rules of Bankruptcy
Procedure and the Local Rules of the Bankruptcy Court, set forth the name of the
objectant, the nature and amount of Claim or Equity Interest held or asserted by
the objectant against the Debtors' estates or property, the basis for the
objection and the specific grounds therefor, and be filed with the Bankruptcy
Court, with a copy to chambers, together with proof of service thereof, and
served upon (i) Weil, Gotshal & Manges LLP, Attorneys for the Debtors, 767 Fifth
Avenue, New York, New York 10153, Attention: Michael P. Kessler, Esq.; (ii) The
Bayard Firm, Attorneys for the Debtors, 222 Delaware Avenue, Suite 900,
Wilmington, Delaware 19899, Attention: Neil B. Glassman, Esq.; (iii) Gibson,
Dunn & Crutcher, LLP, Attorneys for the Official Committee of Unsecured
Creditors, 200 Park Avenue, New York, New York 10166, Attention: D. J. Baker,
Esq.; (iv) Saul, Ewing, Remick & Saul LLP, 222 Delaware Avenue, Suite 1200,
Wilmington, Delaware 19801, Attention: Norman L. Pernick, Esq.; (v) Andrews &
Kurth LLP 850 Third Avenue, 7th Floor, New York, New York
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10022, Attention: Peter Goodman, Esq.; and (vi) The United States Trustee for
the District of Delaware, 601 Walnut Street, Curtis Center, Suite 950 West,
Philadelphia, Pennsylvania 19106, Attention: Frank Perch, Esq., so as to be
received no later than 4:00 P.M., Eastern Time, on January 5, 2001.
Objections to confirmation of the Plan are governed by Federal Rule of
Bankruptcy Procedure 9014. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED
AND FILED, IT MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT.
B. REQUIREMENTS FOR CONFIRMATION OF THE PLAN
At the Confirmation Hearing, the Bankruptcy Court will confirm the Plan
only if all of the requirements of section 1129 of the Bankruptcy Code are met.
Among the requirements for confirmation are that the Plan (a) is accepted by all
impaired Classes of Claims and Equity Interests or, if rejected by an impaired
Class, that the Plan "does not discriminate unfairly" and is "fair and
equitable" as to such Class, (b) is feasible, and (c) is in the "best interests"
of holders of Claims and Equity Interests impaired under the Plan.
1. Fair and Equitable Test
The Debtors may seek to confirm the Plan notwithstanding the
nonacceptance of the Plan by any impaired Class of Claims or Equity Interests
entitled to vote on the Plan. To obtain such confirmation, it must be
demonstrated to the Bankruptcy Court that the Plan "does not discriminate
unfairly" and is "fair and equitable" with respect to each dissenting impaired
Class. The Proponents believe that Claims in Classes 4 and 5 and Equity
Interests in Classes 7 and 8 are impaired by the Plan. A plan does not
discriminate unfairly if the legal rights of a dissenting impaired class are
treated in a manner consistent with the treatment of other classes whose legal
rights are substantially similar to those of the dissenting impaired class and
if no class receives more than it is entitled to for its claims or equity
interests. The Proponents believe that the Plan satisfies this requirement.
The Bankruptcy Code establishes different "fair and equitable" tests for
secured claims, unsecured claims and equity interests, as follows:
(a) Secured Claims
Either (i) each holder of an impaired secured claim (x)
retains the liens securing such claim to the extent of the allowed
amount of such claim and (y) receives on account of such claim deferred
cash payments totaling at least the allowed amount of such claim with a
present value as of the effective date at least equal to the value of
such holder's interest in the estate's interest in the property securing
its liens; (ii) property subject to the lien of the impaired creditor is
sold free and clear of that lien, with the lien attaching to the
proceeds of the sale, and the lien proceeds treated in accordance with
clauses (i) or (iii) hereof, or (iii) the impaired secured creditor
realizes the "indubitable equivalent" of its claim under the Plan.
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(b) Unsecured Claims
Either (i) each holder of an impaired unsecured claim
receives or retains under the plan property of a value equal to the
amount of its allowed claim or (ii) the holders of claims and interests
that are junior to the claims of the dissenting class will not receive
or retain any property under the plan on account of such junior claims
or interests.
(c) Equity Interests
Either (i) each equity interest holder will receive or
retain under the plan property of a value equal to the greater of (x)
the fixed liquidation preference or redemption price, if any, of such
interest or (y) the value of the interest, or (ii) the holders of
interests that are junior to the stock will not receive or retain any
property under the plan on account of such junior interest.
The Proponents believe that the Plan may be confirmed on a
nonconsensual basis if the holders of any Class of Claims or Equity
Interests entitled to vote on the Plan votes to reject the Plan
(provided at least one impaired Class of Claims votes to accept the
Plan). If appropriate, the Proponents will demonstrate at the
Confirmation Hearing that the Plan satisfies the requirements of section
1129(b) of the Bankruptcy Code as to any non-accepting class.
2. Feasibility
The Bankruptcy Code requires that confirmation of a plan is not
likely to be followed by the liquidation or the need for further financial
reorganization of a debtor. For purposes of determining whether the Plan meets
this requirement, the Proponents have analyzed the Debtors' ability to meet
their obligations under the Plan. Based upon such analysis, the Proponents
believe that the Debtors will have sufficient assets to satisfy their
obligations under the Plan and that confirmation of the Plan is not likely to be
followed by liquidation or the need for further financial reorganization.
3. "Best Interests" Test
With respect to each impaired Class of Claims and Equity
Interests, confirmation of the Plan requires that each such holder either (a)
accepts the Plan or (b) receives or retains under the Plan property of a value,
as of the Effective Date of the Plan, that is not less than the value such
holder would receive or retain if the Debtors were liquidated under Chapter 7 of
the Bankruptcy Code.
This analysis requires the Bankruptcy Court to determine what the
holders of Allowed Claims and Allowed Equity Interests in each impaired class
would receive from the liquidation of the Debtors' assets and properties in the
context of a Chapter 7 liquidation case. The cash amount that would be available
for the satisfaction of Claims and Equity Interests of the Debtors would consist
of the proceeds resulting from the disposition of the unencumbered assets of the
Debtors, augmented by the unencumbered cash held by the Debtors at the time of
the commencement of the liquidation case. Such cash amount would be reduced by
the costs and expenses of the liquidation and by such additional administrative
and priority claims that may
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result from the termination of the Debtors' businesses and the use of Chapter 7
for the purposes of liquidation.
The Debtors' costs of liquidation under Chapter 7 would include
the fees payable to a trustee in bankruptcy, as well as those payable to
attorneys and other professionals that such a trustee may engage, plus any
unpaid expenses incurred by the Debtors during the Chapter 11 Cases, such as
compensation for attorneys, financial advisors, accountants and costs and
expenses of members of any official committees that are allowed in the Chapter 7
case. In addition, claims would arise by reason of the breach or rejection of
obligations incurred and executory contracts entered into or assumed by the
Debtors during the pendency of the Chapter 11 Cases. All of these types of
Claims (and such other claims which may arise in the liquidation case or result
from the pending Chapter 11 Cases) would be required to be paid in full from the
liquidation proceeds before the balance of those proceeds would be made
available to pay prepetition Claims.
To determine if the Plan is in the best interests of each
impaired class, the present value of the distributions from the proceeds of the
liquidation of the Debtors' assets and properties (after subtracting the amounts
attributable to the types of claims described above) is then compared with the
present value offered to such classes of Claims and Equity Interests under the
Plan.
After consideration of the effects that a Chapter 7 liquidation
would have on the ultimate proceeds available for distribution to creditors in
the Chapter 11 Cases, including: (a) the increased costs and expenses of a
liquidation under Chapter 7 arising from fees payable to a trustee in bankruptcy
and professional advisors to such trustee; (b) the potential erosion in value of
assets in a Chapter 7 case in the context of the liquidation required under
Chapter 7 and the "forced sale" atmosphere that would prevail; and (c) the
adverse effects on the salability of aspects of the Debtors' operations as a
result of the departure of key employees, the Proponents believe that
confirmation of the Plan will provide each holder of an Allowed Claim or Allowed
Equity Interest with not less than the amount it would receive pursuant to
liquidation of the Debtors under Chapter 7 of the Bankruptcy Code.
The Proponents also believe that the value of any distributions
from the liquidation proceeds to each class of allowed claims in a Chapter 7
case could be less than the value of distributions under the Plan because such
distributions in a Chapter 7 case would not occur for a substantial period of
time. It is likely that distribution of the proceeds of the liquidation could be
delayed for a year or more after the completion of such liquidation in order to
resolve claims and prepare for distributions. In the likely event litigation
were necessary to resolve claims asserted in the Chapter 7 case, the delay could
be prolonged.
The Proponents' Liquidation Analysis is attached hereto as
Exhibit E. The information set forth in Exhibit E provides a summary of the
liquidation values of the Debtors' assets assuming a Chapter 7 liquidation in
which a trustee appointed by the Bankruptcy Court would liquidate the assets of
the Debtors' estate. The Liquidation Analysis is based on reserve reports
prepared by Netherland, Sewell & Associates and provided by the Debtors. The
Proponents do not make any representation that such reserve reports are
accurate, and the Proponents have employed independent experts to review such
reports. The Proponents reserve
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the right to contest the validity or accuracy of such reserve reports at the
Confirmation Hearing, and to the extent that the Bankruptcy Court may determine
that such reserve reports are inaccurate or incomplete, the Liquidation Analysis
may be amended. Because it is based on information provided by the Debtors, the
Proponents view the Liquidation Analysis as a "best case" analysis of the value
of the Debtors' oil and gas reserves, and on this basis the Proponents: (i)
believe that upon liquidation of the assets of the Debtors, no distributions
would be made to holders of Equity Interests; and (ii) believe that creditors
will receive or retain under the Plan on account of their claims, property of a
value that is not less than creditors would receive if the debtor were
liquidated under Chapter 7 of the Bankruptcy Code.
Reference should be made to the Liquidation Analysis for a
complete discussion and presentation of the Liquidation Analysis.
Underlying the Liquidation Analysis are a number of estimates and
assumptions that, although developed and considered reasonable by management,
are inherently subject to significant economic and competitive uncertainties and
contingencies beyond the control of the Debtors and management. The Liquidation
Analysis is also based upon assumptions with regard to liquidation decisions
that are subject to change. Accordingly, the values reflected may not be
realized if the Debtors were, in fact, to undergo such a liquidation. The
Chapter 7 liquidation period is assumed to be a period of six months. This
period would allow for the collection of receivables, selling of assets, and the
winding down of operations.
XIII.
ALTERNATIVES TO CONFIRMATION
AND CONSUMMATION OF THE PLAN
The Proponents have evaluated alternatives to the Plan, including the
liquidation of the Debtors. After studying these alternatives, the Proponents
have concluded that the Plan is the best alternative and will maximize
recoveries by parties in interest, assuming confirmation of the Plan. The
following discussion provides a summary of the Proponents' analysis leading to
their conclusion that a liquidation or alternative plan of reorganization would
not provide the highest value to parties in interest.
A. LIQUIDATION UNDER CHAPTER 7
If no plan of reorganization can be confirmed, the Debtors' Chapter 11
Cases may be converted to cases under Chapter 7 of the Bankruptcy Code in which
one or more trustees would be elected or appointed to liquidate the assets of
the Debtors for distribution to its creditors in accordance with the priorities
established by the Bankruptcy Code. A discussion of the effect that a Chapter 7
liquidation would have on the recovery of holders of Allowed Claims and Allowed
Interests is set forth in the preceding Section XII.B.3. The Debtors believe
that liquidation under Chapter 7 would result in (i) smaller distributions being
made to creditors than those provided for in the Plan, (ii) no distributions
being made to holders of Senior Subordinated Note Claims or Equity Interests,
and (iii) the failure to realize the greater going concern value of the Debtors'
assets.
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B. ALTERNATIVE PLAN OF REORGANIZATION
If the Plan is not confirmed, the Debtors or the Proponents could
attempt to formulate a different plan, or any party in interest may attempt to
formulate its own plan. Such a plan might involve either a reorganization and
continuation of the Debtors' business or an orderly liquidation of their assets.
The Proponents believe that the Plan, as described herein, enables holders of
Claims and Equity Interests to realize the greatest recovery under the
circumstances. In a liquidation under Chapter 11, the Debtors' assets would be
sold in an orderly fashion over a more extended period of time than in a
liquidation under Chapter 7, probably resulting in somewhat greater recoveries
than under Chapter 7. Further, if a trustee were not appointed, because one is
not required in a Chapter 11 case, the expenses for professional fees would most
likely be lower than in a Chapter 7 case. Although preferable to a Chapter 7
liquidation, the Proponents believe that a liquidation under Chapter 11 is a
much less attractive alternative to holders of Claims and Equity Interests than
the Plan because the return to holders of Claims and Equity Interests provided
for in the Plan is likely to be greater than the returns under a Chapter 11
liquidation.
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XIV.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
A. INTRODUCTION
THE FOLLOWING DISCUSSION IS A SUMMARY OF CERTAIN OF THE SIGNIFICANT
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN TO THE DEBTORS AND TO HOLDERS OF
CLAIMS AND EQUITY INTERESTS AND IS BASED ON THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED TO THE DATE HEREOF (THE "TAX CODE"), TREASURY REGULATIONS PROMULGATED
AND PROPOSED THEREUNDER, JUDICIAL DECISIONS AND PUBLISHED ADMINISTRATIVE RULES
AND PRONOUNCEMENTS OF THE INTERNAL REVENUE SERVICE ("IRS") AS IN EFFECT ON THE
DATE HEREOF. CHANGES IN SUCH RULES OR NEW INTERPRETATIONS THEREOF COULD
SIGNIFICANTLY AFFECT THE TAX CONSEQUENCES DESCRIBED BELOW. NO RULINGS HAVE BEEN
REQUESTED FROM THE IRS. MOREOVER, NO LEGAL OPINIONS HAVE BEEN REQUESTED FROM
COUNSEL WITH RESPECT TO ANY OF THE TAX ASPECTS OF THE PLAN.
THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE PLAN TO THE
HOLDERS OF CLAIMS AND EQUITY INTERESTS MAY VARY BASED UPON THE INDIVIDUAL
CIRCUMSTANCES OF EACH HOLDER. IN ADDITION, THIS DISCUSSION DOES NOT COVER ALL
ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO THE DEBTORS OR THE
HOLDERS OF ALLOWED CLAIMS OR EQUITY INTERESTS, NOR DOES THE DISCUSSION DEAL WITH
TAX ISSUES THAT MAY BE RELEVANT TO CERTAIN TYPES OF TAXPAYERS (SUCH AS DEALERS
IN SECURITIES, S CORPORATIONS, LIFE INSURANCE COMPANIES, FINANCIAL INSTITUTIONS,
TAX-EXEMPT ORGANIZATIONS AND FOREIGN TAXPAYERS). NO ASPECT OF FOREIGN, STATE,
LOCAL OR ESTATE AND GIFT TAXATION IS ADDRESSED.
THE FOLLOWING SUMMARY IS, THEREFORE, NOT A SUBSTITUTE FOR CAREFUL TAX
PLANNING AND ADVICE BASED UPON THE INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER OF A
CLAIM OR EQUITY INTEREST. HOLDERS OF CLAIMS OR EQUITY INTERESTS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS FOR THE FEDERAL, STATE, LOCAL AND OTHER TAX
CONSEQUENCES PECULIAR TO THEM UNDER THE PLAN.
B. CONSEQUENCES TO HOLDERS OF CLAIMS
1. Realization and Recognition of Gain or Loss in General
The federal income tax consequences of the implementation of the
Plan to a holder of a Claim will depend, among other things, upon the origin of
the holder's Claim, when the holder's Claim becomes an Allowed Claim, when the
holder receives payment in respect of such Claim, whether the holder reports
income using the accrual or cash method of accounting, whether the holder has
taken a bad debt deduction or worthless security deduction with respect to
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such Claim and whether the holder's Claim constitutes a "security" for federal
income tax purposes.
Generally, a holder of an Allowed Claim will realize gain or loss
on the exchange under the Plan of its Allowed Claim for stock and other property
(such as cash and new debt instruments), in an amount equal to the difference
between (i) the sum of the amount of any Cash, the issue price of any debt
instrument, and the fair market value on the date of the exchange of any other
property received by the holder (other than any consideration attributable to a
Claim for accrued but unpaid interest) and (ii) the adjusted basis of the
Allowed Claim exchanged therefor (other than basis attributable to accrued but
unpaid interest previously included in the holder's taxable income). The
treatment of accrued but unpaid interest and amounts allocable thereto varies
depending on the nature of the holder's claim and is discussed below.
Whether or not such realized gain or loss will be recognized
(i.e., taken into account) for federal income tax purposes will depend in part
upon whether such exchange qualifies as a recapitalization or other
"reorganization" as defined in the Tax Code, which may in turn depend upon
whether the Claim exchanged is classified as a "security" for federal income tax
purposes. The term "security" is not defined in the Tax Code or in the Treasury
Regulations. One of the most significant factors considered in determining
whether a particular debt instrument is a security is the original term thereof.
In general, the longer the term of an instrument, the greater the likelihood
that it will be considered a security. As a general rule, a debt instrument
having an original term of ten years or more will be classified as a security,
and a debt instrument having an original term of fewer than five years will not.
Debt instruments having a term of at least five years but less than ten years
are likely to be treated as securities, but may not be, depending upon their
resemblance to ordinary promissory notes, whether they are publicly traded,
whether the instruments are secured, the financial condition of the debtor at
the time the debt instruments are issued and other factors. Each holder of an
Allowed Claim should consult his or her own tax advisor to determine whether his
or her Allowed Claim constitutes a security for federal income tax purposes.
Moreover, pursuant to applicable Treasury regulations,
consideration received as a result of the consummation of the Plan will be
allocated first to accrued interest on the claim exchanged pursuant to the Plan.
In general, to the extent any amount received (whether stock, cash or other
property) by a holder of a debt instrument is received in satisfaction of
accrued interest during its holding period, such amount will be taxable to the
holder as interest income (if not previously included in the holder's gross
income). Conversely, a holder generally recognizes a deductible loss to the
extent any accrued interest claimed was previously included in its gross income
and is not paid in full. Each holder of a claim is urged to consult its tax
advisor regarding the allocation of consideration and the deductibility of
unpaid interest for tax purposes.
2. Holders of Allowed Administrative Expense Claims (Unclassified),
Professional Compensation and Reimbursement Claims (Unclassified)
and Other Priority Claims (Class 1)
Holders of Allowed Administrative Expense Claims, Allowed
Professional Compensation and Reimbursement Claims and Allowed Other Priority
Claims generally will be
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paid in full in Cash on, or subsequent to, the Effective Date. Such holders must
include such amounts in their gross income in the taxable year in which such
amounts are actually or constructively received by them.
3. Holders of Secured Bank Claims (Class 2)
In general, a holder of an Allowed Secured Bank Claim will
realize gain or loss in an amount equal to the difference between (a) the
holder's basis in the Allowed Secured Bank Claim and (b) the amount of Cash
received. The amount of Cash received in respect of Claims for accrued interest,
fees and charges will be taxed as ordinary income, except to the extent
previously included in income by a holder under his method of accounting.
4. Holders of Other Secured Claims (Class 3)
Each holder of an Allowed Other Secured Claim will either be paid
in full or will have his claim reinstated. If the holder is paid in full, such
holder will realize gain or loss in an amount equal to the difference between
(a) the holder's basis in the Allowed Other Secured Claim and (b) the amount of
Cash received. As discussed above, amounts received in respect of Claims for
accrued interest will be taxed as ordinary income, except to the extent
previously included in income by a holder under his method of accounting. If the
holder of an Allowed Other Secured Claim has his claim reinstated, there will be
no tax consequences as a result thereof.
5. Holders of Old Senior Notes (Class 4)
(a) Treatment as Recapitalization
Each holder of an Old Senior Notes Claim will receive Cash, New
Notes and Series A Common Stock in exchange for such claim. The Proponents
believe that the New Notes will constitute "securities" and that the Old Senior
Notes are properly treated as "securities" for federal income tax purposes.
Accordingly, the exchange will constitute a recapitalization for federal income
tax purposes. The holder will recognize gain, but will not be permitted to
recognize any loss, on the exchange up to the amount of Cash received. As
discussed above, such a holder will be deemed to be in receipt of interest
income for federal income tax purposes to the extent that such holder has not
previously included such amounts in income under his method of accounting. The
basis in the Old Senior Notes Claim will be allocated between the New Notes and
the Series A Common Stock based on their relative fair market values, and the
holder's holding period in the New Notes and the Series A Common Stock will
include the holding period for the Old Senior Notes Claim.
If the Old Senior Notes Claim constitutes a security for federal
income tax purposes but the New Notes do not, the holder will recognize gain,
but will not be permitted to recognize any loss, on the exchange in an amount
equal to the difference between (a) the sum of (i) the amount of Cash received,
(ii) the issue price of the New Notes, and (iii) the fair market value of the
Series A Common Stock and (b) the holder's adjusted tax basis in the Old Senior
Notes Claim, but not in excess of the sum of the amount of Cash and the issue
price of the New Notes. The holder would take an initial tax basis in the New
Notes equal to the issue price
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thereof, and the holding period for such notes would begin on the day following
the date of the exchange.
Finally, if the Old Senior Notes Claim does not constitute a
security for federal income tax purposes, the holder will recognize gain or loss
in an amount equal to the difference between (a) the sum of (i) the amount of
Cash received, (ii) the issue price of the New Notes, and (iii) the fair market
value of the Series A Common Stock and (b) the holder's adjusted tax basis in
the Old Senior Notes Claim. The holder would take an initial tax basis in the
New Notes equal to the issue price thereof, and an initial tax basis in the
Series A Common Stock equal to the fair market value thereof. The holding period
for the New Notes and the Series A Common Stock would begin on the day following
the date of exchange.
(b) Original Issue Discount
A debt instrument will be treated as issued with original issue
discount (or "OID") if its stated redemption price at maturity exceeds its issue
price by more than a de minimis amount. The "stated redemption price at
maturity" of a debt instrument is the sum of all payments to be made on the debt
instrument other than payments of "qualified stated interest." The term
"qualified stated interest" means, generally, stated interest that is
unconditionally payable (other than in additional debt instruments of the
issuer) at least annually at a single fixed rate.
Because the Old Notes are, and the New Notes will be, publicly
traded, the issue price of the New Notes will the fair market value thereof as
of the date of the exchange. If such issue price is less than the stated
redemption price at maturity of the New Notes, holders will be required to
include in income OID calculated on a constant-yield method in advance of the
receipt of some or all of the related cash payments. The amount of OID
includible by a holder is the sum of the "daily portions" of OID with respect to
the New Notes for each day during the taxable year or portion of the taxable
year in which the holder held such notes. This amount is referred to as "Accrued
OID." The daily portion is determined by allocating to each day in any accrual
period a pro rata portion of the OID allocable to that accrual period. The
amount of OID allocable to any accrual period is equal to the product of the New
Notes' adjusted issue price at the beginning of such accrual period and its
yield to maturity (determined on the basis of compounding at the close of each
accrual period and properly adjusted for the length of the accrual period) less
any qualified stated interest allocable to such accrual period. The "adjusted
issue price" of a New Note at the beginning of any accrual period is equal to
its issue price, increased by the Accrued OID for each prior accrual period and
reduced by any payments other than payments of qualified stated interest made on
the New Note on or before the first day of the accrual period. OID allocable to
the final accrual period is the difference between the amount payable at
maturity of the New Notes (other than qualified stated interest) and the New
Notes' "adjusted issue price" at the beginning of the final accrual period.
Special rules will apply for calculating OID for an initial short accrual
period.
Generally, a holder's tax basis in a New Note will be increased
by the amount of OID that is included in such holder's income pursuant to the
foregoing rules through the day preceding the date of disposition and will be
decreased by the amount of any cash payments received in respect of the New
Notes other than payments of qualified stated interest.
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(c) Consequences of Market Discount
A holder who purchased an Old Senior Note at a discount (the
"market discount") from its stated redemption price at maturity where such
discount exceeded a specified de minimis amount will be required to include as
ordinary income any gain recognized upon the exchange of the Old Senior Notes to
the extent of market discount accrued during the period that the holder held the
Old Senior Notes. Any additional gain recognized by the holder would be treated
in accordance with the rules described above. Any accrued market discount not
taken into account at the time of the exchange of the Old Senior Notes will be
carried over into the New Notes and the Series A Common Stock. Although there is
no authority directly on point, it would be reasonable to allocate such market
discount between the New Notes and the Series A Common Stock in accordance with
the relative fair market values thereof. If the New Notes are treated as market
discount bonds in the hands of a holder, the accrued market discount on the Old
Senior Notes that is allocated to the New Notes would be treated as accrued
market discount on the New Notes. If the Noteholder disposes of a New Note that
is not a market discount bond or Series A Common Stock in a taxable transaction,
any gain recognized as a result of such disposition will be treated as ordinary
income to the extent of market discount accrued prior to the exchange of the Old
Senior Notes but not taken into account at the time of such exchange. Holders
are urged to consult their own tax advisors regarding the treatment of accrued
market discount on the Old Senior Notes.
6. Holders of Old Senior Subordinated Notes Claims (Class 5)
If a holder's Old Senior Subordinated Notes Claim constitutes a
security for federal income tax purposes, and the Series B Common Stock
constitutes stock or securities for federal income tax purposes, which, subject
to the discussion below relating to the exercise of all of the New KCS
Subscription Warrants, the Proponents believe is the proper treatment, the
exchange of an interest in the Old Senior Subordinated Note for Series B Common
Stock will constitute a recapitalization for federal income tax purposes. In
such case, no gain or loss will be recognized by the exchanging holder (except
to the extent that such consideration is attributable to accrued and unpaid
interest, as discussed above). A holder's basis in the Series B Common Stock
will equal its adjusted tax basis in the Old Senior Subordinated Notes Claim,
and its holding period in the Series B Common Stock will include the holding
period for the Old Senior Subordinated Notes Claim.
If the Old Senior Subordinated Notes Claim does not constitute a
security for federal income tax purposes, the holder will recognize gain or loss
in an amount equal to the difference between (a) the fair market value of the
Series B Common Stock and (b) the holder's adjusted tax basis in the Old Senior
Subordinated Notes Claim. The holder would have an initial tax basis in the
Series B Common Stock equal to the fair market value thereof and the holding
period for the Series B Common Stock would begin on the day following the date
of the exchange.
A holder in whose hands the Old Senior Subordinated Notes are
market discount bonds will be subject to the rules discussed above under
XIV.B.5.c ("Consequences of Market Discount").
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The federal income tax treatment of a holder as a result of the
exercise of the New KCS Subscription Warrants and the redemption of Series B
Common Stock will depend in part on whether all or a portion of such warrants
are exercised (and thus whether all or a portion of such stock is redeemed). If
all of the New KCS Subscription Warrants are exercised and all of the Series B
Common Stock is redeemed, Reorganized KCS may take the position that the Series
B Common Stock was never issued for federal income tax purposes. There can be no
assurance that such position would be sustained. If such position were
sustained, a holder would be required to recognize gain or loss in an amount
equal to the difference between (a) the amount realized on the redemption and
(b) the holder's adjusted tax basis in the Old Senior Subordinated Notes Claim.
Such gain or loss would be capital gain or loss if such claim were held as a
capital asset, and would be long-term capital gain or loss if such claim were
held for more than one year.
If Reorganized KCS does not take this position or if such
position is not sustained, assuming that a holder has no other interest in
Reorganized KCS, the holder would recognize capital gain or loss on the
difference between the amount realized on the redemption and such holder's
adjusted tax basis in the Series B Common Stock redeemed. Assuming the Old
Senior Subordinated Notes Claim is a security for federal income tax purposes,
such gain or loss would be long-term capital gain or loss if the combined
holding period for such claim and the Series B Common Stock redeemed exceeds one
year.
If any or all of the New KCS Subscription Warrants are exercised
and Reorganized KCS redeems a portion of a holder's shares of Series B Common
Stock, the proceeds from such redemption generally will be treated as a
dividend, rather than as a sale or exchange, unless the transaction is "not
essentially equivalent to a dividend" or the holder (a) owns less than 50% of
the total combined voting power of Reorganized KCS and (b) experiences a greater
than 20% reduction in voting power as a result of the transaction (the
"substantially disproportionate test"). A holder will satisfy the "not
essentially equivalent to a dividend" test if, based on all of the facts and
circumstances, such redemption results in a "meaningful reduction" in the
holder's interest in Reorganized KCS. If a holder satisfies either of the
"substantially disproportionate" or "not essentially equivalent to a dividend"
tests with respect to a redemption of Series B Common Stock, subject to the
market discount rules discussed above under XIV.B.5.c ("Consequences of Market
Discount"), such holder will recognize capital gain or loss equal to the
difference between the amount realized on the redemption and the holder's
adjusted tax basis in the Series B Common Stock. Assuming the Old Senior
Subordinated Notes Claim is a security for federal income tax purposes, such
gain or loss will be long-term capital gain or loss if the combined holding
period for such claim and the Series B Common Stock redeemed exceeds one year.
If the proceeds of the redemption are treated as a dividend, a
holder will be taxed at ordinary income rates on the gross amount received to
the extent such amount is paid out of Reorganized KCS' current and accumulated
earnings and profits. If the amount a holder received exceeds its pro rata share
of Reorganized KCS' earnings and profits, such amount will first be applied to
reduce the holder's adjusted tax basis in its remaining shares of Series B
Common Stock, and then will be treated as gain from the sale of such shares. The
holder will not be permitted to recognize any loss, and the holder's basis in
the shares redeemed will be added to its basis in its remaining shares.
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Reorganized KCS may take the position that, to the extent the New
KCS Warrants are exercised, the portion of the Series B Common Stock redeemed
will not be treated as stock or securities. Even if Reorganized KCS does not
take such position, it is possible that the IRS will assert that the exchange of
an Old Senior Subordinated Notes Claim for Series B Common Stock and the
redemption of a portion of such stock should be treated as part of the same
transaction for federal income tax purposes. If the transactions are so
characterized, a holder will be required to recognize any gain, but will not be
permitted to recognize any loss, on the exchange of the Old Senior Subordinated
Notes Claim up to the amount of the cash ("boot") received in the redemption.
The same "substantially disproportionate" or "meaningful reduction in interest"
tests will apply to determine the appropriate tax treatment of the boot. If the
redemption satisfies either the "substantially disproportionate" or "meaningful
reduction in interest" test, the holder will receive capital gains treatment
with respect to the cash received. If neither test is satisfied, the cash
received in the redemption will be taxable to the holder as a dividend as
described above.
The conversion of unredeemed shares of Series B Common Stock into
an equal number of shares of Series A Common Stock will not be a taxable event
to either the holders of such stock or Reorganized KCS.
7. Holders of Allowed General Unsecured Claims (Class 6)
Holders of Allowed General Unsecured Claims (Class 6) whose
claims are not due and payable at the Effective Date will be unimpaired and
their obligations will be payable in accordance with their terms. No tax
consequences will be realized by the holder of such a claim. In the case of a
claim that is due as of the Effective Date, such claim will be paid in full in
Cash and the tax treatment to the holder of such a claim will depend upon the
nature of the claim, e.g., the holder of a claim for wages would realize
ordinary income upon payment of such claim, the holder of a claim for money
loaned would not recognize any gain or loss except to the extent that he had
previously claimed a deduction for worthlessness of such obligation, and the
holder of a claim for payment in respect of the sale of property constituting a
capital asset might, depending upon the circumstances, be eligible for long term
capital gains treatment. Holders of such claims should consult with their own
tax advisors.
8. Holders of Old KCS Common Stock Equity Interests (Class 7)
Holders of Old KCS Common Stock Equity Interests will not
recognize gain or loss as a result of the exchange of such interests for either
shares of Series A Common Stock or the New KCS Subscription Warrants. A holder's
basis in the Series A Common Stock or a New KCS Subscription Warrant will equal
the holder's adjusted tax basis in the Old KCS Common Stock Equity Interest
exchanged therefor, and the holding period in such stock or such warrant will
include the holding period in such equity interest exchanged therefor. The
expiration of a New KCS Subscription Warrant should generally result in a
long-term capital loss equal to the holder's tax basis in the New KCS
Subscription Warrant if the holder's combined holding period in the Old KCS
Common Stock Equity Interest and the New KCS Subscription Warrant is more than
one year at the time of the expiration.
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<PAGE> 82
In the event that holders of Old KCS Common Stock Equity
Interests receive no property on account of such interests (i.e., if such
holders reject the Plan and the Plan is confirmed), a holder would generally
recognize a capital loss equal to the holder's adjusted tax basis in the Old KCS
Common Stock Equity Interests, which would be a long term capital loss if such
interest were held for more than one year at the Effective Date.
9. Holders of Old KCS Warrants Equity Interests and Old Employee and
Director Stock Option Plan Equity Interests (Class 8)
Holders of Old KCS Warrants Equity Interests will recognize a
loss upon confirmation of the Plan equal to the adjusted basis in such Warrant
for federal income tax purposes. Assuming that stock issuable on the exercise of
the Warrant would have constituted a capital asset in the hands of such a
holder, then such holder's loss will be a capital gain or loss, long term or
short term depending upon the holders holding period for such Warrant. Holders
of Old KCS Warrants Equity Claims should consult their own tax advisors.
Holders of Old Employee and Director Stock Option Plan Equity
Interests will not realize or recognize any gain or loss for federal income tax
purposes as a result of the implementation of the Plan.
10. Withholding
All distributions to holders of Claims under the Plan are subject
to any applicable withholding. Under federal income tax law, interest,
dividends, and other reportable payments may, under certain circumstances, be
subject to "backup withholding" at a 31% rate. Backup withholding generally
applies if the holder (a) fails to furnish its social security number or other
taxpayer identification number ("TIN"), (b) furnishes an incorrect TIN, (c)
fails properly to report interest or dividends, or (d) under certain
circumstances, fails to provide a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that it is not subject
to backup withholding. Backup withholding is not an additional tax but merely an
advance payment, which may be refunded to the extent it results in an
overpayment of tax. Certain persons are exempt from backup withholding,
including, in certain circumstances, corporations and financial institutions.
C. CONSEQUENCES TO DEBTORS OR REORGANIZED DEBTORS
1. Discharge-of-Indebtedness Income Generally
In general, the discharge of a debt obligation by a debtor for an
amount less than the adjusted issue price (generally, the amount received upon
incurring the obligation plus the amount of any previously amortized original
issue discount and less the amount of any previously amortized bond issue
premium) gives rise to cancellation-of-indebtedness ("COD") income which must be
included in a debtor's income for federal income tax purposes, unless, in
accordance with section 108(e)(2) of the Tax Code, payment of the liability
would have given rise to a deduction. A corporate debtor that issues its own
stock or its own debt in satisfaction of its debt is treated as realizing COD
income to the extent the fair market value of the stock or the issue price of
new debt issued is less than the adjusted issue price of the old debt. COD
income is not recognized by a taxpayer that is a debtor in a title 11
(bankruptcy) case if a discharge is
73
<PAGE> 83
granted by the court or pursuant to a plan approved by the court (the
"bankruptcy exclusion rules").
Pursuant to the Plan, Administrative Expense Claims, Professional
Compensation and Reimbursement Claims, Priority Tax Claims, Other Priority
Claims, Secured Bank Claims and General Unsecured Claims generally will be paid
in full and, therefore, treatment of such Claims should not give rise to COD
income. With respect to other Claims, there could be COD income if such Claims
are not satisfied in full. The Proponents believe that consummation of the Plan
may give rise to COD income that will be excluded from gross income as described
above, but would reduce attributes as described below. However, the Proponents
do not believe that such attribute reduction will have a material adverse effect
on the Reorganized Debtors.
2. Attribute Reduction
The relief accorded to COD income by the bankruptcy exclusion
rules is not without cost. If a taxpayer excludes COD income because of the
bankruptcy exclusion rules, it is required to reduce prescribed tax attributes
in the following order and at the following rates: (i) net operating losses
("NOLs") for the taxable year of the discharge and NOL carryovers to such
taxable year, dollar for dollar; (ii) general business credit carryovers, 33-1/3
cents for each dollar of excluded income; (iii) the minimum tax credit available
under section 53(b) of the Tax Code as of the beginning of the taxable year
immediately following the taxable year of the discharge, 33-1/3 cents for each
dollar of excluded income; (iv) any capital losses for the taxable year of the
discharge and any capital loss carryovers to such taxable year, dollar for
dollar; (v) the basis of the taxpayer's assets, both depreciable and
nondepreciable, dollar for dollar, but the basis cannot be reduced below an
amount based on the taxpayer's aggregate liabilities immediately after the
discharge; (vi) passive activity loss or credit carryovers of the taxpayer under
section 469(b) of the Tax Code from the taxable year of the discharge, dollar
for dollar in the case of loss carryovers and 33-1/3 cents for each dollar of
excludable income in the case of any passive activity credit carryovers; and
(vii) foreign tax credit carryovers, 33-1/3 cents for each dollar of excluded
income. However, under section 108(b)(5) of the Tax Code the taxpayer may elect
to avoid the prescribed order of attribute reduction and instead reduce the
basis of depreciable property first, without regard to the "aggregate
liabilities" limitation. This election extends to stock of a subsidiary if the
subsidiary consents to reduce the basis of its depreciable property. If the
Reorganized Debtors make this election, the limitation prohibiting the reduction
of asset basis below the amount of its remaining undischarged liability does not
apply. It is not clear whether, in the case of affiliated corporations filing a
consolidated return (such as the Debtors or Reorganized Debtors), the attribute
reduction rules apply separately to the particular corporation whose debt is
being discharged, and not to the entire group without regard to the identity of
the debtor. The Proponents do not expect the Debtors or the Reorganized Debtors
to make the election to reduce the basis of their depreciable assets first under
section 108(b)(5) of the Tax Code.
3. Utilization of Net Operating Loss Carryovers
In general, whenever there is a 50% ownership change of a debtor
corporation during a three-year period, the ownership change rules in section
382 of the Tax Code limit the utility of NOLs on an annual basis to the product
of the fair market value of the corporate entity
74
<PAGE> 84
immediately before the ownership change, multiplied by a hypothetical interest
rate published monthly by the IRS called the "long-term tax-exempt rate." The
long-term tax-exempt rate as of the date of this Disclosure Statement is 5.75%.
In any given year, this limitation may be increased by certain built-in gains
realized after, but accruing economically before, the ownership change and the
carryover of unused section 382 limitations from prior years.
On the other hand, if at the date of an ownership change the
adjusted basis for federal income tax purposes of a debtor's assets exceed the
fair market value of such assets by prescribed amounts, (a "net unrealized
built-in loss") then, upon the realization of such built-in losses during a
five-year period beginning on the date of the ownership change, such losses are
treated as if they were part of the net operating loss carryover, rather than
the current deduction, and are also subject to the section 382 limitation.
During the last three years, there have been a number of shifts
in the ownership of the Debtors' stock. The Proponents do not believe that those
owner shifts gave rise to any section 382 change of ownership which would limit
the utilization of the Debtors' net operating loss carryovers prior to
implementation of the Plan. However, the Proponents believe that implementation
of the Plan will create a section 382 change of ownership.
The harsh effects of the ownership change rules can be
ameliorated by an exception that applies in the case of reorganizations under
the Bankruptcy Code. Under the so-called "Section 382(l)(5) bankruptcy
exception" to section 382 of the Tax Code, if the reorganization results in an
exchange by qualifying creditors and stockholders of their claims and interests
for at least 50% of the debtor's stock (in vote and value), then the general
ownership change rules will not apply. Instead, the debtor will be subject to a
different tax regime under which the NOL is not limited on an annual basis, but
is reduced by the amount of interest deductions claimed during the three taxable
years, in respect of debt converted into stock in the reorganization. Moreover,
if the Section 382(l)(5) bankruptcy exception applies, any further ownership
change of the debtor within a two-year period will result in forfeiture of all
of the debtor's NOLs incurred prior to the date of the second ownership change.
If the debtor would otherwise qualify for the Section 382(l)(5)
bankruptcy exception, but the NOL reduction rules mandated thereby would greatly
reduce the NOL, the debtor may elect instead to be subject to the annual
limitation rules of section 382 of the Tax Code, but be permitted to value the
equity of the corporation for purposes of applying the formula by using the
value immediately after the ownership change (by increasing the value of the old
loss corporation to reflect any surrender or cancellation of creditors' claims)
instead of immediately before the ownership change (the "Section 382(l)(6)
limitation"). Alternatively, if the debtor does not qualify for the Section
382(l)(5) bankruptcy exception, the utility of its NOL would automatically be
governed by the Section 382(l)(6) limitation.
Because the Proponents believe that an insufficient number of the
holders of the Old Senior Note Claims and the Old Senior Subordinated Note
Claims are "qualifying creditors" for purposes of Section 382(l)(5), the
Proponents anticipate that the ownership change will be governed by the Section
382(l)(6) limitation.
75
<PAGE> 85
Based on the Debtors' returns as filed and upon estimates for the
current taxable year, the Proponents believe that the Debtors will have an NOL
in excess of $240 million. The Proponents do not believe that the Debtors will
have a net unrealized built-in loss as of the ownership change arising from
implementation of the Plan. However, the amount of the NOL could be reduced or
eliminated because of audit adjustments by the IRS that result from IRS
examinations of the Debtors' returns, or any COD income as a result of the
attribute reduction rules discussed above in Section XIV.C.2, "Certain Federal
Income Tax Consequences of the Plan - Consequences to Debtors or Reorganized
Debtors - Attribute Reduction." In addition, depending upon the valuation placed
on the Debtors' assets, the Debtors could have a net unrealized built-in loss.
Holders of Claims should note, however, that the amount of NOLs
available to the Debtors or Reorganized Debtors is based on factual and legal
issues with respect to which there can be no certainty. The actual annual
utility of the NOL carryovers will be determined by actual market value and the
actual long-term tax-exempt rate at the date of reorganization and may be
different from amounts described herein.
The Proponents believe that the New KCS Subscription Warrants
also may have an impact on the treatment of the Series B Common Stock as stock,
and therefore possibly alter the impact of Section 382 on the ability of the
Debtors or the Reorganized Debtors to utilize their NOLs from the treatment
described above, depending upon whether such New KCS Subscription Warrants
actually are exercised. If the New KCS Warrants are exercised, Reorganized KCS
may be able to take the position that the Series B Common Stock redeemed upon
such exercise should not be treated as issued stock for purposes of determining
whether an ownership change within the meaning of Section 382 had occurred.
Accordingly, if all or sufficient amount of such New KCS Warrants are exercised,
Reorganized KCS could take the position that no ownership change had occurred
with respect to its stock, with the result that the Debtors' or Reorganized
Debtors' ability to utilize their NOLs would not be subject to limitation.
4. Consolidated Return Items
The confirmation of the Plan may result in the recognition of
income or loss attributable to the existence of deferred intercompany
transactions, excess loss accounts or similar items. The Proponents, however, do
not believe that the consequence of such items (if any) would have a material
effect on the Debtors.
5. Alternative Minimum Tax
A corporation is required to pay alternative minimum tax to the
extent that 20% of alternative minimum taxable income" ("AMTI") exceeds the
corporation's regular tax liability for the year. AMTI is generally equal to
regular taxable income with certain adjustments. For purposes of computing AMTI,
a corporation is entitled to offset no more than 90% of its AMTI with NOLs (as
computed for alternative minimum tax purposes). Thus, if the Reorganized
Debtors' consolidated group is subject to the alternative minimum tax in future
years, a federal tax of 2% (20% of the 10% of AMTI not offset by NOLs) will
apply to any net taxable income earned by the Reorganized Debtors' consolidated
group in future years that is otherwise offset by NOLs.
76
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XV.
CONCLUSION AND RECOMMENDATION
The Proponents believe that the Plan is in the best interests of all
Creditors and holders of Equity Interests and urge the holders of all Claims and
Equity Interests who receive ballots to vote to accept the Plan and to evidence
such acceptance by returning their ballots so that they will be actually
received on or before 10:00 p.m., Eastern Time, on January 5, 2001.
77
<PAGE> 87
Dated: Wellesley, Massachusetts
October 26, 2000
Respectfully submitted,
THE OFFICIAL COMMITTEE OF UNSECURED
CREDITORS OF KCS ENERGY, INC., ET AL.
By: /s/
---------------------------------
Name: Kathy Lee
Title: Chairperson
Dated: New York, New York
October 26, 2000
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/
---------------------------------
Name: David Matlin
Title: Managing Director
78
<PAGE> 88
EXHIBIT A
PLAN OF REORGANIZATION
<PAGE> 89
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: Chapter 11
KCS ENERGY, INC., PROLIQ, INC., KCS Case No. 00-0028 (PJW) and
ENERGY MARKETING, INC., KCS Case Nos. 00-0310 (PJW) through
RESOURCES, INC. A/K/A KCS MOUNTAIN 00-0318 (PJW)
RESOURCES, INC., KCS MEDALLION
RESOURCES, INC., MEDALLION CALIFORNIA JOINTLY ADMINISTERED
PROPERTIES, INC., MEDALLION GAS
SERVICES, INC., KCS ENERGY SERVICES,
INC., KCS MICHIGAN RESOURCES, INC. AND
NATIONAL ENERDRILL CORP.,
Debtors.
SECOND AMENDED DISCLOSURE STATEMENT FOR SECOND AMENDED JOINT PLAN OF
REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE PROPOSED BY THE OFFICIAL
COMMITTEE OF UNSECURED CREDITORS AND CREDIT SUISSE FIRST BOSTON CORPORATION
GIBSON, DUNN & CRUTCHER LLP ANDREWS & KURTH LLP
D.J. Baker Peter S. Goodman
200 Park Avenue 850 Third Avenue, 7th Floor
New York, New York 10166 New York, New York 10022
(212) 351-4000 (212) 850-2800`
GIBSON, DUNN & CRUTCHER LLP ANDREWS & KURTH LLP
Michael A. Rosenthal Hugh M. Ray
James M. Schober 600 Travis, Suite 4200
2100 McKinney Avenue, Suite 1100 Houston, Texas 77002
Dallas, Texas 75201 (713) 220-4200
(214) 698-3100
ATTORNEYS FOR CREDIT SUISSE
ATTORNEYS FOR THE OFFICIAL FIRST BOSTON CORPORATION
COMMITTEE OF UNSECURED CREDITORS
<PAGE> 90
TABLE OF CONTENTS
PAGE
Article I DEFINITIONS........................................................1
1.1 Administrative Expense Claim..................................1
1.2 Allowed.......................................................2
1.3 Bankruptcy Code...............................................2
1.4 Bankruptcy Court..............................................2
1.5 Bankruptcy Rules..............................................2
1.6 Benefit Plans.................................................2
1.7 Business Day..................................................2
1.8 Cash..........................................................2
1.9 Chapter 11 Cases..............................................2
1.10 Claim.........................................................2
1.11 Class.........................................................3
1.11a Class 7 Election Form.........................................3
1.12 Collateral....................................................3
1.13 Commencement Date.............................................3
1.14 Confirmation Date.............................................3
1.15 Confirmation Hearing..........................................3
1.16 Confirmation Order............................................3
1.17 Creditors' Committee..........................................3
1.18 CSFB..........................................................3
1.19 Debtors.......................................................4
1.20 Debtors in Possession.........................................4
1.21 DIP Cash Collateral Order.....................................4
1.22 Disclosure Statement..........................................4
1.23 Disputed......................................................4
1.24 Distribution Record Date......................................4
1.25 Effective Date................................................4
1.26 Equity Interest...............................................4
1.27 Exercise Deadline Date........................................4
1.28 Exit Facility Commitment......................................5
i
<PAGE> 91
TABLE OF CONTENTS
(CONTINUED)
PAGE
1.29 Final Order...................................................5
1.30 General Unsecured Claim.......................................5
1.31 Indenture Trustees............................................5
1.32 KCS5
1.33 Lien..........................................................5
1.34 Medallion Facility............................................5
1.35 New Credit Facility...........................................6
1.36 New Employee and Director Stock Option Plan...................6
1.37 New Indenture.................................................6
1.38 New KCS Common Stock..........................................6
1.39 New KCS Subscription Warrants.................................6
1.40 New Notes.....................................................6
1.41 Noteholder Agreement..........................................6
1.42 Old Bank Lenders..............................................6
1.43 Old Employee and Director Stock Option Plans..................6
1.44 Old Indentures................................................6
1.45 Old Indenture Trustees........................................6
1.46 Old KCS Common Stock..........................................6
1.47 Old KCS Warrants..............................................7
1.48 Old Senior Notes..............................................7
1.49 Old Senior Indenture..........................................7
1.50 Old Senior Indenture Trustee..................................7
1.51 Old Senior Subordinated Notes.................................7
1.52 Old Senior Subordinated Indenture.............................7
1.53 Old Senior Subordinated Indenture Trustee.....................7
1.54 Old Notes.....................................................7
1.55 Other Priority Claim..........................................7
1.56 Other Secured Claim...........................................7
1.57 Plan..........................................................7
1.58 Plan Supplement...............................................7
ii
<PAGE> 92
TABLE OF CONTENTS
(CONTINUED)
PAGE
1.59 Priority Tax Claim............................................7
1.60 Proponents....................................................7
1.61 Pro Rata Share................................................8
1.62 Registration Rights Agreement.................................8
1.63 Reorganized Debtors...........................................8
1.64 Reorganized Debtors' By-laws..................................8
1.65 Reorganized Debtors' Certificates of Incorporation............8
1.66 Reorganized KCS...............................................8
1.67 Reorganized KCS By-laws.......................................8
1.68 Reorganized KCS Certificate of Incorporation..................8
1.69 Resources Facility............................................8
1.70 Secured Bank Claims...........................................8
1.71 Secured Claim.................................................9
1.72 Series A Common Stock.........................................9
1.73 Series B Common Stock.........................................9
1.74 Subscription and Redemption Price.............................9
Article II TREATMENT OF ADMINISTRATIVE EXPENSE CLAIMS AND PRIORITY TAX
CLAIMS UNDER BANKRUPTCY CODE SECTIONS 507(a)(1), 507(a)(2) and
507(a)(8)...........................................................10
2.1 Administrative Expense Claims................................10
2.2 Professional Compensation and Reimbursement Claims...........10
2.3 Priority Tax Claims..........................................10
Article III CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS...................11
Article IV PROVISIONS FOR TREATMENT OF CLAIMS AND EQUITY INTERESTS.........11
4.1 Other Priority Claims (Class 1)..............................11
4.2 Secured Bank Claims (Class 2)................................12
4.3 Other Secured Claims (Class 3)...............................12
4.4 Old Senior Notes Claims (Class 4)............................12
4.5 Old Senior Subordinated Notes Claims (Class 5)...............13
4.6 General Unsecured Claims (Class 6)..........................13
iii
<PAGE> 93
TABLE OF CONTENTS
(CONTINUED)
PAGE
4.7 Old KCS Common Stock Equity Interests (Class 7)..............13
4.8 Old KCS Warrants Equity Interests and Old Employee and
Director Stock Option Plans Equity Interests (Class 8).......14
Article V IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS IMPAIRED;
ACCEPTANCE OR REJECTION OF THIS PLAN OF REORGANIZATION..............14
5.1 Holders of Claims and Equity Interests Entitled to Vote......14
Article VI MEANS OF IMPLEMENTATION..........................................15
6.1 New Credit Facility..........................................15
6.2 Authorization of New Securities..............................15
6.3 Issuance of New Securities...................................15
6.4 Cancellation of Existing Securities and Agreements...........15
6.5 Corporate Action.............................................16
6.6 Confirmation Under Section 1129(b) of the Bankruptcy Code....17
Article VII PROVISIONS GOVERNING DISTRIBUTIONS..............................17
7.1 Date of Distributions........................................17
7.2 Distribution Record Date for Holders of Old Senior Notes
Claims, Old Senior Subordinated Notes Claims, and old KCS
Common Stock Equity Interests................................17
7.3 Surrender of Instruments.....................................18
7.4 Compensation of Professionals and the Indenture Trustees'
Fees.........................................................18
7.5 Delivery of Distributions....................................18
7.6 Manner of Payment Under the Plan.............................19
7.7 Fractional Shares............................................19
7.8 Distributions After Effective Date...........................19
7.9 Exculpation..................................................19
7.10 Retention of Causes of Action................................20
Article VIII PROCEDURES FOR TREATING DISPUTED CLAIMS UNDER PLAN OF
REORGANIZATION......................................................20
8.1 Disputed Claims..............................................20
8.2 Objections to Claims.........................................21
8.3 No Distributions Pending Allowance...........................21
iv
<PAGE> 94
TABLE OF CONTENTS
(CONTINUED)
PAGE
8.4 Distributions After Allowance................................21
Article IX PROVISIONS GOVERNING EXECUTORY CONTRACTS AND UNEXPIRED
LEASES..............................................................21
Article X CONDITIONS PRECEDENT TO EFFECTIVE DATE............................22
10.1 Conditions Precedent to Effective Date of Plan...............22
10.2 Waiver of Conditions Precedent...............................22
Article XI EFFECT OF CONFIRMATION...........................................22
11.1 Vesting of Assets............................................22
11.2 Binding Effect...............................................22
11.3 Discharge of Debtors.........................................23
11.4 Term of Injunctions or Stays.................................23
11.5 Indemnification Obligations..................................23
11.6 Limited Release..............................................24
Article XII RETENTION OF JURISDICTION.......................................24
Article XIII MISCELLANEOUS PROVISIONS.......................................26
13.1 Payment of Statutory Fees....................................26
13.2 Retiree Benefits.............................................26
13.3 Benefit Plans................................................26
13.4 Administrative Expenses Incurred After the Confirmation
Date.........................................................26
13.5 Compliance with Tax Requirements.............................26
13.6 Severability of Plan Provisions..............................27
13.7 Governing Law................................................27
13.8 Notices......................................................27
<PAGE> 95
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
<TABLE>
<S> <C>
In re: Chapter 11
KCS ENERGY, INC., PROLIQ, INC., KCS ENERGY Case No. 00-0028 (PJW) and
MARKETING, INC., KCS RESOURCES, INC. A/K/A KCS Case Nos. 00-0310 (PJW) through
MOUNTAIN RESOURCES, INC., KCS MEDALLION 00-0318 (PJW)
RESOURCES, INC., MEDALLION CALIFORNIA
PROPERTIES, INC., MEDALLION GAS SERVICES, INC., JOINTLY ADMINISTERED
KCS ENERGY SERVICES, INC., KCS MICHIGAN
RESOURCES, INC. AND NATIONAL ENERDRILL CORP.,
Debtors.
</TABLE>
SECOND AMENDED JOINT PLAN OF REORGANIZATION UNDER
CHAPTER 11OF THE BANKRUPTCY CODE PROPOSED BY THE
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS
AND CREDIT SUISSE FIRST BOSTON CORPORATION
The Official Committee of Unsecured Creditors (the "Creditors'
Committee") appointed in the jointly administered chapter 11 cases of KCS
Energy, Inc., Proliq, Inc., KCS Energy Marketing, Inc., KCS Resources, Inc.
a/k/a/ KCS Mountain Resources, Inc., KCS Medallion Resources, Inc., Medallion
California Properties, Inc., Medallion Gas Services, Inc., KCS Energy Services,
Inc., KCS Michigan Resources, Inc. and National Enerdrill Corp. (collectively,
the "Debtors"), together with Credit Suisse First Boston Corporation ("CSFB"),
jointly propose the following second amended joint chapter 11 plan under section
1121(a) of title 11 of the United States Code:
Article I
DEFINITIONS
As used herein, the following terms have the respective meanings
specified below:
1.1 Administrative Expense Claim means any expense or claim allowable
in the Chapter 11 Cases under sections 503(b) and 507(a)(1) of the Bankruptcy
Code, including, without limitation, any actual and necessary costs and expenses
of preserving the estates of the Debtors, any actual and necessary costs and
expenses of operating the business of the Debtors, any indebtedness or
obligations incurred or assumed by the Debtors in Possession in connection with
the conduct of their business, including, without limitation, for the
acquisition or lease of property or an interest in property or the rendition of
services, all compensation and reimbursement of expenses to the extent Allowed
by the Bankruptcy Court under section 330 or 503 of the Bankruptcy Code and
<PAGE> 96
any fees or charges assessed against the estates of the Debtors under section
1930 of chapter 123 of title 28 of the United States Code.
1.2 Allowed means, with reference to any Claim or Equity Interest, (a)
any Claim against the Debtors which has been listed by the Debtors in their
Schedules as liquidated in amount and not disputed or contingent and for which
no contrary proof of claim has been filed, (b) any Claim or Equity Interest
allowed hereunder, (c) any Claim or Equity Interest which is not Disputed by the
applicable deadline, (d) any Claim or Equity Interest that is compromised,
settled or otherwise resolved pursuant to the authority granted to the
Reorganized Debtors pursuant to a Final Order of the Bankruptcy Court or (e) any
Claim or Equity Interest which, if Disputed, has been Allowed by Final Order;
provided, however, that any Claims allowed solely for the purpose of voting to
accept or reject the Plan pursuant to an order of the Bankruptcy Court shall not
be considered "Allowed Claims" or "Allowed Equity Interests" hereunder. Unless
otherwise specified herein or by order of the Bankruptcy Court, "Allowed
Administrative Expense Claim" or "Allowed Claim" shall not, for any purpose
under the Plan, include interest on such Administrative Expense Claim or Claim
from and after the Commencement Date.
1.3 Bankruptcy Code means title 11 of the United States Code, as
amended from time to time, as applicable to the Chapter 11 Cases.
1.4 Bankruptcy Court means the United States District Court for the
District of Delaware having subject matter jurisdiction over the Chapter 11
Cases and, to the extent of any reference under section 157 of title 28 of the
United States Code, the Bankruptcy Court unit of such District Court under
section 151 of title 28 of the United States Code.
1.5 Bankruptcy Rules means the Federal Rules of Bankruptcy Procedure
as promulgated by the United States Supreme Court under section 2075 of title 28
of the United States Code, and all Local Rules of the Bankruptcy Court
applicable to the Chapter 11 Cases.
1.6 Benefit Plans means all benefit plans, policies and programs
sponsored by KCS, including, without limitation, all savings plans and
retirement pension plans.
1.7 Business Day means any day other than a Saturday, Sunday or any
other day on which commercial banks in New York, New York are required or
authorized to close by law or executive order.
1.8 Cash means lawful currency of the United States of America.
1.9 Chapter 11 Cases means the cases under chapter 11 of the
Bankruptcy Code, In re KCS Energy, Inc., et al., Chapter 11 Case No. 00-0028
(PJW) and Case Nos. 00-0310 (PJW) through 00-0318 (PJW) Jointly Administered,
currently pending before the Bankruptcy Court.
1.10 Claim has the meaning set forth in section 101(5) of the
Bankruptcy Code.
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1.11 Class means a category of holders of Claims or Equity Interests as
set forth in Article III of the Plan.
1.11a Class 7 Election Form means an election form, which may be
included in a form of transmittal letter for shares of Old KCS Common Stock or
similar document, to be delivered to holders of Equity Interests in Class 7
promptly following the Distribution Record Date, by which such holders shall be
allowed to elect to receive, in respect of their equity interests, either (i)
0.0513 shares of Series A Common Stock for each share of Old KCS Common Stock
held by such holder on the Distribution Record Date; or (ii) New KCS
Subscription Warrants evidencing the right to subscribe for one (1) share of
Series A Common Stock for each share of Old KCS Common Stock held by such holder
on the Distribution Record Date (without oversubscription rights), at a price
equal to the Subscription and Redemption Price. The Class 7 Election Form and
the instructions accompanying it shall state that (i) any holder who fails to
make a proper and timely election as therein provided shall be deemed to have
elected to receive 0.0513 shares of Series A Common Stock per share of Old KCS
Common Stock, in lieu of the New KCS Subscription Warrants; and (ii) in the
event that the Effective Date of the Plan does not occur on or prior to May 1,
2001, all holders of Old KCS Common Stock Equity Interests shall receive 0.0513
shares of Series A Common Stock per share of Old KCS Common Stock, and the New
KCS Subscription Warrants shall not be issued.
1.12 Collateral means any property or interest in property of the
estates of the Debtors subject to a Lien to secure the payment or performance of
a Claim, which Lien is not timely avoided under the Bankruptcy Code or otherwise
invalid under the Bankruptcy Code or applicable state law.
1.13 Commencement Date means January 18, 2000, the date on which KCS
answered the involuntary petition and did not object to entry of the Order for
Relief entered in the involuntary Chapter 11 Case No. 00-0028 (PJW) and the date
on which the Chapter 11 Cases of each of the Debtors other than KCS commenced.
1.14 Confirmation Date means the date on which the Bankruptcy Court
signs the Confirmation Order.
1.15 Confirmation Hearing means the hearing held by the Bankruptcy
Court to consider confirmation of the Plan as such hearing may be adjourned or
continued from time to time.
1.16 Confirmation Order means the order of the Bankruptcy Court
confirming the Plan.
1.17 Creditors' Committee means the statutory committee of unsecured
claim holders appointed in the Chapter 11 Cases pursuant to section 1102 of the
Bankruptcy Code.
1.18 CSFB means Credit Suisse First Boston Corporation.
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1.19 Debtors means, collectively, KCS Energy, Inc., Proliq, Inc., KCS
Energy Marketing, Inc., KCS Resources, Inc. a/k/a KCS Mountain Resources, Inc.,
KCS Medallion Resources, Inc., Medallion California Properties, Inc., Medallion
Gas Services, Inc., KCS Energy Services, Inc., KCS Michigan Resources, Inc. and
National Enerdrill Corp.
1.20 Debtors in Possession means the Debtors in their capacity as
debtors in possession in the Chapter 11 Cases pursuant to sections 1101(1),
1107(a) and 1108 of the Bankruptcy Code.
1.21 DIP Cash Collateral Order means the Order Authorizing and
Restricting the Use of Cash Collateral and Granting Adequate Protection, dated
and entered by the Bankruptcy Court on the Commencement Date and providing for,
among other things, the Debtors' use of cash collateral of the lenders thereto,
designating Canadian Imperial Bank of Commerce as agent.
1.22 Disclosure Statement means the Proponents' second amended
disclosure statement relating to this Plan, including all exhibits and schedules
thereto, as approved by the Bankruptcy Court pursuant to section 1125 of the
Bankruptcy Code.
1.23 Disputed means, with reference to any Claim, (i) any Claim proof
of which was timely and properly filed, and in such case or in the case of an
Administrative Expense Claim, any Administrative Expense Claim or Claim which is
disputed under the Plan or as to which the Debtors have interposed a timely
objection and/or request for estimation in accordance with section 502(c) of the
Bankruptcy Code and Bankruptcy Rule 3018, which objection and/or request for
estimation has not been withdrawn or determined by a Final Order; (ii) any Claim
proof of which was required to be filed by order of the Bankruptcy Court, but as
to which a proof of claim was not timely or properly filed; and (iii) any Claim
the liquidation or disposition of which is pending before a court or tribunal of
competent jurisdiction as of the Commencement Date.
1.24 Distribution Record Date means the date set forth in the
Confirmation Order as the distribution record date, which shall be no later than
5 Business Days from and after the Confirmation Date.
1.25 Effective Date means the first Business Day after the Confirmation
Order is signed on which the conditions specified in Section 10.1 of the Plan
have been satisfied or waived.
1.26 Equity Interest means any share of common stock or other
instrument evidencing an ownership interest in any of the Debtors, whether or
not transferable, and any option, warrant or right, contractual or otherwise, to
subscribe for or otherwise acquire any such interest.
1.27 Exercise Deadline Date means the earlier of (i) the first Business
Day that is at least seventy-five days after the Effective Date and (ii) May 15,
2001.
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1.28 Exit Facility Commitment means an agreement to provide an exit
facility in the aggregate principal amount of up to $125 million, or such other
amount as may be acceptable to the Proponents, provided by CIBC World Markets
Corp., as agent for lenders to be party thereto, or by such other provider as
the Proponents may elect, as evidenced by a term sheet and/or a commitment
letter from such provider, either or both of which shall be filed at the time of
the disclosure statement hearing or with the Plan Supplement.
1.29 Final Order means an order of the Bankruptcy Court or any other
court of competent jurisdiction as to which the time to appeal, petition for
certiorari, or move for reargument or rehearing has expired and as to which no
appeal, petition for certiorari, or other proceedings for reargument or
rehearing shall then be pending or as to which any right to appeal, petition for
certiorari, reargument, or rehearing shall have been waived in writing in form
and substance satisfactory to the Debtors or the Reorganized Debtors, or, if an
appeal, writ of certiorari, or reargument or rehearing thereof has been sought,
such order of the Bankruptcy Court or other court of competent jurisdiction
shall have been determined by the highest court to which such order was
appealed, or petition for certiorari, reargument or rehearing shall have been
denied and the time to take any further appeal, petition for certiorari or
motion for reargument or rehearing shall have expired; provided, however, that
the possibility that a motion under Bankruptcy Code section 502(j), Rule 59 or
Rule 60 of the Federal Rules of Civil Procedure, or any analogous rule under the
Bankruptcy Rules or applicable state court rules of civil procedure, may be
filed with respect to such order shall not cause such order not to be a Final
Order.
1.30 General Unsecured Claim means any Claim other than a Secured
Claim, Administrative Expense Claim, Priority Tax Claim, Other Priority Claim,
Old Senior Notes Claim, or Old Senior Subordinated Notes Claim.
1.31 Indenture Trustees means, when referenced collectively, the
indenture trustee of each of the New Indenture, the Old Senior Indenture and the
Old Senior Subordinated Indenture.
1.32 KCS means KCS Energy, Inc., a Delaware corporation.
1.33 Lien has the meaning set forth in section 101(37) of the
Bankruptcy Code.
1.34 Medallion Facility means the secured revolving credit facility
provided pursuant to the First Amended and Restated Credit Agreement among KCS
Medallion Resources, Inc., KCS Energy Services, Inc., KCS Energy, Inc., and
Medallion Gas Services, Inc., and Canadian Imperial Bank of Commerce, New York
Agency, as Agent, CIBC, Inc., as Collateral Agent and the Lenders Signatory
thereto, as to which the aggregate principal amount of indebtedness outstanding
was $49,500,688.30 as of the Commencement Date.
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1.35 New Credit Facility means the loan facility to be effected
pursuant to the terms of the Exit Facility Commitment, which will be secured by
perfected first priority Liens on substantially all of the Reorganized Debtors'
assets.
1.36 New Employee and Director Stock Option Plan means the stock option
plan permitting the Reorganized Debtors to grant to their employees and
directors options and other rights to acquire shares of Series A Common Stock.
The New Employee and Director Stock Option Plan will be substantially in the
form contained in the Plan Supplement.
1.37 New Indenture means the indenture governing the New Notes dated as
of the Effective Date. The New Indenture will be substantially in the form
contained in the Plan Supplement.
1.38 New KCS Common Stock means the Series A Common Stock and the
Series B Common Stock.
1.39 New KCS Subscription Warrants means the transferable warrants for
the purchase of Series A Common Stock to be issued pursuant to the Plan, which
shall be substantially in the form contained in the Plan Supplement.
1.40 New Notes means the 12% Junior Secured Senior Notes due June 15,
2005 of Reorganized KCS issued pursuant to the New Indenture. The New Notes
shall be guaranteed on a senior basis by the other Reorganized Debtors and
secured by a second priority Lien on substantially all of the Reorganized
Debtors' assets. The New Notes will be substantially in the form contained in
the Plan Supplement.
1.41 Noteholder Agreement means the Agreement in Respect of
Restructuring of KCS Energy, Inc. and Affiliates Public Notes, dated December
27, 1999, entered into by and among the Debtors and certain holders of Old
Senior Notes and Old Senior Subordinated Notes.
1.42 Old Bank Lenders means the banks that participated in the
Medallion Facility and the Resources Facility.
1.43 Old Employee and Director Stock Option Plans means the stock
option plans permitting KCS to grant options to its employees and directors to
acquire shares of Old KCS Common Stock.
1.44 Old Indentures means, when referenced collectively, the Old Senior
Indenture and the Old Senior Subordinated Indenture.
1.45 Old Indenture Trustees means, when referenced collectively, the
Old Senior Indenture Trustee and the Old Senior Subordinated Indenture Trustee.
1.46 Old KCS Common Stock means the shares of common stock of KCS
authorized, issued and outstanding immediately prior to the Effective Date.
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1.47 Old KCS Warrants means all warrants to acquire shares of Old KCS
Common Stock.
1.48 Old Senior Notes means the Series A and Series B 11% Senior Notes
due January 15, 2003 issued pursuant to the Old Senior Indenture.
1.49 Old Senior Indenture means the indenture governing the Old Senior
Notes, dated as of January 15, 1996 as amended by the First Supplement dated as
of December 2, 1996, and by the Second Supplement dated as of January 3, 1997.
1.50 Old Senior Indenture Trustee means State Street Bank and Trust
Company, or any successor thereto, in its capacity as Indenture Trustee of the
Old Senior Indenture.
1.51 Old Senior Subordinated Notes means the 8.875% Senior Subordinated
Notes due January 15, 2008 issued pursuant to the Old Senior Subordinated
Indenture.
1.52 Old Senior Subordinated Indenture means the indenture governing
the Old Senior Subordinated Notes, dated as of January 15, 1998.
1.53 Old Senior Subordinated Indenture Trustee means U.S. Bank, N.A.,
or any successor thereto, in its capacity as Indenture Trustee of the Old Senior
Subordinated Indenture.
1.54 Old Notes means, when referenced collectively, the Old Senior
Notes and the Old Senior Subordinated Notes.
1.55 Other Priority Claim means any Claim, other than an Administrative
Expense Claim or a Priority Tax Claim, entitled to priority in right of payment
under section 507(a) of the Bankruptcy Code.
1.56 Other Secured Claim means any Secured Claim other than a Secured
Bank Claim.
1.57 Plan means this chapter 11 plan, including, without limitation,
the Plan Supplement and all exhibits, supplements, appendices and schedules
hereto, either in its present form or as the same may be altered, amended or
modified from time to time.
1.58 Plan Supplement means the forms of documents referenced in the
Plan and attached thereto.
1.59 Priority Tax Claim means any Claim of a governmental unit of the
kind specified in sections 502(i) and 507(a)(8) of the Bankruptcy Code.
1.60 Proponents means the Creditors' Committee and CSFB collectively.
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1.61 Pro Rata Share means a proportionate share, so that the ratio of
the consideration distributed on account of an Allowed Claim or Allowed Equity
Interest in a Class to the amount of such Allowed Claim or Allowed Equity
Interest is the same as the ratio of the amount of the consideration distributed
on account of all Allowed Claims or Allowed Equity Interests in such Class to
the amount of all Allowed Claims or Allowed Equity Interests in such Class.
1.62 Registration Rights Agreement means the registration rights
agreement of Reorganized KCS and the other Reorganized Debtors in favor of 5%
holders of securities of the Reorganized Debtors received under the Plan and
others. The Registration Rights Agreement will be substantially in the form
contained in the Plan Supplement.
1.63 Reorganized Debtors means KCS Energy, Inc., Proliq, Inc., KCS
Energy Marketing, Inc., KCS Resources, Inc. a/k/a KCS Mountain Resources, Inc.,
KCS Medallion Resources, Inc., Medallion California Properties, Inc., Medallion
Gas Services, Inc., KCS Energy Services, Inc., KCS Michigan Resources, Inc. and
National Enerdrill Corp., in each case on or after the Effective Date.
1.64 Reorganized Debtors' By-laws means the amended and restated
By-laws of Reorganized Debtors, which will be substantially in the form
contained in the Plan Supplement.
1.65 Reorganized Debtors' Certificates of Incorporation means the
restated Certificates of Incorporation of Reorganized Debtors, which will be
substantially in the form contained in the Plan Supplement.
1.66 Reorganized KCS means KCS, or any successor thereto by merger,
consolidation or otherwise, on or after the Effective Date.
1.67 Reorganized KCS By-laws means the amended and restated By-laws of
Reorganized KCS which will be substantially in the form contained in the Plan
Supplement.
1.68 Reorganized KCS Certificate of Incorporation means the restated
Certificate of Incorporation of Reorganized KCS, which will be substantially in
the form contained in the Plan Supplement.
1.69 Resources Facility means the secured revolving credit facility
provided pursuant to the First Amended and Restated Credit Agreement among KCS
Resources, Inc., KCS Michigan Resources, Inc., and KCS Energy Marketing, Inc.,
Canadian Imperial Bank of Commerce, New York Agency, as Agent, CIBC, Inc., as
Collateral Agent, Bank One, Texas, National Associates, as Co-Agent, Nations
Bank of Texas, N.A., as Co-Agent and the Lenders Signatory thereto, as to which
the aggregate principal amount of indebtedness outstanding was $57,594,200.60 as
of the Commencement Date.
1.70 Secured Bank Claims means claims and interests in the Debtors
arising from the Resources Facility and the Medallion Facility.
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1.71 Secured Claim means any Claim which is secured by a Lien against
Collateral to the extent of the value of such Collateral, as determined in
accordance with section 506(a) of the Bankruptcy Code, or, if such Claim is
subject to a permissible setoff under section 553 of the Bankruptcy Code, to the
extent of such permissible setoff.
1.72 Series A Common Stock means the series A common stock of
Reorganized KCS that is authorized pursuant to the Plan and the Reorganized KCS
Certificate of Incorporation, the form of certificates for which shall be
substantially similar to the form contained in the Plan Supplement.
1.73 Series B Common Stock means the series B common stock of
Reorganized KCS that is authorized pursuant to the Plan and the Reorganized KCS
Certificate of Incorporation, the form of certificates for which shall be
substantially similar to the form contained in the Plan Supplement. The Series B
Common Stock shall be identical to the Series A Common Stock, except that it
shall be subject to redemption out of the proceeds of the exercise of the New
KCS Subscription Warrants and any shares of Series B Common Stock that are not
so redeemed shall be automatically converted into Series A Common Stock on the
twentieth (20th) day after the Exercise Deadline Date.
1.74 Subscription and Redemption Price means a price per share, stated
to the nearest one-tenth of a cent, equal to (i) the outstanding principal and
interest (at the non-default rate) on the Old Senior Subordinated Notes as of
the Exercise Deadline Date (plus interest on interest to the extent allowed by
law) divided by (ii) (A) 29,265,810 minus (B) the number of shares of Series A
Common Stock delivered to Class 7 as of the Effective Date as set forth in
Section 4.7.
Interpretation; Application of Definitions and Rules of Construction.
Wherever from the context it appears appropriate, each term stated in either the
singular or the plural shall include both the singular and the plural and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, feminine and neuter. Unless otherwise specified, all section,
article, schedule or exhibit references in the Plan are to the respective
Section in, Article of, Schedule to, or Exhibit to, the Plan. If any description
of a security or policy of any of the Debtors in the Plan is inconsistent with
the documents governing such security or policy, the description of the
governing documents is controlling. The rules of construction contained in
section 102 of the Bankruptcy Code apply to the construction of the Plan. A term
used herein that is not defined herein, but that is defined in the Bankruptcy
Code, shall have the meaning ascribed to that term in the Bankruptcy Code. The
headings in the Plan are for convenience of reference only and shall not limit
or otherwise affect the provisions of the Plan.
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Article II
TREATMENT OF ADMINISTRATIVE
EXPENSE CLAIMS AND PRIORITY TAX
CLAIMS UNDER BANKRUPTCY CODE
SECTIONS 507(a)(1), 507(a)(2) and 507(a)(8)
2.1 Administrative Expense Claims.
Except to the extent any entity entitled to payment of any Allowed
Administrative Expense Claim agrees to a different treatment, each holder of an
Allowed Administrative Expense Claim shall receive Cash in an amount equal to
such Allowed Administrative Expense Claim on the later of the Effective Date and
the date such Administrative Expense Claim becomes an Allowed Administrative
Expense Claim, or as soon thereafter as is practicable; provided, however, that
Allowed Administrative Expense Claims representing liabilities incurred in the
ordinary course of business by the Debtors in Possession or liabilities arising
under loans or advances to or other obligations incurred by the Debtors in
Possession shall be paid in full and performed by the Reorganized Debtors in the
ordinary course of business in accordance with the terms and subject to the
conditions of any agreements governing, instruments evidencing or other
documents relating to such transactions.
2.2 Professional Compensation and Reimbursement Claims.
All entities seeking an award by the Bankruptcy Court of compensation for
services rendered or reimbursement of expenses incurred through and including
the Confirmation Date under section 503(b)(2), 503(b)(3), 503(b)(4) or 503(b)(5)
of the Bankruptcy Code shall (a) file their respective applications for final
allowances of compensation for services rendered and reimbursement of expenses
incurred through the Confirmation Date by no later than the date that is thirty
(30) days after the Effective Date or such other date as may be fixed by the
Bankruptcy Court and (b) if granted such an award by the Bankruptcy Court, be
paid in full in such amounts as are Allowed by the Bankruptcy Court (i) on the
date such Professional Compensation and Reimbursement Claim becomes an Allowed
Professional Compensation and Reimbursement Claim by final order, or as soon
thereafter as is practicable, or (ii) upon such other terms as may be mutually
agreed upon between such holder of a Professional Compensation and Reimbursement
Claim and the Reorganized Debtors.
2.3 Priority Tax Claims.
Except to the extent a holder of an Allowed Priority Tax Claim has been
paid by the Debtors prior to the Effective Date or agrees to a different
treatment, each holder of an Allowed Priority Tax Claim shall receive, at the
sole option of the Reorganized Debtors, (a) Cash in an amount equal to such
Allowed Priority Tax Claim on the later of the Effective Date and the date such
Priority Tax
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Claim, or as soon thereafter as is practicable, or (b) equal annual Cash
payments in an aggregate amount equal to such Allowed Priority Tax Claim,
together with interest at a fixed annual rate equal to 8%, or such other rate as
may be determined by the Bankruptcy Court, over a period through the sixth
anniversary of the date of assessment of such Allowed Priority Tax Claim, or
upon such other terms determined by the Bankruptcy Court to provide the holder
of such Allowed Priority Tax Claim deferred Cash payments having a value, as of
the Effective Date, equal to such Allowed Priority Tax Claim.
Article III
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS
Claims against and Equity Interests in the Debtors are divided into the
following Classes:
Class 1--Other Priority Claims
Class 2--Secured Bank Claims
Class 3--Other Secured Claims
Class 4--Old Senior Notes Claims
Class 5--Old Senior Subordinated Notes Claims
Class 6--General Unsecured Claims
Class 7--Old KCS Common Stock Equity Interests
Class 8--Old KCS Warrants Equity Interests and Old Employee and
Director Stock Option Plans Equity Interests
Article IV
PROVISIONS FOR TREATMENT OF
CLAIMS AND EQUITY INTERESTS
4.1 Other Priority Claims (Class 1).
On the Effective Date, except to the extent a holder of an Allowed
Other Priority Claim agrees to a different treatment of such Allowed Other
Priority Claim, each Allowed Other Priority Claim shall be unimpaired in
accordance with section 1124 of the Bankruptcy Code. All Allowed Other Priority
Claims not due and payable on or before the Effective Date shall be paid in the
ordinary course of business in accordance with the terms thereof.
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4.2 Secured Bank Claims (Class 2).
The Secured Bank Claims shall be deemed Allowed Claims solely for
purposes of the Plan in the aggregate amount of $107,094,888.90, plus interest
accrued, and fees and other charges incurred, but unpaid, since the Commencement
Date, minus payments made to the Old Bank Lenders pursuant to the interim and
final orders authorizing and restricting the Debtors' use of cash collateral and
granting the Old Bank Lenders adequate protection. On the Effective Date, the
Reorganized Debtors shall distribute to the agents for the holders of the
Secured Bank Claims Cash in an amount necessary to satisfy all of the Secured
Bank Claims in full, inclusive of all outstanding and unpaid principal,
interest, fees and charges as of the Effective Date.
4.3 Other Secured Claims (Class 3).
On the Effective Date, any Allowed Other Secured Claims shall either be
(i) paid in full by the Reorganized Debtors without consideration to any penalty
or accelerated amount, or (ii) reinstated.
4.4 Old Senior Notes Claims (Class 4).
The Old Senior Notes Claims will be deemed Allowed Claims
solely for purposes of the Plan in the aggregate amount of $166,500,000. On the
Effective Date, the Debtors will distribute to the Old Senior Indenture Trustee
for the holders of Old Senior Notes, in full satisfaction of the Old Senior
Notes Claims and the subordination rights of the holders of such claims, (a)
Cash sufficient to pay all accrued and unpaid interest (at the non-default rate)
on the Old Senior Notes, plus interest on accrued and unpaid interest in
accordance with the Old Senior Indenture to the extent permitted by law, in each
case as of the Effective Date; (b) the New Notes; and (c) 750,405 shares of
Series A Common Stock.
The New Notes will be substantially in the form contained in
the Plan Supplement. The New Notes will bear interest at the rate of 12% per
annum, will mature on June 15, 2005, and will be guaranteed on a senior basis by
all of the Reorganized Debtors other than Reorganized KCS. Reorganized KCS may
redeem, at its option, up to 100% in aggregate principal amount of the
outstanding New Notes by paying to the holders thereof 102% of the stated
principal amount of the New Notes from the Effective Date through June 15, 2001;
101.5% of the stated principal amount from June 16, 2001 through June 15, 2002;
101% of the stated principal amount from June 16, 2002 through June 15, 2003;
100.5% of the stated principal amount from June 16, 2003 through June 15, 2004;
and 100% of the stated principal amount from June 16, 2004 through the maturity
date; plus, in all cases, accrued and unpaid interest to the redemption date.
In accordance with the New Indenture, the New Notes shall be
secured by a Lien on substantially all of the assets of the Reorganized Debtors,
subject in priority only to the Liens of the lenders under the New Credit
Facility, or any refinancing thereof.
After the issuance of the shares of Series A Common Stock
pursuant to the exercise of the New KCS Subscription Warrants, the redemption of
a corresponding
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number of shares of Series B Common Stock and the conversion of the unredeemed
shares of Series B Common Stock into an equal number of shares of Series A
Common Stock, the number of shares of New KCS Common Stock outstanding will be
30,018,463, all of which shall be Series A Common Stock.
4.5 Old Senior Subordinated Notes Claims (Class 5).
The Old Senior Subordinated Notes Claims will be deemed
Allowed Claims solely for purposes of the Plan in the aggregate amount of
$136,094,000. On the Effective Date, the Debtors will distribute to the Old
Senior Subordinated Indenture Trustee for the holders of Old Senior Subordinated
Notes, in full satisfaction of the Old Senior Subordinated Notes Claims and the
subordination rights of the holders of such Claims, the number of shares of
Series B Common Stock that is equal to (i) 29,265,810 minus (ii) the number of
shares of Series A Common Stock delivered to Class 7 as of the Effective Date as
set forth in Section 4.7 below.
The shares of the Series B Common Stock that are delivered to
the Old Senior Subordinated Indenture Trustee will be issued in the names of the
respective holders of the Old Senior Subordinated Notes, or as otherwise
directed by such holders. The Series B Common Stock shall be subject to
redemption by Reorganized KCS from the proceeds of the exercise of the New KCS
Subscription Warrants, with a call therefor on the fifth (5th) day after the
Exercise Deadline Date, and any such shares called shall be redeemed at the
Subscription and Redemption Price by payment from such proceeds on the twentieth
(20th) day after the Exercise Deadline Date, without interest from the date of
the call, as more specifically provided for in Section 4.7. Any shares of Series
B Common Stock that are not called for redemption shall automatically be
converted into an equal number of shares of Series A Common Stock on the
twentieth (20th) day after the Exercise Deadline Date.
4.6 General Unsecured Claims (Class 6).
On the Effective Date, except to the extent a holder of an Allowed
General Unsecured Claim agrees to a different treatment, each General Unsecured
Claim shall be unimpaired in accordance with section 1124 of the Bankruptcy
Code. All Allowed General Unsecured Claims not due and payable on or before the
Effective Date shall be paid in the ordinary course of business in accordance
with the terms thereof. As of the Commencement Date, the Debtors have estimated
the General Unsecured Claims to be approximately $700,000.
4.7 Old KCS Common Stock Equity Interests (Class 7).
Each share of Old KCS Common Stock shall be cancelled on the Effective
Date. On the Effective Date, holders of record as of the Distribution Record
Date of Old KCS Common Stock shall be entitled to receive, in accordance with
the elections made by such holders on the Class 7 Election Form, either (i)
0.0513 shares of Series A Common Stock for each share of Old KCS Common Stock
held
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by such holder on the Distribution Record Date; or (ii)New KCS Subscription
Warrants evidencing the right to subscribe for one (1) share of Series A Common
Stock for each share of Old KCS Common Stock held by such holder on the
Distribution Record Date (without oversubscription rights), at a price equal to
the Subscription and Redemption Price.
The New KCS Subscription Warrants shall be substantially in the form
contained in the Plan Supplement. The New KCS Subscription Warrants may be
exercised at any time prior to the close of business on the Exercise Deadline
Date, at which time they shall expire. On the fifth (5th) day after the Exercise
Deadline Date, to the extent funds are available pursuant to the exercise of the
New KCS Subscription Warrants, Reorganized KCS shall call for redemption shares
of Series B Common Stock at the Subscription and Redemption Price, without
interest from the date of the call. In the event that less than all of the
shares of Series B Common Stock are called for redemption, such call shall be
exercised on a pro rata basis among all holders of Series B Common Stock, in
such proportions as necessary to redeem odd lots of Series B Common Stock (i.e.,
less than 100 shares), or in any other equitable manner, as determined in good
faith by the Board of Directors of Reorganized KCS. On the twentieth (20th) day
after the Exercise Deadline Date, Reorganized KCS shall make available the funds
to pay for the shares of Series B Common Stock called for redemption. Any shares
of Series B Common Stock not called for redemption by Reorganized KCS shall
automatically be converted into an equal number of shares of Series A Common
Stock on the twentieth (20th) day after the Exercise Deadline Date.
As provided in Section 6.6 below, in the event that Class 7 rejects the
Plan and the Plan is confirmed pursuant to Section 1129(b) of the Bankruptcy
Code, the holders of Equity Interests in Class 7 shall not receive or retain any
property on account of their Equity Interests, to the extent permitted by law.
4.8 Old KCS Warrants Equity Interests and Old Employee and
Director Stock Option Plans Equity Interests (Class 8).
On the Effective Date, the Old KCS Warrants Equity Interests, Old
Employee and Director Stock Option Plans Equity Interests and each issued and
unexercised option issued under the Old Employee and Director Stock Option Plans
shall be cancelled, and each holder of Old KCS Warrants Equity Interests and
each holder of Old Employee and Director Stock Option Plans Equity Interests
shall not receive or retain any property, interest in property or interest under
the Plan, on account of such Old KCS Warrants or Old Employee and Director Stock
Option Plans options.
Article V
IDENTIFICATION OF CLASSES OF CLAIMS AND
INTERESTS IMPAIRED; ACCEPTANCE OR REJECTION
OF THIS PLAN OF REORGANIZATION
5.1 Holders of Claims and Equity Interests Entitled to Vote.
Each of Class 1 (Other Priority Claims), Class 2 (Secured Bank Claims),
Class 3 (Other Secured Claims) and Class 6 (General Unsecured Claims) is
unimpaired by the Plan. Holders of Claims in such Classes are conclusively
presumed to have accepted the Plan and are not entitled to vote to accept or
reject the Plan.
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Each of Class 4 (Old Senior Notes Claims), Class 5 (Old Senior
Subordinated Notes Claims), and Class 7 (Old KCS Equity Interests) is impaired,
and the holders of Claims and Equity Interests in Classes 4, 5 and 7 are
entitled to vote to accept or reject the Plan.
Class 8 (Old KCS Warrants Equity Interests and Old Employee and
Director Stock Option Plan Equity Interests) is impaired by the Plan and the
holders of Equity Interests in such Class will not receive any distribution or
retain any property on account of such Equity Interests. Accordingly, holders of
Equity Interests in Class 8 are deemed to reject the Plan and are not entitled
to vote on the Plan.
Article VI
MEANS OF IMPLEMENTATION
6.1 New Credit Facility.
On the Effective Date, the New Credit Facility and documents referred
to therein shall be executed and delivered and the New Credit Facility funds
shall be made available for use by the Reorganized Debtors in accordance with
the terms thereof.
6.2 Authorization of New Securities.
The Reorganized KCS Certificate of Incorporation, which shall be deemed
adopted on the Effective Date pursuant to this Plan, will authorize 30,016,215
shares of Series A Common Stock and a maximum of 29,265,810 shares of Series B
Common Stock, which shall be a sufficient number of shares of New KCS Common
Stock for issuance pursuant to the Plan and the New KCS Subscription Warrants,
plus such additional shares of Series A Common Stock as may be issued pursuant
to the New Employee and Director Stock Option Plan.
6.3 Issuance of New Securities.
The issuance of the New Notes, the New KCS Common Stock, and the New
KCS Subscription Warrants by Reorganized KCS, as well as the guarantee of the
New Notes by all of the Reorganized Debtors other than Reorganized KCS, will be
authorized, upon confirmation of the Plan, without the need for any further
corporate action. The New KCS Common Stock to be issued on the Effective Date,
pursuant to the New KCS Subscription Warrants and pursuant to the New Employee
and Director Stock Option Plan shall be authorized upon confirmation of the Plan
for issuance in accordance with the terms of the Plan, the New KCS Subscription
Warrants and the New Employee and Director Stock Option Plan.
6.4 Cancellation of Existing Securities and Agreements.
On the Effective Date, without need for further corporate action, the
Old Senior Notes, the Old Senior Subordinated Notes, the Old KCS Warrants, the
Old KCS Employee and Director Stock Option Plan, the Old KCS Common Stock, and
the options
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issued and unexercised under the Old KCS Employee and Director Stock Option Plan
shall be cancelled and will have no further force or effect. Except for purposes
of effectuating the distributions under the Plan, on the Effective Date the Old
Indentures shall be cancelled and will have no further force or effect;
provided, however, that the rights of the Old Indenture Trustees set forth in
Section 6.6 of the respective Old Indentures shall not be terminated until such
time as each of the Old Indenture Trustees shall have no further obligations
under the respective Old Indentures or the Plan and shall have been paid in full
for all of their respective fees and expenses, including those of counsel. On
and after the Effective Date, the Old Senior Trustee and the Old Senior
Subordinated Trustee shall have no further obligations to the Debtors or the
holders of any of the Old Senior Notes or the Old Senior Subordinated Notes
except those expressly set forth in the Plan.
6.5 Corporate Action.
(a) Board of Directors of Reorganized Debtors. On the Effective Date,
the operation of the Reorganized Debtors shall become the general responsibility
of their Boards of Directors, subject to, and in accordance with, the
Reorganized Debtors' Certificates of Incorporation and the Reorganized Debtors'
By-laws. The initial Boards of Directors of the Reorganized Debtors shall
consist of the members disclosed in the Disclosure Statement or an amendment or
supplement to the Disclosure Statement or such other filing as may be made by
the Proponents with the Bankruptcy Court.
(b) Officers of Reorganized Debtors. The initial officers of the
Reorganized Debtors are or shall be disclosed in the Disclosure Statement or an
amendment or supplement to the Disclosure Statement or such other filing as may
be made by the Proponents with the Bankruptcy Court. The selection of officers
of Reorganized Debtors after the Effective Date shall be as provided in the
Reorganized Debtors' Certificate of Incorporation and the Reorganized Debtors'
By-laws, and an annual meeting of shareholders for Reorganized KCS shall take
place as set forth in the Reorganized KCS By-laws.
(c) Liquidity Provisions. The Debtors shall make their best efforts
necessary to ensure an active and fully-valued public market for the trading of
the New Notes and the New KCS Common Stock, including, but not limited to,
issuing appropriate releases of information and otherwise complying with the
requirements of paragraph (c) of Rule 144 under the Securities Act of 1933, as
amended, conducting informational meetings with potential investors and research
analysts, and registering the New Notes and the New KCS Common Stock under the
Securities Exchange Act of 1934, as amended, so that Reorganized KCS will remain
a public reporting Company on the New York Stock Exchange (or other nationally
recognized exchange), in all events subject to applicable laws, rules and
regulations. Pursuant to the terms of the Registration Rights Agreement, certain
claimants, including those who would be deemed after the Effective Date to be an
"affiliate" of KCS by reason of their holdings in KCS after consummation of the
Plan, would be granted demand and piggyback registration rights for the New
Notes and the shares of New KCS Common Stock, providing for the registration of
the securities of such claimants at the expense of Reorganized KCS, as provided
in the Registration Rights Agreement.
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(d) The Debtors shall take all steps necessary to qualify the New Notes
under the Trust Indenture Act.
6.6 Confirmation Under Section 1129(b) of the Bankruptcy Code
If any impaired class rejects the Plan, the Proponents may request
confirmation of the Plan pursuant to Bankruptcy Code section 1129(b). The
Proponents reserve the right to modify the Plan to the extent permitted under
the Bankruptcy Code prior to requesting confirmation under section 1129(b);
provided, however, that such right shall not in any manner adversely affect,
limit or modify the rights or distributions of holders of Claims in Classes 4
and 5. In the event that Class 7 votes to reject the Plan, the holders of Equity
Interests in Class 7 shall not receive any distribution or retain any property
on account of such Equity Interests, to the extent permitted by law.
Article VII
PROVISIONS GOVERNING DISTRIBUTIONS
7.1 Date of Distributions.
Unless otherwise provided herein, any distributions and deliveries to
be made hereunder shall be made on the first Business Day after the Effective
Date or as soon as practicable thereafter and deemed made on the first Business
Day after the Effective Date. If any payment or act under the Plan is required
to be made or performed on a date that is not a Business Day, then the making of
such payment or the performance of such act may be completed on the next
succeeding Business Day, but shall be deemed to have been completed as of the
required date.
7.2 Distribution Record Date for Holders of Old Senior Notes
Claims, Old Senior Subordinated Notes Claims, and old KCS
Common Stock Equity Interests.
The Distribution Record Date shall be the date for determining the
holders of Allowed Old Senior Notes Claims, Allowed Senior Subordinated Notes
Claims and Old KCS Common Stock Equity Interests entitled to receive the
distributions provided under the Plan. As of the close of business on the
Distribution Record Date, the Reorganized Debtors and the Indenture Trustees or
agents shall have no obligations to recognize any transfer of Old Senior Notes,
Old Senior Subordinated Notes or Old KCS Common Stock occurring after the
Distribution Record Date for purposes of distributions under the Plan. The
Reorganized Debtors and the Indenture Trustees or agents shall be entitled to
recognize and deal for all purposes herein with only those holders of record
stated on the transfer ledger maintained by the Indenture Trustees or agents for
the Old Senior Notes and Old Senior Subordinated Notes and the stock transfer
ledgers of the transfer agent for the Old KCS Common Stock as of the close of
business on the Distribution Record Date.
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7.3 Surrender of Instruments.
As a condition to receiving any distribution under the Plan, each
holder of Old Notes or Old KCS Common Stock must surrender such Old Notes or Old
KCS Common Stock to the Reorganized Debtors or their designee. Any holder of Old
Notes or Old KCS Common Stock who fails to (a) surrender such Old Notes or Old
KCS Common Stock, or (b) execute and deliver an affidavit of loss and/or
indemnity reasonably satisfactory to the Reorganized Debtors and furnish a bond
in form, substance, and amount reasonably satisfactory to the Reorganized
Debtors before the first anniversary of the Effective Date shall be deemed to
have forfeited all rights and claims and may not participate in any distribution
under the Plan.
7.4 Compensation of Professionals and the Indenture Trustees'
Fees.
Each person retained or requesting compensation in the Chapter 11 Cases
pursuant to section 330 or 503(b) of the Bankruptcy Code shall file an
application for allowance of final compensation and reimbursement of expenses in
the Chapter 11 Cases on or before a date to be determined by the Bankruptcy
Court in the Confirmation Order or any other order of the Bankruptcy Court.
Objections to any application made under this section shall be filed on or
before a date to be fixed and determined by the Bankruptcy Court in the
Confirmation Order or such other order. To the extent allowed by law, the fees
of the Indenture Trustees and their professionals shall conclusively be deemed
to be fair and reasonable and shall be paid by the Debtors pursuant to the
Confirmation Order. Upon payment of the fees and expenses of the Indenture
Trustees, the Indenture Trustees will be deemed to have released their liens
securing payment of their fees and expenses for all fees and expenses payable
through the Effective Date. The Proponents anticipate supporting applications
for reasonable compensation for services rendered by Andrews & Kurth LLP, Akin,
Gump, Strauss, Hauer & Feld, LLP, Young, Conaway, Stargatt & Taylor, LLP, and
Klett, Rooney, Lieber & Schorling in making substantial contributions in these
Chapter 11 cases.
7.5 Delivery of Distributions.
Subject to Bankruptcy Rule 9010, all distributions to any holder of an
Allowed Claim or an Allowed Equity Interest shall be made at the address of such
holder as set forth on the Schedules filed with the Bankruptcy Court or on the
books and records of the Debtors or its agents, unless the Debtors or the
Reorganized Debtors, as applicable, have been notified in writing of a change of
address, including, without limitation, by the filing of a proof of claim or
interest by such holder that contains an address for such holder different from
the address reflected on such Schedules for such holder. If any distribution to
any holder is returned as undeliverable, the Reorganized Debtors shall use
reasonable efforts to determine the current address of such holder, but no
distribution to such holder shall be made unless and until the Debtors have
determined the then current address of such holder, at which time such
distribution shall be made to such holder without interest; provided that such
distributions shall be deemed unclaimed property under section 347(b) of the
Bankruptcy Code at the expiration of one year from the Effective Date. After
such date, all unclaimed property or interest in property shall revert
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to the Reorganized Debtors, and the claim of any other holder to such property
or interest in property shall be discharged and forever barred.
At the option of the Debtors, distributions to holders of Old Senior
Notes and holders of Old Senior Subordinated Notes shall be made by a
distribution agent or the Debtors. The Debtors shall make such distribution
directly to the Old Senior Indenture Trustee and the Old Senior Subordinated
Indenture Trustee for the benefit of the holders of Old Senior Notes and Old
Senior Subordinated Notes, respectively. The shares of the New KCS Common Stock
that are delivered to the Old Indenture Trustees will be registered and issued
in the names of the respective holders of the Old Senior Notes or the Old Senior
Subordinated Notes, as the case may be, or as otherwise directed by such
holders.
At the option of the Debtors, distributions to holders of shares of Old
KCS Common Stock shall be made by a distribution agent or the Debtors. The
shares of New KCS Common Stock or New KCS Subscription Warrants to which holders
of Old KCS Common Stock shall be entitled in accordance with the Plan will be
registered and issued in the names of such holders or as otherwise directed by
such holders pursuant to such form of instruction as the Debtors shall approve.
7.6 Manner of Payment Under the Plan.
At the option of the Debtors, any Cash payment to be made hereunder may
be made by a check or wire transfer or as otherwise required or provided in
applicable agreements.
7.7 Fractional Shares.
No fractional shares of New KCS Common Stock, or Cash in lieu thereof,
shall be distributed. For purposes of distribution, fractional shares of New KCS
Common Stock shall be rounded down to the next whole number.
7.8 Distributions After Effective Date.
Distributions made after the Effective Date to holders of Disputed
Claims that are not Allowed Claims as of the Effective Date but which later
become Allowed Claims shall be deemed to have been made on the Effective Date.
7.9 Exculpation.
The Debtors, the Reorganized Debtors, the Creditors' Committee, each
member of the Creditors' Committee, CSFB, the Minority Noteholders, the Working
Noteholders, the Old Indenture Trustees and each of their respective members,
partners, officers, directors, employees, advisors, agents, affiliates, and
representatives (including any attorneys, accountants, financial advisors,
investment bankers and other professionals retained by such persons or entities)
shall have no liability to any holder of any Claim or Equity Interest for any
act or omission in connection with, or arising out of, the Disclosure Statement,
the Plan, the solicitation of votes for and the pursuit of confirmation of the
Plan, the consummation of the Plan, or the administration of the Plan or the
property to be distributed under the Plan, except for willful misconduct or
gross
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negligence as determined by a Final Order of the Bankruptcy Court and, in all
respects, shall be entitled to rely upon the advice of counsel with respect to
their duties and responsibilities under the Plan.
7.10 Retention of Causes of Action
The Reorganized Debtors do not release or abandon any of their causes
of action except as expressly set forth in the Plan.
Article VIII
PROCEDURES FOR TREATING DISPUTED
CLAIMS UNDER PLAN OF REORGANIZATION
8.1 Disputed Claims.
(a) Process. If the Debtors dispute any Claim, such Disputed Claim
shall be determined, resolved, or adjudicated, as the case may be, in a manner
as if the Chapter 11 Cases had not been commenced and shall survive the
Effective Date as if the Chapter 11 Cases had not been commenced and, upon the
determination, resolution, or adjudication thereof as provided herein, shall be
deemed to be an Allowed Claim as of the date of, and in the amount established
by, such determination, resolution, or adjudication; provided, however, that (i)
the Debtors may elect, at their sole option, to object under section 502 of the
Bankruptcy Code with respect to any proof of claim filed by or on behalf of a
holder of a Claim, and (ii) any Claim arising out of the exercise by the
Debtors, as Debtors in Possession, of any rejection, avoidance, recovery,
subordination, or other power (or defense) available to them under applicable
provisions of the Bankruptcy Code shall be determined in accordance with
applicable bankruptcy law as well as any applicable nonbankruptcy law. As used
in this section, the phrase "date of ... determination, resolution, or
adjudication" means the date on which the liability, if any, of a Debtor on a
Disputed Claim is established by a final, nonappealable order of a court or
other tribunal of competent jurisdiction or date of the execution of an
agreement between the Debtor and the claimant with respect to such Claim such
that the Debtors, under applicable nonbankruptcy law, would be required to pay
such Claim on that date. To effectuate the foregoing, the entry of an order
confirming this Plan shall, effective as of the Effective Date, constitute a
modification of any stay or injunction under the Bankruptcy Code that would
otherwise preclude the determination, resolution, or adjudication of a Disputed
Claim, except for any Disputed Claim arising out of the exercise by the Debtors,
as Debtors in Possession, of any rejection, avoidance, recovery, subordination,
or other power (or defense) available to them under applicable provisions of the
Bankruptcy Code. Upon the date of determination, resolution, adjudication or
allowance of a Disputed Claim as provided herein, the Disputed Claim shall
become an Allowed Claim, and shall be enforceable against the Reorganized
Debtors only as provided in the Plan.
(b) Tort Claims. All Tort Claims are Disputed Claims. Any
unliquidated Tort Claim that is not otherwise settled or resolved pursuant to
subsection 8.1(a) above shall
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be determined and liquidated in the administrative or judicial tribunal in which
it is pending on the Confirmation Date or, if no such action was pending on the
Confirmation Date, in any administrative or judicial tribunal of appropriate
jurisdiction. Any Tort Claim determined and liquidated pursuant to a judgment
obtained in accordance with this subsection and applicable non-bankruptcy law
that is no longer subject to appeal or other review shall be deemed to be an
Allowed Claim in Class 6 in such liquidated amount and satisfied in accordance
with the Plan. Nothing contained in this subsection shall constitute or be
deemed a waiver of any claim, right or cause of action that the Debtors or the
Reorganized Debtors may have against any person in connection with or arising
out of any Tort Claim, including, without limitation, any rights under section
157(b) of title 28, United States Code.
8.2 Objections to Claims.
Except insofar as a proof of claim filed in respect of a Claim is
allowed under the Plan, the Reorganized Debtors will be entitled to object to
such proof of claim. Unless the Bankruptcy Court sets a different date, any
objections to a proof of claim shall be served and filed on or before the latest
of (a) one hundred and twenty (120) days after the Effective Date or (b)
forty-five (45) days after the proof of claim is filed with the Bankruptcy
Court.
8.3 No Distributions Pending Allowance.
Notwithstanding any other provision hereof, if any portion of a Claim
is a Disputed Claim, no payment or distribution provided hereunder shall be made
on account of such disputed portion of such Claim unless and until such Disputed
Claim becomes an Allowed Claim.
8.4 Distributions After Allowance.
To the extent that a Disputed Claim ultimately becomes an Allowed
Claim, a distribution shall be made to the holder of such Allowed Claim in
accordance with the provisions of the Plan. As soon as practicable after the
date on which a Disputed Claim becomes an Allowed Claim, the Reorganized Debtor
or Reorganized Debtors obligated on such Claim will provide to the holder of
such Claim the distribution to which such holder is entitled under the Plan.
Article IX
PROVISIONS GOVERNING EXECUTORY
CONTRACTS AND UNEXPIRED LEASES
On the Effective Date, and except as otherwise provided in the Plan,
all executory contracts and unexpired leases of the Debtors shall be assumed
other than those executory contracts and unexpired leases that (i) the Debtors
shall have previously rejected or (ii) the Proponents shall have listed on a
schedule filed with the Bankruptcy Court prior to the commencement of the
Confirmation Hearing. Entry of the
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Confirmation Order shall constitute approval, pursuant to section 365(a) of the
Bankruptcy Code, of such assumptions pursuant to the Plan.
Article X
CONDITIONS PRECEDENT TO EFFECTIVE DATE
10.1 Conditions Precedent to Effective Date of Plan.
The occurrence of the Effective Date of the Plan is subject to
satisfaction of the following conditions precedent:
(a) Confirmation Order. The Clerk of the Bankruptcy Court shall
have entered the Confirmation Order, in form and substance acceptable to the
Proponents, and there shall not be a stay or injunction in effect with respect
thereto.
(b) Exit Facility. Closing and funding of the New Credit Facility
shall have begun.
(c) Regulatory Approvals. All authorizations, consents, and
regulatory approvals required (if any) in connection with the effectiveness of
the Plan shall have been obtained.
10.2 Waiver of Conditions Precedent.
Each of the conditions precedent in section 10.1 hereof may be waived,
in whole or in part, by the Proponents in their absolute discretion.
Article XI
EFFECT OF CONFIRMATION
11.1 Vesting of Assets.
On the Effective Date, the Debtors, their properties, interests in
property and their operations shall be released from the custody and
jurisdiction of the Bankruptcy Court, and the estate of the Debtors shall vest
in the Reorganized Debtors. From and after the Effective Date the Reorganized
Debtors may operate their businesses and may use, acquire and dispose of their
property free of any restrictions of the Bankruptcy Code or the Bankruptcy
Rules, subject to the terms and conditions of the Plan.
11.2 Binding Effect.
Except as otherwise provided in section 1141(d)(3) of the Bankruptcy
Code and subject to the occurrence of the Effective Date, on and after the
Confirmation Date, the provisions of the Plan shall bind any holder of a Claim
against, or Equity Interest in, the Debtors, and such holder's respective
successors and assigns, whether or not the Claim or
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Equity Interest of such holder is impaired under the Plan and whether or not
such holder has accepted the Plan.
11.3 Discharge of Debtors.
Except as otherwise provided herein, pursuant to Bankruptcy Code
section 1141(d)(1), upon the Effective Date, all Claims against and Equity
Interests in any of the Debtors will be satisfied, discharged and released.
Except as otherwise provided herein, on the Effective Date, as to every
discharged debt, Claim, or Equity Interest, all persons, entities, and
governmental units (including, without limitation, any creditor or holder of a
Claim or Equity Interest) shall be precluded from asserting against the Debtors
or the Reorganized Debtors, or against the Debtors' or the Reorganized Debtors'
assets or properties, all such debts, Claims, or Equity Interests and any other
or further Claim based upon any document, instrument, or act, omission,
transaction or other activity of any kind or nature that occurred prior to the
Confirmation Date.
11.4 Term of Injunctions or Stays.
Unless otherwise provided, all injunctions or stays arising under or
entered during the Chapter 11 Cases under section 105 or 362 of the Bankruptcy
Code, or otherwise, and in existence on the Confirmation Date, shall remain in
full force and effect until the Effective Date.
11.5 Indemnification Obligations.
Subject to the occurrence of the Effective Date, the obligations of the
Debtors as of the Commencement Date to indemnify, defend, reimburse, or limit
the liability of directors, officers, or employees who were directors, officers,
or employees of the Debtors, respectively, and who have agreed to continue to
serve in such capacity with the Reorganized Debtors pursuant to employment
agreements entered into on or before the Effective Date, against any claims or
causes of action as provided in the Debtors' certificates of incorporation,
bylaws, or applicable state or federal law, will survive confirmation of the
Plan, remain unaffected thereby, and not be discharged, irrespective of whether
such indemnification, defense, reimbursement, or limitation is owed in
connection with an event occurring before or after the Commencement Date. The
Debtors' indemnification obligations are limited to those authorized or
permitted under state or federal law as the same is now or may become applicable
at the time any claim for indemnification is made. Among other things,
applicable state and federal law may limit the ability of officers, directors,
and employees to enforce indemnification provisions in connection with
violations of federal or state securities laws. The Proponents believe that
there are no indemnification claims currently pending against any of the Debtors
and the Debtors have claimed that they are not aware of any claims against their
officers, directors, or employees that could result in the assertion of claims
for indemnification against any of the Debtors.
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11.6 Limited Release.
The Confirmation Order shall provide for the release of the officers
and directors of the Debtors holding office at any time prior to the Effective
Date, the Creditors' Committee, each member of the Creditors' Committee, CSFB,
the Working Noteholders, the Minority Noteholders, the lenders under the DIP
Cash Collateral Agreement, signatories of the Noteholder Agreement, each holder
of Old KCS Common Stock Equity Interests, the Old Indenture Trustees and each of
their respective members, partners, officers, directors, employees, advisors,
agents, affiliates, and representatives (including any attorneys, accountants,
financial advisors, investment bankers and other professionals retained by such
persons or entities) for any act or omission in connection with, or arising out
of, the Disclosure Statement, the Plan, the solicitation of votes for and the
pursuit of confirmation of the Plan, the consummation of the Plan, or the
administration of the Plan or the property to be distributed under the Plan,
except for willful misconduct or gross negligence as determined by a Final Order
of the Bankruptcy Court.
Article XII
RETENTION OF JURISDICTION
The Bankruptcy Court has exclusive jurisdiction of all matters arising
out of, or related to, these Chapter 11 Cases and the Plan pursuant to, and for
the purposes of, sections 105(a) and 1142 of the Bankruptcy Code and for, among
other things, the following purposes, and retains exclusive jurisdiction where
it exists:
(a) To hear and determine pending applications for the assumption or
rejection of executory contracts or unexpired leases and the allowance of Claims
resulting therefrom.
(b) To determine any and all adversary proceedings, applications and
contested or litigated matters and any other matters or grant or deny any
applications involving the Debtors that may be pending on the Effective Date,
and to determine claims, rights and causes of action preserved to the
Reorganized Debtors hereunder, including any claims, rights or causes of action
arising in favor of the Debtors under Chapter 5 of the Bankruptcy Code or any
similar provisions of state law.
(c) To ensure that the distributions to holders of Allowed Claims and
Allowed Equity Interests and the subscriptions for and redemptions of New KCS
Common Stock are accomplished as provided herein.
(d) To hear and determine any timely objections to Administrative
Expense Claims or to proofs of claim, including, without limitation, any
objections to the classification of any Claim, and to allow or disallow any
Claim as to which an objection has been filed in whole or in part.
(e) To enter and implement such orders as may be appropriate in the
event the Confirmation Order is for any reason stayed, revoked, modified or
vacated.
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(f) To issue such orders in aid of execution of the Plan, to the full
extent authorized by section 1142 of the Bankruptcy Code, and to enter such
other orders as may be necessary or appropriate to implement or consummate all
contracts, instruments, releases, and other agreements or documents created in
connection with the Plan or the Disclosure Statement.
(g) To consider any amendments to or modifications of the Plan, or to
cure any defect or omission in, or reconcile any inconsistency in, any order of
the Bankruptcy Court, including, without limitation, the Confirmation Order.
(h) To hear and determine all applications of retained professionals
under sections 330, 331 and 503(b) of the Bankruptcy Code for awards of
compensation for services rendered and reimbursement of expenses incurred prior
to the Confirmation Date.
(i) To hear and determine any and all controversies, suits or issues
that may arise in connection with the consummation, interpretation or
enforcement of the Plan, the Confirmation Order, any transactions or payments
contemplated hereby, any agreement, instrument or other document governing or
relating to any of the foregoing, or any entity's obligations incurred in
connection therewith.
(j) To hear and determine matters concerning state, local and federal
taxes in accordance with sections 346, 505 and 1146 of the Bankruptcy Code.
(k) To hear any other matter not inconsistent with the Bankruptcy
Code.
(l) To hear and determine all disputes involving the existence, scope
and nature of the discharges granted under section 11.3 hereof.
(m) To issue injunctions and effect any other actions that may be
necessary or desirable to restrain interference by any entity with the
consummation or implementation of the Plan.
(n) To determine any dispute under the Old Senior Indenture, Old Senior
Subordinated Indenture or any amendment or supplement to such documents.
(o) To modify the Plan before or after the Effective Date pursuant to
section 1127 of the Bankruptcy Code, or to modify the Disclosure Statement or
any contract, instrument, release, or other agreement or document created in
connection with the Plan or Disclosure Statement; or remedy any defect or
omission or reconcile any inconsistency in any Bankruptcy Court Order, the Plan,
the Disclosure Statement or any contract, instrument, release, or other
agreement or document created in connection with the Plan or Disclosure
Statement, in such manner as may be necessary or appropriate to consummate the
plan, to the extent authorized by the Bankruptcy Code.
(p) To determine any other matters that may arise in connection
with or relate to the Plan, the Disclosure Statement, the Confirmation Order or
any contract, instrument,
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release, or other agreement or document created in connection with the Plan or
the Disclosure Statement.
(q) To enter a final decree closing these Chapter 11 Cases.
Article XIII
MISCELLANEOUS PROVISIONS
13.1 Payment of Statutory Fees.
All fees payable under section 1930, chapter 123, title 28, United
States Code, as determined by the Bankruptcy Court at the Confirmation Hearing,
shall be paid on the Effective Date. Any such fees accrued after the Effective
Date will constitute an Allowed Administrative Expense Claim and be treated in
accordance with section 2.1 hereof.
13.2 Retiree Benefits.
On and after the Effective Date, pursuant to section 1129(a)(13) of the
Bankruptcy Code, the Reorganized Debtors shall continue to pay all retiree
benefits (within the meaning of section 1114 of the Bankruptcy Code), at the
level established in accordance with section 1114 of the Bankruptcy Code, at any
time prior to the Confirmation Date, for the duration of the period for which
the Debtors have obligated themselves to provide such benefits.
13.3 Benefit Plans.
Subject to the occurrence of the Effective Date, all Benefit Plans will
survive confirmation of the Plan to the extent required under the Bankruptcy
Code.
13.4 Administrative Expenses Incurred After the Confirmation Date.
Administrative expenses incurred by the Debtors or the Reorganized
Debtors after the Confirmation Date, including (without limitation) claims for
professionals' fees and expenses, shall not be subject to application and may be
paid by the Debtors or the Reorganized Debtors, as the case may be, in the
ordinary course of business and without further Bankruptcy Court approval;
provided, however, that no claims for professional fees and expenses incurred
after the Confirmation Date shall be paid until after the occurrence of the
Effective Date.
13.5 Compliance with Tax Requirements.
In connection with the consummation of the Plan, the Debtors shall
comply with all withholding and reporting requirements imposed by any taxing
authority, and all distributions hereunder shall be subject to such withholding
and reporting requirements.
26
<PAGE> 121
13.6 Severability of Plan Provisions.
If, prior to the Confirmation Date, any term or provision of the Plan
is held by the Bankruptcy Court to be invalid, void or unenforceable, the
Bankruptcy Court shall have the power to alter and interpret such term or
provision to make it valid or enforceable to the maximum extent practicable,
consistent with the original purpose of the term or provision held to be
invalid, void or unenforceable, and such term or provision shall then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration or interpretation, the remainder of the terms and provisions hereof
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated by such holding, alteration or interpretation. The Confirmation
Order shall constitute a judicial determination and shall provide that each term
and provision hereof, as it may have been altered or interpreted in accordance
with the foregoing, is valid and enforceable in accordance with its terms.
13.7 Governing Law.
Except to the extent that the Bankruptcy Code or other federal law is
applicable, or to the extent provided otherwise in the documents contained in
the Plan Supplement, the rights, duties and obligations arising under the Plan
shall be governed by, and construed and enforced in accordance with, the laws of
the State of New York without giving effect to the principles of conflict of
laws thereof.
13.8 Notices.
All notices, requests, and demands to be effective shall be in writing
(including by facsimile transmission) and, unless otherwise expressly provided
herein, shall be deemed to have been duly given or made when actually delivered
or, in the case of notice by facsimile transmission, when received and
telephonically confirmed, addressed as follows:
If to the Debtors: KCS Energy, Inc.
5555 San Felipe
Suite 1200
Houston, Texas 77056
Attn: Frederick Dwyer, Secretary
Telephone: (713) 877-8006
Telecopier: (713) 877-1372
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attn: Michael P. Kessler
Telephone: (212) 310-8000
Telecopier: (212) 310-8007
and
27
<PAGE> 122
The Bayard Firm
222 Delaware Avenue, Suite 900
Wilmington, Delaware 19899
Attention: Neil B. Glassman
Telephone: (302) 655-5000
Telecopier: (302) 668-6395
If to the Proponents: Kathy Lee
DDJ Capital Management LLC
141 Linden Street, Suite S-4
Wellesley, Massachusetts 02482
Telephone: (781) 283-8500
Telecopier: (781) 283-8555
D.J. Baker
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, New York 10166
Telephone: (212) 351-4000
Telecopier: (212) 351-4035
David Matlin
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, New York 10010
Telephone: (212) 325-2000
Telecopier: (212) 325-8290
and
Peter Goodman
Andrews & Kurth LLP
850 Third Avenue, 7th Floor
New York, New York 10022
Telephone: (212) 850-2800
Telecopier: (212) 850-2929
28
<PAGE> 123
Dated: Wellesley, Massachusetts
August 25, 2000
Respectfully submitted,
THE OFFICIAL COMMITTEE OF
UNSECURED CREDITORS OF KCS ENERGY,
INC., ET AL.
By:
------------------------------------
Name: Kathy Lee
Title: Chairperson
Dated: New York, New York
August __, 2000
CREDIT SUISSE FIRST BOSTON CORPORATION
By:
------------------------------------
Name:
-----------------------------
Title:
-----------------------------
29
<PAGE> 124
EXHIBIT B
NOTEHOLDER AGREEMENT
<PAGE> 125
EXHIBIT C
KCS ENERGY, INC. ANNUAL REPORT ON FORM 1999 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1999
<PAGE> 126
EXHIBIT D
KCS ENERGY, INC. QUARTERLY REPORT OF FORM 1999 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
<PAGE> 127
EXHIBIT E
LIQUIDATION ANALYSIS
<PAGE> 128
PROCEEDS FROM LIQUIDATION
Oil and Gas Reserves
<TABLE>
<CAPTION>
Liquidation Proceeds
--------------------
Lower Higher
------ ------
<C> <C>
$220.0 $240.0
<CAPTION>
Recovery Percentage
-------------------
Value Lower Higher --
----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Other property, plant and equipment $ 4.1 25.0% -- 50.0% 1.0 -- 2.1
Accounts Receivable $28.8 50.0% -- 75.0% 14.4 -- 21.6
Other Current Assets $ 4.6 45.0% -- 55.0% 2.1 -- 2.5
Emission Credits $ 6.9 50.0% -- 75.0% 3.5 -- 5.2
------- -------
Total Proceeds Available for Distribution $ 240.9 $271.4
TOTAL PROCEEDS AVAILABLE FOR DISTRIBUTION
TOTAL PROCEEDS AVAILABLE FOR DISTRIBUTION, MID-POINT $ 256.2
Unrestricted Cash 35.0
-------
NET LIQUIDATION PROCEEDS $291.2
Present Value of Liquidation Proceeds as of Effective Date $277.3
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED ESTIMATED
ALLOCATION OF PROCEEDS CLAIM RECOVERY RECOVERY %
----- -------- ----------
<S> <C> <C> <C>
Chapter 7 Administrative Claims
Trustee Fees $ 8.7 $ 8.7 100.0%
Wind-down Expenses 3.8 3.8 100.0%
Professional Fees 5.6 5.6 100.0%
------ ------ ------
$ 18.1 $ 18.1 100.0%
PROCEEDS AVAILABLE FOR PAYMENT OF SECURED CLAIMS
Secured Claims
Bank Debt $ 79.5 $ 79.5 100.0%
Hedge Obligations 13.7 13.7 100.0%
------ ------ ------
$ 93.2 $ 93.2 100.0%
PROCEEDS AVAILABLE FOR PAYMENT OF ADMINISTRATIVE CLAIMS
Chapter 11 Administrative Claims $ 7.6 $ 7.6 100.0%
------ ------ ------
Administrative Expenses $ 7.6 $ 7.6 100.0%
PROCEEDS AVAILABLE FOR PAYMENT OF GENERAL UNSECURED CLAIMS $158.4
Trade Claims $ 31.5 $ 13.9 44.2%
11.0% Senior Notes due 2003 181.0 144.4 79.8%
8.875% Senior Subordinated Notes due 2008 145.8 -- 0.0%
------ ------
Total General Unsecured Claims $358.3 $158.4
PROCEEDS AVAILABLE FOR DISTRIBUTIONS TO EQUITY $ 0.0
SUMMARY OF RECOVERIES BY CLASS
</TABLE>
<TABLE>
<CAPTION>
Description Class Under the Plan Chapter 7
----------- ----- -------------- ---------
<S> <C> <C> <C>
Secured Bank Debt Class 2 100.0% 100.0%
General Unsecured Claims Class 6 100.0% 44.2%
Senior Notes Class 4 100.0% 79.8%
Senior Subordinated Notes Class 5 ( * ) 0.0%
Equity Class 7 ( * ) 0.0%
</TABLE>
(*) See Summary of Recovery by Class Under the Plan (Senior
Subordinated Notes and Equity) in the Footnotes to Liquidation
Analysis.
<PAGE> 129
FOOTNOTES TO LIQUIDATION ANALYSIS
Proved Oil and Gas Reserves
The Debtor provided Petrie Parkman with its mid-year (June 30, 2000) reserve
report prepared by Netherland, Sewell and Associates, Inc., ("NSAI"),
Petrie Parkman utilized the reserve quantities estimated by NSAI and applied
various discrete pricing scenarios to such reserve quantity estimates. Petrie
Parkman applied various after-tax discount rates to after-tax cash flows by
category of reserves. Based on this analysis, Petrie Parkman determined the
liquidation value of the proved reserves to be in the range of $220 million to
$240 million as of the Effective Date.
Other Property, Plant and Equipment
The value of Other Property, Plant and Equipment was estimated based on the net
book value of such assets as disclosed on the condensed consolidated balance
sheet in the Debtor's Form 10-Q for the period ended June 30, 2000.
THE FOLLOWING FOOTNOTES WERE OBTAINED FROM THE DEBTORS' SUPPLEMENT CONTAINING
EXHIBIT C (LIQUIDATION ANALYSIS) TO DEBTORS FOURTH AMENDED DISCLOSURE STATEMENT
FOR DEBTORS' THIRD AMENDED JOINT PLAN OF REORGANIZATION UNDER CHAPTER 11 OR
THE BANKRUPTCY CODE. THE ACCURACY OF SUCH FOOTNOTES HAS NOT BEEN INDEPENDENTLY
VERIFIED.
Accounts Receivable
The Company's customer base primarily consists of pipeline companies, oil and
gas aggregators and refiners. Historically, the Company has experienced minimal
bad debt expense. KCS does not expect its future collection of receivables to
differ materially from its collection history.
Other Current Assets
Includes inventory, pre-paid insurance, deposits and other current assets.
Trustee Fees
Section 326 of the Bankruptcy Code limits the chapter 7 trustee fees to 3.0% of
all monies disbursed or turned over the case by the chapter 7 trustee to
parties in interest, excluding the Debtor, but including holders of secured
claims. In this analysis, chapter 7 trustee fees were estimated at the cap
imposed by Section 326.
<PAGE> 130
Wind Down Costs
Wind down costs consist of corporate overhead, severance, stay bonuses and
other related costs to be incurred during the chapter 7 liquidation period.
Management assumes that the liquidation would occur over a six-month period and
that such expenses, costs and overhead would decrease over time.
Professional Fees
Professional fees represent the costs of a chapter 7 case related to attorneys,
accountants, appraisers and other professionals retained by the trustee. Based
on management review of the nature of these costs and the outcomes of similar
liquidations, fees were estimated to be $5.5 million which equates to
approximately $950 thousand per month.
Bank Debt
As of the Effective Date, the Company estimates the balance under its bank
facilities will be approximately $79.5 million, assuming the Company continues
to pay $2.5 million per month to reduce its principal outstanding in accordance
with the Cash Collateral Agreement.
Hedge Obligations
Hedge obligations reflects a secured transaction entered into by KCS Medallion
and CIBC before the acquisition of KCS Medallion by KCS. Per the terms of the
swap agreement, KCS is obligated to sell 3.4, 3.0, 2.5, 1.7 and 1.1 BCFE in the
years 2000-2005, respectively, at $2,055/MCFE. In addition, KCS has hedged 9
BCFE for the period July 1, 2000 through March 31, 2001 using no cost collars
with floor prices of $2.70 to $3.53 per MMBTU and cap prices of $4.00 to $5.50
per MMBTU.
Trade Claims
Represents accounts payable and accrued liabilities.
Other Unsecured Claims
Other unsecured claims consist of $150.0 million of Senior Notes plus accrued
interest of $31.0 million and $125.0 million of Senior Subordinated Notes plus
accrued interest of $20.9 million as of December 1, 2000.
Administrative Expenses
Costs associated with the administration of the Chapter 11 case prior to its
conversion to a chapter 7, including senior management severance programs and
professional fees. Analysis assumes Chapter case is converted to chapter 7 on
the Effective Date.
<PAGE> 131
EXHIBIT F
REORGANIZATION VALUE
<PAGE> 132
VALUATION OF REORGANIZED KCS
1. Valuation Overview
THE ESTIMATES OF REORGANIZATION VALUE SET FORTH HEREIN REPRESENT
HYPOTHETICAL REORGANIZATION VALUES THAT WERE DEVELOPED SOLELY FOR THE PURPOSE OF
THE PLAN. SUCH ESTIMATES REFLECT COMPUTATIONS OF THE ESTIMATED REORGANIZATION
VALUE OF KCS THROUGH THE APPLICATION OF VARIOUS CUSTOMARY AND GENERALLY ACCEPTED
VALUATION TECHNIQUES AND DO NOT REFLECT OR CONSTITUTE APPRAISALS OF THE ASSETS
OF KCS OR THE ACTUAL MARKET VALUE OF KCS. BECAUSE SUCH ESTIMATES ARE INHERENTLY
UNCERTAIN, PETRIE PARKMAN, ASSUMES NO RESPONSIBILITY FOR THEIR ACCURACY. IN
ADDITION, PETRIE PARKMAN DID NOT INDEPENDENTLY VERIFY KCS'S PROJECTIONS IN
CONNECTION WITH THE VALUATION, AND NO INDEPENDENT EVALUATIONS OR APPRAISALS OF
KCS'S ASSETS WERE SOUGHT OR OBTAINED THEREWITH.
In developing its estimate of Reorganization Value of KCS, Petrie
Parkman performed several different analyses. Petrie Parkman performed a
discounted cash flow analysis, an analysis of comparable corporate transactions
and offers for control, an analysis of comparable property transactions, an
analysis of comparable publicly-traded companies, and an analysis of the going
concern value of KCS.
2. Discounted Cash Flow Analysis.
Petrie Parkman performed a discounted cash flow analysis as one of the
analyses employed in determining the reorganization value of KCS. Petrie Parkman
calculated the net present value of estimates of future after-tax cash flows for
KCS's oil and gas reserve assets based on the Company's reserve estimates and
for its non-reserve assets utilizing information provided by KCS.
Petrie Parkman evaluated five scenarios in which the principal
variables were oil and gas prices. The five pricing scenarios were based on
NYMEX benchmark prices for natural gas and West Texas Intermediate crude oil.
Petrie Parkman applied appropriate quality and transportation adjustments to
these benchmarks. In doing its analysis, Petrie Parkman applied various
after-tax discount rates to the resulting after-tax cash flows to arrive at
asset reference value ranges for each price sensitivity.
3. Comparable Transactions Analysis.
PROPERTY TRANSACTIONS
Petrie Parkman considered asset transactions which Petrie Parkman
determined to be comparable to KCS assets based on a variety of qualitative
factors. Petrie Parkman calculated
<PAGE> 133
purchase price multiples of equivalent reserves for the acquired assets in each
transaction. Petrie Parkman compared these purchase price multiples to relevant
KCS data.
COMPANY ACQUISITIONS
Additionally, Petrie Parkman reviewed certain publicly available
information on certain company acquisition transactions and offers for control
in the oil and gas exploration and production industry.
Using publicly available information, Petrie Parkman calculated total
investment (which Petrie Parkman defined for the purposes of this analysis as
purchase price of equity plus net obligations assumed) multiples of unlevered
cash flow for the target company in each transaction. Petrie Parkman also
calculated market capitalization (which Petrie Parkman defined for purpose of
this analysis as market value of common equity) multiples of historical
financial criteria for discretionary cash flow for the target company in each
transaction. Petrie Parkman also calculated implied purchase price of reserves
(which Petrie Parkman defined for the purposes of this analysis as total
investment less estimated values of non-reserve assets) multiples of (i)
equivalent proved reserves and (ii) standardized measure of discounted future
net cash flows ("SEC Value") for the target company in each transaction.
Petrie Parkman compared these measures to relevant KCS data.
4. Common Stock Comparison.
Petrie Parkman calculated multiples of financial criteria for for
various publicly traded independent oil and gas companies deemed to be
comparable to KCS and compared these to relevant KCS data.
5. Going Concern Analysis. Petrie Parkman projected the potential
financial performance of KCS for the period beginning on December 1, 2000 using
five distinct pricing scenarios and adjusting for the proposed recapitalization
of the Company. Petrie Parkman prepared these projections utilizing certain
information and projections prepared or provided by KCS management and by
applying certain other assumptions Petrie Parkman felt were appropriate.
Petrie Parkman also applied probability of success factors for each of
the Company's reserve categories against which it then applied each of its five
pricing scenarios. Petrie Parkman calculated a range of terminal values by
applying terminal multiples to projected terminal year cash flows in each price
case scenario and then applied a range of discount rates to these terminal
values to discount back to December 1, 2000.
After considering each of the above analyses in aggregate, Petrie
Parkman has concluded the Reorganization Value of KCS to be in a range of $340
million to $380 million as of December 1, 2000.
2
<PAGE> 134
EXHIBIT G
PROJECTIONS
<PAGE> 135
KCS ENERGY, INC.
PROJECTED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $136,491 $176,261 $164,238 $134,494 $120,142
Lease Operating Expenses 26,624 24,660 28,173 28,575 29,632
Production Taxes 3,524 5,523 4,690 3,780 3,350
General & Administrative 9,847 7,936 8,965 9,234 9,511
Restructuring Expenses 1,886 13,128 - - -
Exploration - - - - -
DD&A 50,967 43,588 68,676 78,378 74,089
-------- -------- -------- -------- --------
Total Operating Expenses 92,848 94,835 110,504 119,968 116,582
Operating Income 43,643 81,426 53,735 14,526 3,560
Interest Expense (40,005) (36,711) (25,552) (25,552) (25,552)
Interest & Other Income 702 1,132 452 400 400
-------- -------- -------- -------- --------
Pretax Income 4,340 45,848 28,636 (10,626) (21,592)
Income Taxes - (11,080) (10,022) 3,719 7,557
-------- -------- -------- -------- --------
Income for Common $ 4,340 $ 34,768 $ 18,613 $ (6,907) $(14,035)
======== ======== ======== ======== ========
EBITDA (a) $ 96,496 $138,143 $122,410 $ 92,904 $77,649
EBITDA/Interest Expense 2.4x 3.8x 4.8x 3.6x 3.0x
Total Debt/EBITDA 4.2x 1.7x 1.9x 2.3x 3.0x
</TABLE>
(a) Excludes restructuring expenses and extraordinary items.
<PAGE> 136
KCS ENERGY, INC.
PROJECTED BALANCE SHEET
(DOLLARS IN THOUSANDS)
[CAPTION]
<TABLE>
As of December 31,
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash $ 10,584 $ 25,708 $ 10,000 $ 10,000 $ 10,000
Accounts Receivable 21,941 24,221 21,690 16,413 14,621
Other 7,571 4,633 4,633 4,633 4,633
-------- -------- -------- -------- --------
Total Current
Assets 40,096 54,562 36,323 31,048 29,254
Property Plant &
Equipment, net 236,967 287,990 333,177 320,631 297,967
Other Assets 7,869 2,205 2,205 2,205 2,205
-------- -------- -------- -------- --------
Total Assets $284,932 $344,757 $371,705 $353,884 $329,425
======== ======== ======== ======== ========
Current Liabilities:
Accrued Liabilities $ 24,602 $ 15,677 $ 15,677 $ 15,677 $ 15,677
Accounts Payable - 16,147 14,460 10,943 9,747
Other Current
Liabilities - 1,963 1,963 1,963 1,963
-------- -------- -------- -------- --------
Total Current
Liabilities 24,602 33,787 32,100 28,583 27,387
Bank Debt 107,095 79,490 79,490 79,490 79,490
11% Senior Notes 165,074 150,000 150,000 150,000 150,000
8.875% Subordinate
Notes 136,094 - - - -
Deferred Taxes - 2,389 12,412 5,014 (4,213)
Other Liabilities 1,910 2,018 2,018 2,018 2,018
Preferred Stock - - - - -
Common Equity (149,843) 77,072 95,685 88,778 74,744
-------- -------- -------- -------- --------
Total Stock-
holders' Equity (149,843) 77,072 95,685 88,778 74,744
-------- -------- -------- -------- --------
Total Liabilities
& Equity $284,932 $344,757 $371,705 $353,884 $329,425
======== ======== ======== ======== ========
</TABLE>
<PAGE> 137
KCS ENERGY, INC.
PROJECTED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income to Common......... $ 4,340 $ 24,768 $ 18,613 $ (6,907) $(14,035)
Depreciation, Depletion &
Amortization............... 50,967 43,588 68,676 78,378 74,089
Deferred Taxes............... -- 11,080 10,022 (7,397) (9,228)
Other (Incl. Non-cash
Preferred Payment)......... 2,862 10,458 -- -- --
Decrease (Increase) in A/R... 12,686 (2,280) 2,531 5,276 1,794
(Decrease) Increase in A/P... 1,779 9,240 (1,687) (3,517) (1,196)
(Decrease) Increase in Acc.
Int. -- Sr. Notes.......... -- 16,258 -- -- --
(Decrease) Increase in Acc.
Int. -- Sub. Notes......... -- 9,706 -- -- --
Other Assets & Liabilities... (1,171) (454) -- -- --
--------- --------- -------- -------- --------
Cash Provided by (Used in)
Operating Activities..... 71,463 132,365 98,155 65,833 51,425
INVESTING ACTIVITIES
Capital Expenditures --
Indentified Projects....... (60,000) (59,588) (24,064) (21,858) (11,535)
Capital Expenditures --
Exp./Acq................... -- -- (89,799) (44,174) (39,890)
Proceeds from Asset Sales.... 27,718 143 -- -- --
Other........................ 840 (158) -- -- --
--------- --------- -------- -------- --------
Cash Provided by (Used in)
Investing Activities..... (31,442) (59,603) (113,863) (65,833) (51,425)
FINANCING ACTIVITIES
Planned Borrowings
(Repayments)............... 16,300 (56,613) -- -- --
Other Borrowings
(Repayments)............... (44,905) 292 -- -- --
Common Stock Transactions.... 21 -- -- -- --
Cash Dividends Paid.......... (585) -- -- -- --
Other........................ (1,144) (1,317) -- -- --
--------- --------- -------- -------- --------
Cash Provided by (Used in)
Financing Activities..... (30,313) (57,638) -- -- --
Net Change in Cash............ 9,708 15,124 (15,708) -- --
Cash at Beginning of Period... 876 10,584 25,708 10,000 10,000
--------- --------- -------- -------- --------
Cash at End of Period.......... $ 10,584 $ 25,708 $ 10,000 $ 10,000 $ 10,000
========= ========= ======== ======== ========
</TABLE>
<PAGE> 138
THE CREDITORS' COMMITTEE CAUTIONS THAT NO REPRESENTATIONS CAN BE MADE AS TO THE
ACCURACY OF THESE FINANCIAL PROJECTIONS OR TO THE REORGANIZED DEBTORS' ABILITY
TO ACHIEVE THE PROJECTED RESULTS. SOME ASSUMPTIONS INEVITABLY WILL NOT
MATERIALIZE. FURTHER, EVENTS AND CIRCUMSTANCES OCCURRING SUBSEQUNT TO THE DATE
ON WHICH THESE PROJECTIONS WERE PREPARED MAY BE DIFFERENT FROM THOSE ASSUMED OR,
ALTERNATIVELY, MAY HAVE BEEN UNANTICIPATED, AND THUS THE OCCURRENCE OF THESE
EVENTS MAY AFFECT FINANCIAL RESULTS IN A MATERIAL AND POSSIBLY ADVERSE MANNER.
THE PROJECTIONS, THEREFORE, MAY NOT BE RELIED UPON AS A GUARANTY OR OTHER
ASSURANCE OF THE ACTUAL RESULTS THAT WILL OCCUR.
Summary of Significant Assumptions
The Creditors' Committee has developed the Projections (summarized below) to
assist both creditors and shareholders in their evaluation of the Plan and to
analyze its feasibility. THE PROJECTIONS ARE BASED UPON A NUMBER OF SIGNIFICANT
ASSUMPTIONS DESCRIBED BELOW. ACTUAL OPERATING RESULTS AND VALUES MAY AND WILL
VARY FROM THOSE PROJECTED.
a. Fiscal Years
KCS's fiscal year ends on December 31 of each year.
b. Plan Terms and Consummation
The Projections assume an Effective Date of December 1, 2000 with
Allowed Claims and Equity Interests treated in accordance with the treatment
provided in the Plan with respect to such Allowed Claims and Equity Interests.
Whether or not consummation of the Plan occurs on or about December 1, 2000,
there is no guarantee that, among other things, the trade creditors will support
the Debtor as projected. A material reduction in trade credit and terms could
materially impact the Debtors' ability to achieve the projected results.
Further, if the Effective Date does not occur by December 1, 2000, additional
bankruptcy expenses will be incurred until such time as a plan of reorganization
is confirmed. These expenses could significantly impact KCS's results of
operations and cash flow.
c. Assumptions Preceding the Effective Date
As a basis for the Projections, the Creditors' Committee has estimated
the operating results for the period of time leading up to the Effective Date.
Specifically, it has been assumed that during the Chapter 11 cases, trade
vendors will continue to provide KCS with goods and services on customary terms
and credit.
d. Revenues
Revenues are based on projections of NYMEX natural gas and WTI crude
oil prices for the years 2000, 2001, 2002, and 2003 as prepared by Petrie
Parkman & Co. These prices were then adjusted for regional basis differentials.
Projected revenues also
<PAGE> 139
reflect the impact of existing commodity price hedges. Additionally, projected
revenues are based upon the Creditors' Committee's assessment of future
production taking into consideration the Netherland, Sewell & Associates Reserve
Report. Additionally, the Creditors' Committee incorporated its views of a
program of reinvestment of available cash flow in drill wells and VPP's.
f. Lifting and Operating Expenses (LOE) and Production Taxes
LOE and production taxes are projected to be consistent with current
levels plus estimates for incremental costs projected to be incurred when new
proved reserves are brought into production.
g. General and Administrative Expenses (G&A)
G&A expenses are projected based on current expense levels initially,
forecasted to increase 3% per annum after 2001.
h. Working Capital
Working capital components have been estimated based upon underlying
production levels and the analysis of historical averages.
i. Capital Expenditures
Capital expenditures consist primarily of the capital expenditures
prescribed in the Reserve Report as well as investment in new oil and natural
gas drilling, the development of oil and natural gas reserves and VPP
investments. The Projections assume a level of capital expenditures which can be
supported by the capital structure and forecast operating results of Reorganized
KCS. The Projections assume an average finding and development cost of $1.50 per
Mcfe for acquisition and exploration type projects. The finding and development
cost for VPP investments is based on the assumed prices in effect in the year
such investments are made.
j. EBITDA
EBITDA is defined for purposes of the Projections as earnings before
interest expense, income tax provision, depreciation, depletion and
amortization, restructuring expenses, and extraordinary items.
k. Interest Expense
Interest expense reflects interest on the New Credit Facility and
interest on the $150.0 million of Senior Notes.
l. New Credit Facility
Reorganized KCS is assumed to enter into a new revolving credit
facility with an initial draw of $79.5 million with interest at approximately
LIBOR plus 3.0%
2
