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UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
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In re: Chapter 11
KCS Case No. 00-0028 (PJW) and
ENERGY, INC., PROLIQ, INC., KCS
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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FOURTH AMENDED DISCLOSURE STATEMENT
FOR DEBTORS' THIRD AMENDED JOINT PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
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WEIL, GOTSHAL & MANGES LLP THE BAYARD FIRM
767 Fifth Avenue 222 Delaware Avenue, Suite 900
New York, New York 10153 Wilmington, Delaware 19899
(212) 310-8000 (302) 655-5000
Attorneys for Debtors and Attorneys for Debtors and
Debtors in Possession Debtors in Possession
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INTRODUCTORY STATEMENT
THIS JOINT DISCLOSURE STATEMENT UNDER SECTION 1125 OF THE
BANKRUPTCY CODE WITH RESPECT TO THE DEBTORS' JOINT PLAN OF REORGANIZATION UNDER
CHAPTER 11 OF THE BANKRUPTCY CODE (THE "DISCLOSURE STATEMENT") CONTAINS
SUMMARIES OF CERTAIN PROVISIONS OF THE DEBTORS' THIRD AMENDED JOINT PLAN OF
REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (THE "PLAN"), AND OTHER
DOCUMENTS RELATING TO THE PLAN. WHILE THE DEBTORS BELIEVE 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 ANY OTHER PARTY, OR BE DEEMED CONCLUSIVE EVIDENCE OF THE TAX OR OTHER LEGAL
EFFECTS OF THE REORGANIZATION OF THE DEBTORS OR ON HOLDERS OF CLAIMS OR EQUITY
INTERESTS.
NO PARTY IS AUTHORIZED BY THE DEBTORS TO PROVIDE ANY INFORMATION
WITH RESPECT TO THE DEBTORS, THE PLAN, THE DEBTORS' ANTICIPATED FINANCIAL
POSITION OR OPERATIONS AFTER CONFIRMATION OF THE PLAN, OR THE VALUE OF THE
DEBTORS' BUSINESSES AND PROPERTIES OTHER THAN AS SET FORTH IN THIS DISCLOSURE
STATEMENT. TO THE EXTENT INFORMATION IN THIS DISCLOSURE STATEMENT RELATES TO THE
DEBTORS, THE DEBTORS HAVE PROVIDED THE INFORMATION IN THIS DISCLOSURE STATEMENT.
CERTAIN OF THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT
ARE FORWARD LOOKING PROJECTIONS AND FORECASTS BASED UPON CERTAIN ESTIMATES AND
ASSUMPTIONS. THERE CAN BE NO ASSURANCE THAT SUCH STATEMENTS WILL BE REFLECTIVE
OF ACTUAL OUTCOMES. NOTHING CONTAINED IN THIS DISCLOSURE STATEMENT, EXPRESS OR
IMPLIED, IS INTENDED TO GIVE RISE TO ANY COMMITMENT OR
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OBLIGATION OF THE DEBTORS OR WILL CONFER UPON ANY PERSON ANY RIGHTS, BENEFITS OR
REMEDIES OF ANY NATURE WHATSOEVER.
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 WILL BE UNDER ANY OBLIGATION TO UPDATE SUCH INFORMATION IN THE FUTURE.
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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.....................................................................................5
A. Overview of the Debtors' Business..............................................................5
B. Organizational Structure of the Debtors........................................................6
C. Oil and Gas Exploration and Production.........................................................7
1. Development and Production Activities.................................................7
2. Volumetric Production Payment Program.................................................7
D. Oil and Gas Properties.........................................................................8
E. Dramatic Increase in Oil and Gas Prices Since Commencement Date...............................10
F. Hedging Activities............................................................................11
G. Selected Financial Information................................................................12
H. The Debtors' Significant Debt Obligations.....................................................12
1. The Resources Facility...............................................................12
2. The Medallion Facility...............................................................12
3. The Senior Notes.....................................................................13
4. The Senior Subordinated Notes........................................................13
V. THE DEBTORS' CHAPTER 11 CASES..........................................................................13
A. Events Preceding the Filing of the Chapter 11.................................................13
1. Brief History of Debtors' Operations.................................................13
2. Disappointing Results in Manderson Field and Drop in Oil and Gas Prices Led to
Defaults Under the Credit Facilities.................................................14
3. Forbearance Agreements with Bank Lenders.............................................15
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4. Efforts to Improve Financial Condition...............................................16
5. Negotiation of the Restructuring.....................................................17
B. Events During the Chapter 11 Cases............................................................17
1. Commencement of the Chapter 11 Cases and "First Day" Motions and Orders..............17
a. Use of Cash Collateral......................................................17
b. Payment of Prepetition Employee Compensation, Benefits, Expenses and
Related Items...............................................................18
c. Payment of Certain Prepetition Claims in the Ordinary Course................18
d. Cash Management.............................................................18
e. Retention of Professionals..................................................19
f. Joint Administration of the Chapter 11 Cases................................19
g. Extension of Time to File Statements of Financial Affairs and
Schedules of Assets, Liabilities, Executory Contracts and Unexpired
Leases......................................................................19
h. Extension of Time to Assume or Reject Non-Residential Real Property
Leases......................................................................20
i. Interim Compensation and Reimbursement of Chapter 11 Professionals
and Committee Members.......................................................20
2. Other Material Matters...............................................................20
3. Other Material Motions and Orders....................................................21
a. Permission to Assume Gas Trading Agreements.................................21
b. Payment of Employee Bonuses Related to Debtors' Incentive Award
Program.....................................................................21
c. The First Impairment Motion.................................................21
d. The Second Impairment Motion................................................22
e. The Third Impairment Motion.................................................23
f. Exclusivity.................................................................23
4. Exit Facility Commitment.............................................................24
5. No Bar Date Fixed in These Chapter 11 Cases..........................................24
VI. THE PLAN OF REORGANIZATION.............................................................................24
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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)......................................................26
6. Secured Bank Claims (Class 2)........................................................27
7. Other Secured Claims (Class 3).......................................................28
8. Senior Notes Claims (Class 4)........................................................28
9. Senior Subordinated Notes Claims (Class 5)...........................................29
10. General Unsecured Claims (Class 6)...................................................30
11. KCS Common Stock Equity Interests (Class 7)..........................................30
12. Employee and Director Stock Option Plans 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. Secured Bank Renewal Notes...........................................................31
2. Issuance of New Securities...........................................................31
3. Cancellation of Existing Securities and Agreements...................................32
4. Corporate Action.....................................................................32
a. Board of Directors of Reorganized Debtors...................................32
b. Officers of the Reorganized Debtors.........................................32
c. Liquidity Provisions........................................................32
5. Rights Offering......................................................................33
6. Confirmation Under Section 1129(b) of the Bankruptcy Code............................33
D. Summary of Certain Other Provisions of the Plan...............................................33
1. Provisions Governing Distributions...................................................33
a. Date of Distributions.......................................................33
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b. Distribution Record Date for Holders of Senior Notes and Senior
Subordinated Notes Claims...................................................33
c. Surrender of Instruments....................................................34
d. Compensation of Professionals and the Indenture Trustees' Fees..............34
e. Delivery of Distributions...................................................34
f. Manner of Payment Under the Plan............................................35
g. Fractional Shares...........................................................35
h. Setoffs and Recoupment......................................................35
i. Distributions After Effective Date..........................................35
j. Exculpation.................................................................35
k. Allocation Relating to Senior Subordinated Notes............................36
l. Change of Control...........................................................36
m. Retention of Causes of Action...............................................36
2. Procedures for Treating Disputed Claims Under Plan of Reorganization.................36
a. Disputed Claims.............................................................36
(i) Process.............................................................36
(ii) Tort Claims.........................................................37
b. Objections to Claims........................................................37
c. No Distributions Pending Allowance..........................................37
d. Distributions After Allowance...............................................37
3. Provisions Governing Executory Contracts and Unexpired Leases........................38
4. Conditions Precedent to Effective Date...............................................38
a. Conditions Precedent to Effective Date of Plan..............................38
(i) Confirmation Order..................................................38
(ii) Secured Bank Renewal Notes..........................................38
(iii) Regulatory Approvals................................................38
b. Waiver of Conditions Precedent..............................................38
5. Effect of Confirmation...............................................................38
a. Vesting of Assets...........................................................38
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b. Binding Effect..............................................................39
c. Discharge of Debtors........................................................39
d. Term of Injunctions or Stays................................................39
e. Indemnification Obligations.................................................39
f. Limited Release.............................................................40
6. Retention of Jurisdiction............................................................40
7. Miscellaneous Provisions.............................................................40
a. Payment of Statutory Fees...................................................40
b. Retiree Benefits............................................................40
c. Benefit Plans...............................................................40
d. Administrative Expenses Incurred After the Confirmation Date................41
e. Compliance with Tax Requirements............................................41
f. Severability of Plan Provisions.............................................41
g. Governing Law...............................................................41
h. Notices.....................................................................41
VII. DIRECTORS, OFFICERS AND OWNERSHIP OF REORGANIZED DEBTORS...............................................42
A. Boards of Directors of Reorganized Debtors....................................................42
1. Identities and Compensation..........................................................42
2. Biographies of Directors.............................................................43
B. Management....................................................................................44
1. Identities and Compensation..........................................................44
2. Biographies of Senior Management.....................................................44
C. Security Ownership............................................................................45
D. New Employee and Director Stock Options.......................................................46
VIII. SECURITIES TO BE ISSUED PURSUANT TO PLAN...............................................................46
A. Reorganized KCS Convertible Preferred Stock...................................................46
B. New Employee and Director Stock Options.......................................................46
IX. SECURITIES LAW MATTERS.................................................................................46
X. CERTAIN FACTORS TO BE CONSIDERED.......................................................................49
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A. Variances from Projections....................................................................50
B. Volatile Nature of Oil and Gas Markets; Fluctuations in Prices................................50
C. Risks of Hedging Transactions.................................................................51
D. Dependence on Acquiring and Finding Additional Reserves.......................................51
E. Exploration and Development Risks.............................................................51
F. Substantial Capital Requirements..............................................................51
G. Acquisition Risks.............................................................................52
H. Marketing Risks...............................................................................52
I. Operating Risks...............................................................................52
J. Uncertainty of Estimates of Oil and Gas Reserves and Future Net Cash Flows....................53
K. Financing Requirements and Restrictions.......................................................54
L. Change of Control.............................................................................54
M. Absence of Public Market......................................................................55
N. Effective Subordination of the Senior Notes and Reorganized KCS Convertible Preferred
Stock.........................................................................................56
O. Competitive Industry..........................................................................56
P. Governmental Regulations......................................................................56
Q. Pending Litigation and Other Legal Proceedings................................................57
R. Certain Tax Matters...........................................................................57
XI. VOTING PROCEDURES AND REQUIREMENTS.....................................................................57
A. Classes Entitled to Vote Under the Plan.......................................................57
B. Voting Requirements...........................................................................57
C. Acceptance by Classes of Claims or Equity Interests...........................................58
XII. CONFIRMATION OF THE PLAN...............................................................................58
A. Confirmation Hearing..........................................................................58
B. Requirements for Confirmation of the Plan.....................................................59
1. Fair and Equitable Test..............................................................59
a. Secured Claims..............................................................59
b. Unsecured Claims............................................................60
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c. Equity Interests............................................................60
2. Feasibility..........................................................................60
3. "Best Interests" Test................................................................61
XIII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN..............................................62
A. Liquidation Under Chapter 7...................................................................62
B. Alternative Plan of Reorganization............................................................63
XIV. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN....................................................63
A. Introduction..................................................................................63
B. Consequences to Holders of Claims.............................................................64
1. Realization and Recognition of Gain or Loss in General...............................64
2. Holders of Allowed Administrative Expense Claims (Unclassified) and
Professional Compensation and Reimbursement Claims (Unclassified)....................65
3. Holders of Other Priority Claims (Class 1) and Other Secured Claims (Class 3)........65
4. Holders of Secured Bank Claims (Class 2).............................................65
5. Holders of Reinstated Senior Notes (Class 4).........................................66
6. Holders of Senior Subordinated Notes Claims (Class 5)................................66
7. Holders of Allowed General Unsecured Claims (Class 6)................................67
8. Holders of KCS Common Stock Equity Interests (Class 7)...............................67
9. Holders of Employee and Director Stock Option Plans Equity Interests (Class 8).......67
10. Withholding..........................................................................67
C. Consequences to Debtors or Reorganized Debtors................................................67
1. Discharge-of-Indebtedness Income Generally...........................................67
2. Utilization of Net Operating Loss Carryovers.........................................68
3. Consolidated Return Items............................................................69
4. Alternative Minimum Tax..............................................................69
XV. CONCLUSION AND RECOMMENDATION..........................................................................69
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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.
Also on the Commencement Date, the Debtors filed their initial
Disclosure Statement with the Bankruptcy Court for approval in connection with
the solicitation of acceptances and rejections with respect to the Debtors'
Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (as
currently amended, the "Plan"). Amended versions of the Disclosure Statement
were filed on January 28, 2000, March 7, 2000, March 24, 2000 and October 20,
2000. 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. A
copy of the Plan is annexed hereto as Exhibit A. 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
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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 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 Debtors 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. There has been no independent audit of the financial information
contained in this Disclosure Statement and no fairness opinion has been obtained
regarding the value of the assets and the amount of the liabilities. The factual
information regarding the Debtors and their assets and liabilities has been
derived from the Debtors' internal documents and available public records. While
every effort has been made by the Debtors to provide accurate information
herein, the Debtors, and their respective legal and financial advisors, cannot
and do not warrant or represent that the information contained in this
Disclosure Statement is without any inaccuracy.
3. Certain of the statements contained in this Disclosure Statement
or in exhibits attached hereto are forward looking projections and forecasts
based on certain estimates and assumptions. There can be no assurance that such
statements will reflect actual outcomes. You should carefully review and
consider Section X below, 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.
6. Except as set forth in this Disclosure Statement, the Plan, the
Exhibits and Plan Supplement, no representations concerning the Debtors, their
assets, past or future business operations, or the Plan are authorized, nor are
any such representations to be relied upon in arriving at a decision with
respect to the Plan. Any representations made to secure acceptance or
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rejection of the Plan other than as contained in this Disclosure Statement
should be reported to counsel for the Debtors.
B. VOTING
Only holders of Claims or Equity Interests in Classes 2, 5, 6 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 chapter 11 plan and (ii) entitled to receive a
distribution under such a plan are entitled to vote on a chapter 11 plan. In the
Chapter 11 Cases, only the Claims and Equity Interests in Classes 2, 5, 6 and 7
are impaired by and entitled to receive a distribution under the Plan and,
therefore, are entitled to vote to accept or reject the Plan. Classes 1, 3 and 4
and the holders of Claims in such Classes, are unimpaired, are conclusively
presumed to have accepted the Plan and thus are not entitled to vote on the
Plan. The holders of Equity Interests in Class 8 will not receive a distribution
under the Plan and, therefore, are deemed to have rejected the Plan and thus are
not entitled to vote to accept or reject 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 2, 5, 6 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 2, 5, 6 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; phone: (212) 681-9600; fax: (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 executed Ballots that are received timely but do not indicate
either an acceptance
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or rejection of the Plan will be deemed to constitute an acceptance of the Plan.
Further information regarding voting 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 commencing at 9:30 a.m. (Eastern Time) and continuing on
January 31, 2001, 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,
please refer to 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 a renewal, extension and amendment to the
existing secured Resources Facility and Medallion Facility. Allowed Other
Secured Claims will be paid in full on the Effective Date or reinstated. Allowed
General Unsecured Claims will be paid in full in Cash without interest 90 days
after the Effective Date. Allowed Administrative Expense Claims, Allowed
Professional Compensation and Reimbursement Claims, Allowed Priority Tax Claims
and Allowed Other Priority Claims will be paid in full.
The holders of Senior Notes will receive Cash in the amount of all
accrued and unpaid interest (at the non-default rate) on such notes as of the
last scheduled interest payment date prior to the Effective Date. In addition,
the Senior Notes and Senior Indenture will be reinstated.
Each holder of a Senior Subordinated Note will receive one share
of Reorganized KCS Convertible Preferred Stock with a liquidation preference and
stated value of $1000 plus accrued interest in respect of such note as of the
Effective Date for every $1000 in principal amount of such note. The Reorganized
KCS Convertible Preferred Stock will bear a fixed, preferred dividend of 7.50%
per annum and will be convertible into shares of Reorganized KCS Common Stock
representing approximately 32.37% of such common stock. The ownership interest
of holders of Reorganized KCS Convertible Preferred Stock upon conversion of
such stock into Reorganized KCS Common stock may be diluted by the exercise of
options granted under the New Employee and Director Stock Option Plan. In
addition, the liquidation preference will be effective in the event of a sale of
all or substantially all of the assets of Reorganized KCS.
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The terms of the Reorganized KCS Convertible Preferred Stock have
been designed to provide holders of Allowed Senior Subordinated Notes Claims
with property of a value, as of the Effective Date, equal to the Allowed amount
of such Claims. The value of the distribution to holders of Allowed Senior
Subordinated Notes Claims is based, in part, on the valuation of the Reorganized
Debtors annexed hereto as Exhibit G. The valuation of the Reorganized Debtors
may be adjusted prior to the Confirmation Date by result of, among other things,
discovery of additional reserves through the Debtors' ongoing exploration
program. If the Bankruptcy Court determines a different valuation of the
proposed distribution to holders of Allowed Senior Subordinated Notes Claims,
the dividend rate on the Reorganized KCS Convertible Preferred Stock will be
adjusted in order to provide holders of Allowed Senior Subordinated Notes Claims
with property of a value, as of the Effective Date, equal to the Allowed amount
of such Claims.
Additional details of the terms of the Reorganized KCS Convertible
Preferred Stock, including conversion rights, ranking, redemption and voting
rights, will be substantially the same as the terms set forth in the Summary of
Reorganized KCS Convertible Preferred Stock Terms, annexed hereto as Exhibit B.
The holders of KCS Common Stock Equity Interests will retain their
Pro Rata Share of 29,265,810 shares of Common Stock which will constitute 100%
of the authorized, issued and outstanding common shares of Reorganized KCS on
the Effective Date. The KCS Common Stock Equity Interests' Pro Rata Share of the
authorized, issued and outstanding shares of Reorganized KCS Common Stock will
be diluted if the Reorganized KCS Convertible Preferred Stock is converted.
Assuming full conversion of Reorganized KCS Convertible Preferred Stock into
Reorganized KCS Common Stock, the dilution will result in holders of KCS Common
Stock Equity Interests retaining approximately 67.63% of the authorized, issued
and outstanding shares of Reorganized KCS. The ownership interest of holders of
KCS Common Stock Equity Interests also may be diluted by the exercise of options
granted under the New Employee and Director Stock Option Plan.
All outstanding options to acquire shares of KCS Common Stock will
be cancelled and the holders thereof will receive no consideration with respect
to such 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 properties through their
Volumetric Production Payment Program ("VPP Program"), which is currently
concentrated in properties located in the Gulf of Mexico.
5
<PAGE> 16
Certain information about the Debtors is set forth below.
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"), annexed hereto as Exhibit C, and Quarterly Report on Form 10-Q for
the three-month period ended June 30, 2000 (the "June 30, 2000 10-Q"), annexed
hereto as Exhibit D.
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]
<TABLE>
<CAPTION>
-----------------------
KCS Energy, Inc.
(DE)
-----------------------
<S> <C> <C> <C> <C> <C> <C>
----------------- -------------- --------------- ----------------------- -------------- --------------- --------------
Proliq, Inc. KCS KCS Medallion Medallion Gas KCS Energy KCS Michigan National
(NJ) Resources, Resources, Services, Inc. Services, Resources, Enerdrill
Inc. Inc. (OK) Inc. Inc. Corporation
(DE) (DE) (DE) (DE) (NJ)
a/k/a KCS
Mountain
Resources,
Inc
----------------- -------------- --------------- ----------------------- -------------- --------------- --------------
----------------- ---------------
KCS Energy Medallion
Marketing, Inc. California
(NJ) Properties,
Inc.
(TX)
----------------- ---------------
</TABLE>
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 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, Inc., KCS
6
<PAGE> 17
Michigan Resources, 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 believe that their 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.
Typically, 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.
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 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.
7
<PAGE> 18
D. OIL AND GAS PROPERTIES
The following tables set forth the Debtors' oil and gas reserve
data as of June 30, 2000.
<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)
of the Debtors' reserves calculated in accordance with SEC guidelines was
approximately $526 million at June 30, 2000 after giving effect to oil and gas
hedges compared to $293 million at December 31, 1999. The oil price used to
calculate the PV-10 is based on the June 30, 2000 West Texas/New Mexico
Intermediate ("WTI") posted price of $29.75 ($22.75 at December 31, 1999) per
barrel, 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 New York Mercantile Exchange ("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.
8
<PAGE> 19
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 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. Proved reserves for
these properties were estimated 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 and June 30, 2000 10-Q annexed hereto as Exhibits C and D,
respectively.
9
<PAGE> 20
E. DRAMATIC INCREASE IN OIL AND GAS PRICES SINCE COMMENCEMENT DATE
Since the Commencement Date, the price of gas and oil has risen
decisively and materially, affording the Debtor substantially more free cash
flow. As of September 20, the spot price of natural gas has increased 130% since
the Commencement Date to $5.22 from $2.27 per MMbtu for deliveries in the Gulf
Coast. More importantly, the forward price curve of gas (the futures market for
natural gas) has significantly strengthened, indicating the Debtors may continue
to enjoy these significantly higher gas prices and additional cash flow. On the
Commencement Date, a one-year forward average price for gas was $2.51 per MMbtu.
On September 20, it was $4.90, a 95% increase.
At least three factors have led to the increase in natural gas
prices: 1) storage inventories, 2) supply and 3) demand.
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 only 2,325 Bcf in storage, 421 Bcf less than last year,
and this after coming out of the warmest winter in 105 years of recorded weather
history. For the storage operators to reach a historic comfort level of 3,000
Bcf by October 31, the beginning of the winter heating season, they need to
inject an additional 9.1 Bcf per day more than last year. Should the U.S. suffer
significant interruptions in supply, or if there is a return to a normal winter
pattern, working gas in storage may not be sufficient to meet demand. Concern
about storage levels has been a driving factor in the increase in gas prices.
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 only 496 rigs. The lack of new drilling
has impacted supply availability. In the first quarter of 2000, gas production
was down .9 Bcf per day (Bcfd) or about 1.3% from the previous year. Initial
reports indicate that gas production fell an additional .4 Bcfd from the first
quarter to the second quarter of 2000. Even with increased drilling activity as
a result of higher prices (there were 776 rigs drilling for natural gas during
the week of September 15, 2000), increases in deliverability are not expected to
have any meaningful impact until 2001.
Demand for natural gas is forecast to increase as much as 1.5% in
North America in 2000, or about 1.25 Bcfd. In the first quarter, reports
indicate the increase was actually 1.8 Bcfd or 2% over the demand for a similar
period of 1999. Much of this growth is due to the growing U.S. economy, but a
new segment of growth is just now being seen: the demand for unregulated natural
gas fired electric power generators which have no alternate fuel to utilize in
meeting peak electric demand.
The combination of incremental storage demand (9.1 Bcfd), growth
in total gas demand (1.75 Bcfd) and less supply (0.9 Bcfd), have in concert
moved prices for natural gas to record levels and are supportive of gas prices
for the future.
Oil prices have also risen decisively. 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,
10
<PAGE> 21
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.
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. With OPEC vowing to keep the price of Brent Crude between $22
and $28 per barrel (equivalent to approximately $24 to $30 per barrel NYMEX oil)
per barrel during the near term, 2 years, the outlook for crude prices are
positive. 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, an increase of 30%.
The increases in natural gas prices and oil prices have
significantly increased the value of the Debtors since the filing of bankruptcy.
The Debtors believe the value of the ongoing enterprise is far in excess of the
value of the Debtors' proved reserves. However, the basic value of the Debtors'
known, proved reserves is significantly higher because of the increase in gas
and oil prices. 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. The gas price
used at June 30, 2000 was $4.48 per MMbtu ($2.239 per MMbtu at December 31,
1999). The Debtors believe additional value exists in other categories of
reserves that do not meet the SEC definition of proved reserves. Probable and
possible reserves are estimated to be 110 Bcfe at June 30, 2000. In addition,
the Debtors believe additional value exists in their significant prospect
inventory, undrilled leased land, seismic data, other tangible equipment and the
ongoing value of the organization to generate future reserves.
F. 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 $5.04per
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
11
<PAGE> 22
Debtors' hedging activities is contained in the 1999 10-K and June 30, 2000 10-Q
annexed hereto as Exhibits C and D, respectively.
G. 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.
Additional financial information regarding the Debtors is
contained in the 1999 10-K and June 30, 2000 10-Q annexed hereto as Exhibits C
and D, respectively.
H. 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 Senior Notes and (iv) the 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 plus interest, costs and expenses. As
of July 31, 2000, the aggregate outstanding principal amount was $48,776,460.
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). Interest has been paid currently and principal payments have been
made during the Chapter 11 Cases.
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
12
<PAGE> 23
Medallion Resources, Inc. were indebted under the Medallion Facility in the
aggregate principal amount of $49,500,688, plus interest, costs and expenses. As
of July 31, 2000, the aggregate outstanding principal amount was $40,668,683.
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.
Interest has been paid currently and principal payments have been made during
the Chapter 11 Cases.
3. The Senior Notes
On or about January 15, 1996, KCS issued the Senior Notes in the
aggregate principal amount of $150 million, due January 15, 2003. The Senior
Notes bear interest at an annual rate of 11%, payable semi-annually. KCS's
obligations under the 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 Senior Notes, including principal and all accrued and unpaid interest
aggregated approximately $166,500,000. As of the July 15, 2000 interest payment
date, the outstanding amount owed including principal and accrued and unpaid
interest was approximately $174,750,000.
4. The Senior Subordinated Notes
On or about January 15, 1998, KCS issued the Senior Subordinated
Notes in the aggregate principal amount of $125 million, due January 15, 2008.
The Senior Subordinated Notes bear interest at an annual rate of 8.875%, payable
semi-annually. KCS's obligations under the 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 Senior Subordinated Notes,
including principal and all accrued and unpaid interest aggregated approximately
$136,094,000. As of the July 15, 2000 interest payment date, the outstanding
amount owed including principal and accrued and unpaid interest was
approximately $141,640,625.
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
13
<PAGE> 24
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"). The warrants were subsequently cancelled.
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.
Additional historical information regarding the Debtors and their
operations are contained in the 1999 10-K and June 30, 2000 10-Q annexed hereto
as Exhibits C and D, respectively.
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 appeared to be 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 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.
14
<PAGE> 25
By 1998, the combination of disappointing results in the Manderson
Field and the impact of substantially lower oil and gas prices resulted in
significant losses and reduced cash flow to the Debtors. These events caused the
Debtors to be 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 to help offset the impact of their reduced cash flow, strengthen
their balance sheets and better position themselves to grow. In the face of
declining energy prices, however, the private equity market essentially
disappeared for most companies. In fact, two previously announced transactions
were cancelled.
3. Forbearance Agreements with Bank Lenders
On May 18, 1999, KCS and the 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 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 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 Bank Lenders also delivered
a payment blockage notice to the indenture trustee of the Senior Subordinated
Notes. Following the payment blockage notice, KCS did not make the scheduled
July 15, 1999 interest payments on either the Senior Subordinated Notes or the
Senior Notes. As a result of these payment defaults, the holders of the
requisite percentage of the Senior Notes and 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.
On July 26, 1999, KCS and the Bank Lenders entered into new
forbearance agreements (the "New Forbearance Agreements") which provided that
the Bank Lenders would refrain from exercising their rights and remedies not
previously exercised until October 5, 1999 (subsequently extended through March
2, 2000). The 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 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
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Forbearance Agreements also precluded KCS from making principal or interest
payments on the Senior Notes and the Senior Subordinated Notes. From the time
that the Initial Forbearance Agreements were entered into, KCS has made
principal repayments to the Bank Lenders of approximately $60.6 million,
reducing the total outstanding amount under the Credit Facilities to $89.4
million as of July 31, 2000. The New Forbearance Agreements expired on March 2,
2000.
4. Efforts to Improve Financial Condition
Since early 1998, the Debtors have taken several steps to improve
their financial situation. Among other things, the Debtors reduced their
workforce by approximately 31%, closed their New Jersey corporate office and
froze senior management salaries for 1999. Expense reduction initiatives reduced
lease operating expenses and G & A costs by 24% in the second quarter of 2000
compared to the same period in 1998 and by 11% compared to the same period in
1999. Planned capital investments in 1999 were reduced and refocused on
maintaining reserves and production levels. Moreover, the Debtors proceeded with
their property divestiture program designed to dispose of and monetize
higher-cost, non-core properties, reduce debt and allow the Debtors' technical
personnel to focus on core assets. In 1999, the Debtors completed sales
transactions with gross sales proceeds of $27.7 million, including the
monetization of one VPP for $19.1 million.
In the second quarter of 1999, oil and gas prices began recovering
from the precipitous decline that began in late 1997. This recovery in prices
together with the Debtors' increased natural gas production and lower operating
and administrative expenses more than offset higher interest costs and the
impact of low natural gas prices during the first quarter of the year. Net
income for the year ended December 31, 1999 was approximately $4.34 million, or
$0.15 per share, compared to a net loss of $296.5 million, or $10.08 per share,
for the same period in 1998. Prices continued to strengthen in the first half of
2000. EBITDAR was $62.3 million and income before reorganization items was $23.6
million or $0.80 per share, but was partially offset by reorganization costs of
approximately $9.4 million ($6.1 million of which was a non-Cash write-off of
deferred debt issuance costs associated with its senior notes and senior
subordinated notes), yielding net income for the six months ended June 30, 2000
of $14.2 million or $0.48 per share compared to a net loss of $1.7 million or
$0.06 per share during the first half of 1999. For the three months ended June
30, 2000, alone, EBITDAR was $35.4 million and net income was $14.8 million, or
$0.51 per share. Prices have continued to strengthen in the third quarter of
2000, pointing to continued strong earnings and cash flow.
As of January 14, 2000, the Debtors had approximately $3.6 million
cash on hand. The Debtors remained unable to repay the Bank Lenders the amount
outstanding under the Credit Facilities in excess of the new borrowing base or
pay the current interest obligations due on the Senior Notes and the Senior
Subordinated Notes. Notwithstanding their defaults under the Credit Facilities,
the Senior Notes and the Senior Subordinated Notes, the Debtors have remained
current on their post-petition trade and other ordinary course obligations,
reduced indebtedness under the Credit Facilities by $17.65 million from January
18 to July 31, 2000 and, with approval of the Bankruptcy Court, paid the
substantial majority of its pre-petition trade obligations. As of August 1,
2000, the Debtors had approximately $24.9 million in Cash on hand.
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<PAGE> 27
5. Negotiation of the 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 Senior Notes and Senior Subordinated Notes in an
effort to pursue a consensual restructuring transaction.
Pursuant to these discussions, certain institutional creditors and
the Debtors entered into an Agreement in Respect of Restructuring of KCS Energy,
Inc. and Affiliates' Public Notes, dated December 27, 1999 (the "Noteholder
Agreement") which provided 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.
The Noteholder Agreement was entered into by six (6) holders of 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
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, and confirm a
joint plan of reorganization on or before April 30, 2000.
The Noteholder Agreement was terminated by Credit Suisse First
Boston Corporation because the Debtors failed to confirm a joint plan of
reorganization by April 30, 2000.
B. EVENTS DURING THE CHAPTER 11 CASES
1. Commencement of the Chapter 11 Cases and "First Day" Motions and
Orders
Notwithstanding the Debtors' pre-existing obligations to commence
chapter 11 cases in accordance with the Noteholder Agreement, on January 5,
2000, three institutional creditors holding 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. Although KCS did not object to the
entry of an order for relief from and after January 18, 2000, the Debtors
reserved their rights against the involuntary petitioners and their attorneys
under section 303(i) 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) are described below.
a. Use of Cash Collateral. As of the Commencement Date, the
Debtors were indebted to the Bank Lenders in the aggregate principal amount of
approximately $107.1 million,
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<PAGE> 28
plus interest and other costs and expenses provided for under the applicable
loan documents relating to the Resources Facility and the Medallion Facility.
The 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 Bank Lenders that the Debtors may not use without the consent of the 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 its value.
Accordingly, the Debtors entered into an agreed order with the 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 Bank Lenders, (ii)
as adequate protection for the Debtors' use of cash collateral, the 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 Bank Lenders; (iii) adequate protection claims of the
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 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 Debtors believe the payment of such employee obligations
is necessary in order to maintain employee morale. Moreover, 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. Due to the nature of their businesses, the Debtors believe that 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 estimate
that the prepetition claims they are authorized to pay under these orders total
less than $18 million. The Debtors believe the payment of such claims in the
ordinary course of business is necessary to maximize the value of the Debtors'
estates for the benefit of all creditors.
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
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<PAGE> 29
Bankruptcy Court entered an order (a) authorizing the Debtors to continue the
use of their pre-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
their pre-petition and current practice of depositing excess funds into a
Salomon Smith Barney investment account. Such relief also allows 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 myriad complex legal and financial issues involved in connection with
the Chapter 11 Cases, it was necessary for the Debtors to retain 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)
Orloff, Lowenbach, Stifelman & Siegel, P.A. Special Corporate Counsel
(Securities and Consulting Matters)
Arthur Andersen LLP Accountants
Houlihan Lokey Howard & Zukin Financial Advisors
The Altman Group, Inc. Voting Agent
</TABLE>
In addition to the foregoing, the Bankruptcy Court 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 governing such retention.
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.
Due to the extensive work that would be required to prepare and file Chapter 11
statements and schedules within the fifteen day period provided in the
Bankruptcy Rules, 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 chapter 11
statements and schedules were filed with the Bankruptcy Court on April 28, 2000.
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<PAGE> 30
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. As is customary for large reorganizations with many
non-residential real property leases, on March 16, 2000, 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 18, 2000. On July 10, 2000, the Bankruptcy Court granted the
Debtors' motion to further extend this deadline to the earlier of the
Confirmation Date or January 18, 2001.
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.
2. Other Material Matters.
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, LP;
c. Lord Abbett & Co.;
d. Van Kampen High Income Corporate Bond Fund;
e. Offitbank;
f. DDJ Capital Management LLC; and
g. Halliburton Energy Services, Inc.
Halliburton Energy Services, Inc. resigned from the Creditors'
Committee, effective February 29, 2000. On March 15, 2000, the United States
Trustee appointed Wiser Oil Company to replace Halliburton. On or about April 1,
2000, Wiser Oil Company resigned from the Creditors' Committee. On or about May
11, 2000, Turnberry Capital Management, LP resigned from the Creditors
Committee.
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<PAGE> 31
The Creditors' Committee retained Gibson, Dunn & Crutcher, L.L.P.
and Saul, Ewing, Remick & Saul LLP as its attorneys with the approval of the
Bankruptcy Court. The Creditors' Committee also retained Petrie Parkman & Co.,
Inc., as its financial advisor.
3. Other Material Motions and Orders.
a. Permission to Assume Gas Trading Agreements. The Debtors,
following standard practice in their industry, typically hedge a portion of
their natural gas. These transactions are performed under forward trading or
hedging agreements. The purpose of such agreements is to reduce the risk, faced
by both buyers and sellers of natural gas and oil, of fluctuating gas and oil
prices by establishing a certain fixed minimum price for the future sale of a
certain volume of gas or oil. The Debtors' prepetition gas trading agreements
were, arguably, terminated under the Bankruptcy Code upon commencement of the
Chapter 11 Cases.
On May 4, 2000, the Bankruptcy Court entered an order permitting
the Debtors to assume certain gas trading agreements, enter into new gas trading
agreements, and perform transactions under their terms.
b. Payment of Employee Bonuses Related to Debtors' Incentive
Award Program. The Debtors provide annual performance-improving incentives to
their workforce through bonuses tied to performance targets. On April 11, 2000,
the Bankruptcy Court entered an order authorizing the Debtors to pay the 1999
incentive bonuses earned and approved by the Board of Directors to all employees
except the President and Chief Executive Officer, James W. Christmas. Payment of
the 1999 incentive bonus to Mr. Christmas was denied by the Bankruptcy Court
without prejudice to a later application for payment.
c. The First Impairment Motion. The signatories to the
Noteholder Agreement, comprising holders of Senior Notes in an aggregate
principal amount in excess of fifty percent of the total $150 million aggregate
principal amount of Senior Notes, consented to and approved the Senior Indenture
Third Supplement, and claimed with the Debtors the Senior Indenture Third
Supplement thereby became binding and effective to amend the 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 Court. The
Impairment Motion argued the treatment of Class 4 (Senior Notes Claims) in an
earlier version of the Plan did not impair the Class because (i) such treatment
was fully in accordance with the respective rights, powers, and obligations of
the Debtors and the Senior Notes noteholders under the Senior Indenture, as
amended by the Senior Indenture Third Supplement, (ii) the Plan did not alter
the rights of the holders of Senior Notes, and (iii) the holders of Senior Notes
were, therefore, unimpaired under the Plan.
A group of holders of Senior Notes who were 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 the Senior Indenture Third Supplement was
ineffective to change the terms of the Senior Notes and Senior Indenture.
Therefore, according to the Minority Noteholders, the earlier version of the
Plan modified their "legal, equitable, and contractual rights," with the result
that they were impaired under such Plan. In particular, the Minority Noteholders
argued the earlier version of the Plan
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<PAGE> 32
could not be confirmed because it violated the subordination provisions of the
Senior Subordinated Notes by providing for distributions to be made to the
holders of Senior Subordinated Notes Claims without the payment in full in cash
of the Senior Notes Claims.
On February 25, 2000, the Bankruptcy Court held a hearing and
ruled that the Senior Notes Claims were impaired under that plan. After denial
of the Impairment Motion, the Debtors amended the earlier version of the Plan
to, among other things, provide for reinstatement of the Senior Notes without
amendment of the Senior Indenture by the Senior Indenture Third Supplement (the
"First Amended Plan"). The First Amended Plan, in accordance with Section 10.20
of the Senior Indenture, contemplated the signatories of the Noteholder
Agreement would grant a waiver of Section 10.15 of the 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 Senior Indenture for making payments on the Senior Subordinated
Notes, the Debtors believed the treatment of the Senior Notes under the First
Amended Plan did not impair the Class because they considered such treatment to
be fully in accordance with the respective rights, powers and obligations of the
Debtors and the holders of Senior Notes under the Senior Indenture and not based
on any power (or any limitation on any such power) granted to a plan proponent
by Bankruptcy Code sections 1124 through 1129.
d. 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 First Amended Plan (the "Second Impairment Motion"). The Second
Impairment Motion asserted the First Amended Plan modified the "legal,
equitable, and contractual rights" of the holders of Senior Notes with the
result that Class 4 was impaired by the First Amended Plan. Among other things,
the Second Impairment Motion argued the First Amended Plan could not be
confirmed because it violated the subordination provisions of the Senior
Subordinated Notes by providing for distributions to be made in respect of the
Senior Subordinated Notes Claims without the prior payment in full in cash of
the Senior Notes Claims. The Second Impairment Motion also asserted the proposed
waiver by holders of Senior Notes of certain provisions of the Senior Indenture
in order to authorize a lien securing the New Credit Facility was improper.
Further, the Second Impairment Motion asserted holders of Senior Notes Claims
would be impaired under the First Amended Plan unless they received interest
payments on unpaid and past due interest under the Senior Notes.
On March 14, 2000, the Debtors filed a response to the Second
Impairment Motion. In their response, the Debtors argued the First Amended Plan
did not impair Class 4 because, among other things, the First Amended Plan did
not deprive holders of Senior Notes of their contractual subordination rights
and a new credit facility would be secured with a lien authorized by a waiver of
the relevant provisions of the Senior Indenture. In addition, the Debtors
revised the First Amended Plan to provide that the Debtors would pay interest on
unpaid and past due interest owed on the Senior Notes through the Effective Date
if the Bankruptcy Court determined that such additional interest is required in
order to leave the holders of 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
and held the Class of Senior Notes Claims was impaired under the First Amended
Plan.
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<PAGE> 33
e. The Third Impairment Motion. After the Bankruptcy Court
granted the Second Impairment Motion, the Debtors amended the First Amended Plan
and filed their Third Amended Disclosure Statement and Second Amended Plan. One
of the perceived defects of the First Amended Plan was it required, by its
terms, the Debtors to redeem for Cash the preferred stock issued to holders of
Senior Subordinated Notes. To remedy this defect, the Second Amended Plan, among
other things, removed all language requiring the Debtors to redeem preferred
stock issued pursuant to the Second Amended Plan -- that plan provided preferred
stock may, but need not, be redeemed.
On April 5, 2000, the Minority Noteholders filed a motion for an
order deeming Class 4 impaired by the Second Amended Plan ("the Third Impairment
Motion"). The Third Impairment Motion argued that, even though the Second
Amended Plan did not require redemption of preferred stock by its terms, the
Debtors admittedly intended to redeem the preferred stock and, therefore, the
Second Amended Plan provided effectively the same treatment as the First Amended
Plan and should yield the same ruling from the Bankruptcy Court.
On April 10, 2000, the Debtors replied to the Third Impairment
Motion. Their reply argued, among other things, the test for impairment under
the Bankruptcy Code requires an alteration or infringement of legal, equitable
or contractual rights by a plan; because the Second Amended Plan did not require
any action in violation of any rights of the holders of Senior Notes, the Second
Amended Plan could not impair the Class of Senior Notes Claims.
On April 28, 2000, the Bankruptcy Court issued a memorandum
opinion granting the Third Impairment Motion, finding Class 4 to be impaired
under the Second Amended Plan. The Debtors filed an appeal from the order
granting the Third Impairment Motion. The appeal is pending before the United
States District Court for the District of Delaware.
f. Exclusivity. Under section 1121(b) and (c) of the
Bankruptcy Code, a chapter 11 debtor receives a 120 day exclusive period during
which no party other than the debtor may file a chapter 11 plan and a 180 day
exclusive period during which only the debtor may seek to obtain acceptance of a
plan filed within the 120 day period (the "Exclusive Periods"). The Exclusive
Periods are measured from the Commencement Date. The Exclusive Periods may be
reduced or extended by the presiding court for cause.
On April 3, 2000, the Creditors' Committee filed a motion to
terminate the Debtors' Exclusive Periods. The central argument in support of the
motion was the Debtors' failure to propose a plan other than one based on the
Noteholder Agreement, and that the Noteholder Agreement proposed a
nonconfirmable plan. This motion was joined by the Minority Noteholders on April
6, 2000 and on May 2, 2000, by the noteholders who had originally signed the
Noteholder Agreement.
On April 7, 2000, the Debtors filed a response to the Creditors'
Committee's motion to terminate the Exclusive Periods and a cross-motion to
extend the Exclusive Periods.
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<PAGE> 34
On April 10, 2000, the United States Trustee responded to the
Debtors' cross-motion for an extension of the Exclusive Periods and argued for
no extension or, at most, a short extension to allow the Debtors to propose one
more plan.
On April 18, 2000, the Creditors' Committee and the Debtors each
filed one more pleading responding to the other's reply to their motion and
cross-motion, respectively.
On May 4, 2000, the Bankruptcy Court held a hearing and entered an
Order terminating the Exclusive Periods, effective immediately.
4. Exit Facility Commitment.
On January 14, 2000, KCS entered into a commitment letter
agreement for an exit financing facility in the aggregate principal amount of up
to $190 million provided by CIBC World Markets Corp. ("Markets"), as agent for
lenders to be party thereto (the "Exit Facility Commitment"). On March 7, 2000,
KCS entered into an amendment to the Exit Facility Commitment with Markets, as
agent, and an affiliate of Farallon Capital Management, LLC ("Farallon"), as
co-term agent, whereby Markets and Farallon, would provide KCS with a new credit
facility in the aggregate principal amount of up to $190 million. The new credit
facility required loan disbursements be fully secured by perfected first
priority liens, deeds of trust, security interests, and financing statements on
substantially all of the Reorganized Debtors' assets.
The Exit Facility Commitment expired by its terms on May 31, 2000.
The Debtors are currently negotiating with Markets and Farallon to extend and
modify the Exit Facility Commitment in the form of a Renewal Notes Commitment as
described in Section VI.6.
5. No Bar Date Fixed in These Chapter 11 Cases
As all creditors of the Debtors other than holders of Secured Bank
Claims, General Unsecured Claims, and Senior Subordinated Notes Claims are
unimpaired under the Plan, 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 Senior Notes
and Senior Subordinated Notes as of the Distribution Record Date for purposes of
distribution.
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.
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<PAGE> 35
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:
<TABLE>
<S> <C> <C>
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 - Senior Notes Claims
Class 5 - Senior Subordinated Notes Claims
Class 6 - General Unsecured Claims
Class 7 - KCS Common Stock Equity Interests
Class 8 - Employee and Director Stock Option Plans Equity Interests
</TABLE>
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 necessary costs and expenses of
preserving the Debtors' estates or operating the Debtors' businesses, (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;
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<PAGE> 36
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 must (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 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 Priority Tax Claim, together with
interest at a fixed annual rate equal to 8%, 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
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Bankruptcy Code. All Allowed Other Priority Claims which 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.
Class 1 will not be impaired under the Plan.
6. Secured Bank Claims (Class 2)
The Secured Bank Claims are Secured Claims held by the 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 since the Commencement Date, minus
payments made to the Bank Lenders pursuant to interim and final orders
authorizing and restricting the Debtors' use of cash collateral and granting the
Bank Lenders adequate protection.
The Allowed Secured Bank Claims shall be restructured as follows,
or as otherwise agreed with the Bank Lenders and provided to the Court and
parties in interest:
a. Issuance of Secured Bank Renewal Notes. On the Effective
Date, the Reorganized KCS shall execute and deliver to the agents of the holders
of the Secured Bank Claims two renewal promissory notes, the Resources Facility
Renewal Note being in the principal amount of $75 million and the Medallion
Facility Renewal Note being in the principal amount of $40 million (together,
the "Secured Bank Renewal Notes", and, individually, the "Resources Facility
Renewal Note" and "Medallion Facility Renewal Note"). The Secured Bank Renewal
Notes and the liens securing such notes will have the following additional
terms:
(i) Interest payable on the Resources Facility Renewal
Note shall be calculated and paid on the same basis as set forth
in the Resources Facility First Amended and Restated Credit
Agreement and interest payable on the Medallion Facility Renewal
Note shall be calculated and paid on the same basis as set forth
in the Medallion Facility First Amended and Restated Credit
Agreement, or such other interest rate as may be agreed upon by
the Debtors and the Bank Lenders.
(ii) Principal payable on the Resources Facility Renewal
Note shall be paid on the same basis and on the same dates as set
forth in the Resources Facility First Amended and Restated Credit
Agreement and principal payable on the Medallion Facility Renewal
Note shall be paid on the same basis and on the same dates as set
forth in the Medallion Facility First Amended and Restated Credit
Agreement, provided, however, that such principal payments shall
continue through the Extended Maturity Date (defined below).
(iii) The maturity date shall be extended to the earlier
of 90 days prior to the maturity of the Senior Notes or three
years from the Effective Date (the "Extended Maturity Date").
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b. Liens.
(i) The Resources Facility Renewal Note shall be secured
by all validly attached properly perfected liens securing the
Resources Facility as of the Effective Date, and the Medallion
Facility Renewal Note shall be secured by all validly attached
properly perfected liens securing the Medallion Facility as of the
Effective Date. Such liens shall continue to be evidenced by the
existing documents evidencing such liens, including such documents
currently on file in the relevant recording offices, except as
such documents shall be amended or modified on the Effective Date
to reflect the terms of the Plan.
(ii) In addition, the Resources Facility Renewal Note
shall be secured by a second, junior and inferior lien to the
Medallion Facility liens on all property securing the Medallion
Facility.
c. Credit Agreement. On the Effective Date, the Reorganized
Debtors shall execute an amended and restated credit agreement which shall
replace the existing First Amended and Restated Credit Agreement relating to the
Medallion Facility and an amended and restated credit agreement which shall
replace the existing First Amended and Restated Credit Agreement relating to the
Resources Facility (together, the "Second Amended and Restated Credit
Agreements"), and which shall be in the forms of the First Amended and Restated
Credit Agreements, as amended and revised by the Plan. The Second Amended and
Restated Credit Agreements will be substantially in the form contained in the
Plan Supplement.
d. On the Effective Date the Debtors will distribute to the
agents for the holders of the Secured Bank Claims Cash sufficient to pay all
accrued and unpaid interest (at the non-default rate) on the Secured Bank Claims
through the Effective Date.
Class 2 will be impaired under the Plan.
7. Other Secured Claims (Class 3)
On the Effective Date, any Allowed Other Secured Claims will be
either (i) paid in full by the Reorganized Debtors without consideration to any
penalty or accelerated amount, or (ii) reinstated.
Class 3 will not be impaired under the Plan.
8. Senior Notes Claims (Class 4)
Senior Notes Claims are Claims arising from the Debtors'
obligations under the Senior Notes. The Senior Notes Claims will be deemed
Allowed Claims solely for purposes of the Plan in the aggregate amount of
$174,750,000. On the Effective Date, the holders of Senior Notes will receive
Cash in the amount of all accrued and unpaid interest (at the non-default rate)
on such notes as of the last scheduled interest payment date under the Senior
Indenture prior to the Effective Date. In addition, the Senior Notes and Senior
Indenture will be reinstated.
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The unconditional guarantees of the Senior Notes by all Debtors
other than KCS, as provided by Article XIII of the Senior Indenture, will be
reinstated and will become the unconditional guarantees of all reinstated Senior
Notes by all Reorganized Debtors other than Reorganized KCS. Without limitation
to the foregoing, the maturity date of the reinstated Senior Notes will not be
altered. All actions required to consummate the Plan and the actions KCS
contemplates taking on the Effective Date that impact the Senior Indenture will
be valid under the reinstated Senior Indenture.
Holders of Senior Notes and the Senior Indenture Trustee will have
no right, pursuant to a subordination agreement or otherwise, to attach or
otherwise acquire distributions made to holders of Senior Subordinated Notes
under the Plan, because the Senior Indenture and Senior Subordinated Indenture
do not provide for attachment of securities distributed to Senior Subordinated
Noteholders that are subordinated to at least the same extent as the Senior
Subordinated Notes.
Class 4 will not be impaired under the Plan. If the Bankruptcy
Court determines the payment of interest on accrued and unpaid interest is
required to leave Class 4 unimpaired under the Plan, the Debtors will pay such
additional Interest.
9. Senior Subordinated Notes Claims (Class 5)
Senior Subordinated Notes Claims are Claims arising from the
Debtors' obligations under the Senior Subordinated Notes. The Senior
Subordinated Notes Claims will be deemed Allowed Claims solely for purposes of
the Plan in the aggregate amount of $141,640,625 plus accrued interest from July
15, 2000 to the Effective Date.
Each holder of a Senior Subordinated Note will receive one share
of Reorganized KCS Convertible Preferred Stock with a liquidation preference and
stated value of $1000 plus accrued interest in respect of such note as of the
Effective Date for every $1000 in principal amount of such note. The Reorganized
KCS Convertible Preferred Stock will bear a fixed, preferred dividend of 7.50%
per annum and will be convertible into shares of Reorganized KCS Common Stock
representing approximately 32.37% of such common stock. The ownership interest
of holders of Reorganized KCS Convertible Preferred Stock upon conversion of
such stock into Reorganized KCS Common stock may be diluted by the exercise of
options granted under the New Employee and Director Stock Option Plan. In
addition, the liquidation preference will be effective in the event of a sale of
all or substantially all of the assets of Reorganized KCS.
The terms of the Reorganized KCS Convertible Preferred Stock have
been designed to provide holders of Allowed Senior Subordinated Notes Claims
with property of a value, as of the Effective Date, equal to the Allowed amount
of such Claims. The value of the distribution to holders of Allowed Senior
Subordinated Notes Claims is based, in part, on the valuation of the Reorganized
Debtors annexed hereto as Exhibit G. The valuation of the Reorganized Debtors
may be adjusted prior to the Confirmation Date by result of, among other things,
discovery of additional reserves through the Debtors' ongoing exploration
program. If the Bankruptcy Court determines a different valuation of the
distribution to Class 5, the dividend rate on the Reorganized KCS Convertible
Preferred Stock will be adjusted in order to provide
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holders of Allowed Senior Subordinated Notes Claims with property of a value, as
of the Effective Date, equal to the Allowed Amount of such Claims.
Additional details of the terms of the Reorganized KCS Convertible
Preferred Stock, including conversion rights, ranking, redemption and voting
rights, will be substantially the same as the terms set forth in the Summary of
Reorganized KCS Convertible Preferred Stock Terms, annexed hereto as Exhibit B.
If the Bankruptcy Court determines the payment of interest on
accrued and unpaid interest is required to deem holders of Class 5 Claims paid
in full, the Debtors will increase the liquidation preference and stated value
of the shares of Reorganized KCS Convertible Preferred Stock by the amount of
such additional interest.
The Reorganized KCS Convertible Preferred Stock will be
substantially in the form contained in the Plan Supplement and shall be
subordinated to the Senior Notes at least to the same extent as the Senior
Subordinated Notes.
Class 5 will be impaired under the Plan.
10. General Unsecured Claims (Class 6)
General Unsecured Claims are Unsecured Claims other than a Senior
Note Claim or a Senior Subordinated Note Claim. Allowed General Unsecured Claims
will be paid in full in Cash without interest 90 days after the Effective Date
by the Reorganized Debtor or Reorganized Debtors obligated on such Claim. As of
the Commencement Date, the General Unsecured Claims are estimated to be
approximately $700,000.
Class 6 will be impaired by the Plan.
11. KCS Common Stock Equity Interests (Class 7)
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. Each share of KCS Common Stock constitutes an
Allowed KCS Common Stock Equity Interest. The holders of KCS Common Stock Equity
Interests will retain their Pro Rata Share of 29,265,810 shares of Common Stock
which will constitute 100% of the authorized, issued and outstanding shares of
Reorganized KCS on the Effective Date.
The KCS Common Stock Equity Interests' Pro Rata Share of the
authorized, issued and outstanding shares of Reorganized KCS Common Stock will
be diluted if the Reorganized KCS Convertible Preferred Stock is converted.
Assuming Reorganized KCS Convertible Preferred Stock is fully converted into
Reorganized KCS Common Stock, the dilution will result in holders of KCS Common
Stock Equity Interests retaining approximately 67.63% of the authorized, issued
and outstanding shares of Reorganized KCS. The ownership interest of holders of
KCS Common Stock Equity Interests also may be diluted by the exercise of options
granted under the New Employee and Director Stock Option Plan.
Class 7 will be impaired under the Plan.
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12. Employee and Director Stock Option Plans Equity Interests
(Class 8)
Employee and Director Stock Option Plans Equity Interests are
Equity Interests arising from options to acquire shares of KCS Common Stock. On
the Effective Date, the Employee and Director Stock Option Plans Equity
Interests and each issued and unexercised option issued under the Employee and
Director Stock Option Plans shall be cancelled, and each holder of Employee and
Director Stock Option Plans Equity Interests shall not receive or retain any
property, interest in property or interest in KCS Common Stock or Reorganized
KCS Common Stock on account of such Employee and Director Stock Option Plans
options.
Class 8 will be impaired under the Plan.
B. IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS IMPAIRED; ACCEPTANCE OR
REJECTION OF PLAN OF REORGANIZATION
Each of Class 1 (Other Priority Claims), Class 3 (Other Secured
Claims) and Class 4 (Senior Notes Claims) is not impaired 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 2 (Secured Bank Claims), Class 5 (Senior
Subordinated Notes Claims), Class 6 (General Unsecured Claims), and Class 7 (KCS
Common Stock Equity Interests) is impaired by the Plan and the holders of Claims
and Interests in such Classes are entitled to vote to accept or reject the Plan.
Class 8 (Employee and Director Stock Option Plans 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. Secured Bank Renewal Notes
On the Effective Date, the Secured Bank Renewal Notes and
documents referred to therein will be executed and delivered and the undrawn
funds under such notes will be available for use by the Debtors in accordance
with the terms thereof.
2. Issuance of New Securities
The issuance of Reorganized KCS Convertible Preferred Stock by
Reorganized KCS shall be authorized, upon confirmation of the Plan, without the
need for any further corporate action. The Reorganized KCS Common Stock to be
issued upon a conversion of Reorganized KCS Convertible Preferred Stock and
pursuant to the New Employee and Director Stock Option Plan shall be authorized
upon confirmation of the Plan under the Reorganized KCS Certificate of
Incorporation and the Reorganized KCS By-laws.
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3. Cancellation of Existing Securities and Agreements
On the Effective Date, without the need for further corporate
action, the Employee and Director Stock Option Plans, and the options issued and
unexercised under the Employee and Director Stock Option Plans will be cancelled
and will have no further force or effect. In addition, the Senior Subordinated
Notes and the Senior Subordinated Indenture, except for purposes of effectuating
the distributions under the Plan, will be cancelled on the Effective Date and
will have no further force or effect; provided, however, that the rights of the
Senior Subordinated Indenture Trustee set forth in Section 6.6 of the Senior
Subordinated Indenture will not be terminated until such time as such trustee
will have no further obligations under either such indenture or the Plan and
will have been paid in full for all of its fees and expenses, including those of
its counsel. On and after the Effective Date, the Senior Subordinated Indenture
Trustee will have no further obligations to the Debtors or the holders of any of
the Senior Subordinated Notes except those expressly set forth in the Plan.
4. 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 initial Boards of Directors of the Reorganized Debtors will
consist of the current members. The members of the Boards of Directors
and their annual compensation is set forth in Section VII.B below.
b. Officers of the Reorganized Debtors
The initial officers of the Reorganized Debtors will
consist of the current officers. Such officers and their initial annual
base salaries as of the Effective Date are set forth in Section VII.A.
below. The selection of officers of the Reorganized Debtors after the
Effective Date will be as provided in the Reorganized Debtors'
Certificates of Incorporation and the Reorganized Debtors' By-laws.
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 Reorganized 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 any newly issued shares
of the Reorganized 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. The Reorganized KCS expects to file with the Securities and
Exchange Commission, promptly following the Effective Date, a
registration statement on form S-8, or other appropriate form under the
Securities Act, to
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register Reorganized KCS Common Stock issuable upon exercise of options
granted under the New Employee and Director Stock Option Plan and to use
its reasonable efforts in such registration statement to remain effective
until the exercise or expiration of such options.
5. Rights Offering
The Reorganized KCS, in its discretion, may raise additional
capital through, without limitation, an offering to holders of securities of
Reorganized KCS of rights to subscribe for newly issued Reorganized KCS
securities contemporaneously with or after consummation of the Plan, subject to
applicable laws, rules and regulations.
6. Confirmation Under Section 1129(b) of the Bankruptcy Code
If any impaired Class rejects the Plan, the Debtors may request
confirmation of the Plan pursuant to Bankruptcy Code section 1129(b).
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 Senior Notes and
Senior Subordinated Notes Claims
The Distribution Record Date will be the date for
determining the holders of Senior Notes and Senior Subordinated Notes
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 transfer agents will have no
obligations to recognize any transfer of Senior Notes or Senior
Subordinated Notes occurring after the Distribution Record Date for
purposes of distributions under the Plan. The Reorganized Debtors and the
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 Indenture Trustees or transfer
agents for the Senior Notes and Senior Subordinated Notes as of the close
of business on the Distribution Record Date.
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c. Surrender of Instruments
As a condition to receiving any distribution under
the Plan, each holder of a Senior Subordinated Note must surrender such
note to the Reorganized Debtors or their designee. Any holder of a Senior
Subordinated Note who fails to (a) surrender such note 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 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 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 Indenture
Trustees and their professionals will conclusively be deemed fair and
reasonable and will be paid by the Debtors pursuant to the Confirmation
Order. Upon payment of the fees and expenses of the Indenture Trustees,
the 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.
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; 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.
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At the option of the Debtors, distributions to
holders of Senior Notes and Senior Subordinated Notes will be made by a
distribution agent or the Debtors. The Debtors shall make such
distribution directly to the Senior Indenture Trustee or the Senior
Subordinated Indenture Trustee for the benefit of the holders of Senior
Notes and Senior Subordinated Notes, respectively. Shares of Reorganized
KCS Convertible Preferred Stock delivered to the Senior Subordinated
Indenture Trustee will be registered and issued in the names of the
respective holders of the Senior Subordinated Notes, or as otherwise
directed by such holders.
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 securities or Cash in lieu
thereof will be distributed. For purposes of distribution, fractional
shares will be rounded down to the next whole number.
h. Setoffs and Recoupment
The Debtors may, but will not be required to, set
off against or recoup from any Claim and the payments to be made pursuant
to the Plan in respect of such Claim (other than Senior Notes Claims,
Senior Subordinated Notes Claims or Secured Bank Claims), any claims of
any nature whatsoever that the Debtors may have against the claimant, but
neither the failure to do so nor the allowance of any Claim hereunder
shall constitute a waiver or release by the Debtors of any such claim it
may have against such claimant.
i. Distributions After Effective Date
Distributions made after the Effective Date to
holders of a Disputed Claim that is not an Allowed Claim as of the
Effective Date but which later becomes an Allowed Claim will be deemed to
have been made on the date distributions are made to holders of Allowed
Claims in the same Class as the Disputed Claim.
j. Exculpation
The Debtors, the Reorganized Debtors, the 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
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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.
k. Allocation Relating to Senior Subordinated Notes
All distributions to holders of Senior Subordinated
Notes Claims shall be allocated first to the portion of each of such
Claims representing the principal amount of the Senior Subordinated Notes
and then to the remainder of such Claim.
l. Change of Control
Under the terms of the Plan, no change of control
will occur under the Debtors' current contracts because holders of KCS
Common Stock Equity Interests will continue to own more than half of the
outstanding common stock of the Reorganized KCS at the Effective Date.
m. 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.
2. Procedures for Treating Disputed Claims Under Plan of
Reorganization
a. Disputed Claims
(i) Process
If any Debtor disputes 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) any Debtor may elect, at its 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 any
Debtor, as Debtor in Possession, of any rejection, avoidance,
recovery, subordination, or other power (or defense) available to
it 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 such Debtor, under applicable
nonbankruptcy law, would be required to pay such Claim on that
date. To effectuate the foregoing, the entry of an order
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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 a Debtor, as Debtor
in Possession, of any rejection, avoidance, recovery,
subordination, or other power (or defense) available to it under
applicable provisions of the Bankruptcy Code.
(ii) 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 obtained in
accordance with subsection 8.1(a) of the Plan and applicable
non-bankruptcy law 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
any Debtor or Reorganized Debtor 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 the latest of (a) one hundred and
twenty (120) days after the Effective Date, (b) forty-five (45) days
after the proof of claim is filed with the Bankruptcy Court, and (c) such
date as may be fixed by 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 Claim unless and
until such Disputed Claim becomes an Allowed Claim.
d. Distributions After Allowance
If 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.
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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 the Debtors will have previously rejected or will list on
a schedule filed with the Bankruptcy Court prior to 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.
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) Secured Bank Renewal Notes
Closing and funding pursuant to the Secured Bank
Renewal Notes 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 Debtors in their absolute
discretion.
5. Effect of Confirmation
a. Vesting of Assets
On the Confirmation 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 Confirmation 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.
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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.
c. Discharge of Debtors
Except as otherwise provided in the Plan, pursuant to
Bankruptcy Code section 1141(d)(1), upon the Confirmation Date, all
Claims against and Equity Interests in any of the Debtors will be
discharged and released. Except as otherwise provided in the Plan, on the
Confirmation 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, by-laws, 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. There
are no indemnification claims currently pending against any of the
Debtors and the Debtors 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.
39
<PAGE> 50
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, the lenders under the DIP Cash Collateral Agreement, each
holder of KCS Common Stock Equity Interests, the 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.
40
<PAGE> 51
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 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 hereto 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
The Plan provides that all notices, requests, and demands
to or upon the Debtors 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
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
VII.
DIRECTORS, OFFICERS AND OWNERSHIP OF REORGANIZED DEBTORS
A. BOARDS OF DIRECTORS OF REORGANIZED DEBTORS
1. Identities and Compensation
As of the Effective Date, the boards of directors of the
respective Reorganized Debtors will remain those individuals serving on the
boards of directors immediately prior to the Effective Date. Thereafter, 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' By-laws, as the same may be amended.
The initial members of the Board of Directors of Reorganized KCS
and their annual compensation are set forth below:
42
<PAGE> 53
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
NAME POSITION ANNUAL RETAINER(1)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James W. Christmas(2) Director (3)
--------------------------------------------------------------------------------------------------------------------
G. Stanton Geary Director $20,000
--------------------------------------------------------------------------------------------------------------------
Stewart B. Kean Director and Chairman of the Board $20,000
--------------------------------------------------------------------------------------------------------------------
James E. Murphy, Jr. Director $20,000
--------------------------------------------------------------------------------------------------------------------
Robert G. Raynolds Director $20,000
--------------------------------------------------------------------------------------------------------------------
Joel D. Siegel Director $20,000
--------------------------------------------------------------------------------------------------------------------
Christopher A. Viggiano Director $20,000
--------------------------------------------------------------------------------------------------------------------
</TABLE>
2. Biographies of Directors
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 Andersen & Co.
G. Stanton Geary has served as a director of KCS since 1988. He is
proprietor of Gemini Associates, Pomfret, Connecticut, a venture capital
consulting firm, and was business manager of the Rectory School, Pomfret,
Connecticut from 1988 through 1997.
Stewart B. Kean has served as Chairman of the Board of Directors
of KCS since 1988. He was President of Utility Propane Company, a former
subsidiary of KCS, from 1965 to 1989. He is past President of the National LP
Gas Association and past President of the World LP Gas Forum. He currently
serves as President of the Liberty Hall Foundation. Mr. Kean is Robert G.
Raynolds' uncle.
James E. Murphy, Jr. has served as a director of KCS since 1988.
Mr. Murphy leads his own political and governmental relations consulting firm
offering strategic planning and management consulting services to Republican
candidates nationwide, with extensive experience at the presidential, state and
congressional levels. Based in Potomac, Maryland, he
------------------------------
(1) The Annual Retainer is paid 50% in cash and 50% in common stock of KCS. In
addition, the Directors receive $1,500 for attending each meeting of the Board
of Directors in person ($500 for participating by telephone) and $1,000 for
attending each meeting of a committee on which the member serves.
(2) James W. Christmas is also President and Chief Executive Officer of KCS.
(3) James W. Christmas' annual compensation is set forth in Section VII.B.1.
below. He receives no additional compensation as a director.
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<PAGE> 54
also advises corporations and industry groups on strategic planning,
governmental relations and grassroots lobbying projects.
Robert G. Raynolds has served as a director of KCS since August
1995. He has been an independent consulting geologist for several major and
independent oil and gas companies from 1992 until the present and was a
geologist with Amoco Production Company from 1983 until 1992. Mr. Raynolds is
Stewart B. Kean's nephew.
Joel D. Siegel has served as a director of KCS since 1988. He is
an attorney-at-law and has been President of the law firm, Orloff, Lowenbach,
Stifelman & Siegel, P.A. of Roseland, New Jersey, since 1975. Orloff, Lowenbach,
Stifelman & Siegel, P.A. serves as outside legal counsel to the Company.
Christopher A. Viggiano has served as a director of KCS since
1988. Mr. Viggiano has been President, Chairman of the Board and majority owner
of O'Bryan Glass Corp., Queens, New York, since December 1991, and served as
Vice President and a member of the board of directors of O'Bryan Glass Corp.
from 1985 to December 1, 1991. He is a Certified Public Accountant.
B. MANAGEMENT
1. Identities and Compensation
The identity of the senior managers of the Reorganized KCS and the
initial base salaries to be paid to such senior managers is set forth below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
NAME POSITION WITH INITIAL BASE
THE COMPANY ANNUAL SALARY
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James W. Christmas President, Chief Executive Officer and Director $ 338,000
------------------------------------------------------------------------------------------------------------------
William N. Hahne Senior Vice President and Chief Operating Officer $ 250,000
------------------------------------------------------------------------------------------------------------------
J. Chris Jacobsen Vice President Engineering and Portfolio $ 165,000
Development
------------------------------------------------------------------------------------------------------------------
Frederick Dwyer Vice President, Controller and Secretary $ 120,000
------------------------------------------------------------------------------------------------------------------
</TABLE>
2. Biographies of Senior Management
James W. Christmas (see Section VII.A.2 above.)
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 employed by LL&E from October 1993 to October 1997 where he
held a number of positions including Worldwide
44
<PAGE> 55
Operations Vice President. From October 1997 to April 1998, Mr. Hahne served as
Vice President of International and Onshore for Burlington Resources, Inc.
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 employed by Netherland, Sewell & Associates, Inc., where he
served in various positions including Senior Vice President. 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' 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
KCS' officers and directors beneficially own approximately 15.3%
of KCS' outstanding common stock (calculated in accordance with SEC guidelines).
The table below sets forth the approximate percentage ownership of KCS'
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 15.3%
=====
</TABLE>
In addition, as of June 30, 2000, 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:
45
<PAGE> 56
<TABLE>
<CAPTION>
% OF
ENTITY OUTSTANDING SHARES
------ ------------------
<S> <C>
State Street Research & Management Company 10.31%
Dimensional Fund Advisors, Inc. 5.11%
</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, pursuant to which
options to purchase up to an aggregate of ten percent (10%) of the shares of
common stock of Reorganized KCS on a fully diluted basis may be granted. 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.
VIII.
SECURITIES TO BE ISSUED PURSUANT TO PLAN
A. REORGANIZED KCS CONVERTIBLE PREFERRED STOCK
The Debtors will issue Reorganized KCS Convertible Preferred Stock
to holders of Senior Subordinated Notes, the terms of which will be
substantially the same as set forth in section VI A.9 above and the Summary of
Reorganized KCS Convertible Preferred Stock Terms annexed hereto as Exhibit B.
B. NEW EMPLOYEE AND DIRECTOR STOCK OPTIONS
Reorganized KCS will be authorized to issue and distribute stock
options, stock and other stock rights in an amount of up to ten percent (10%) of
the authorized, issued and outstanding shares of the common stock of Reorganized
KCS on a fully diluted basis 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
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, Reorganized KCS Convertible Preferred Stock to be
issued on the Effective Date as provided in the Plan and Reorganized KCS Common
Stock to be issued upon conversion of such preferred
46
<PAGE> 57
stock 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 a debtor's
securities 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.
KCS believes the exchange of Reorganized KCS Convertible Preferred
Stock for Senior Subordinated Notes Claims under the circumstances provided in
the Plan will satisfy the requirements of section 1145(a) of the Bankruptcy
Code. Thus, any Reorganized KCS Convertible Preferred Stock issued pursuant to
the Plan on the Effective Date 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
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 (in this case, 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 such debtor.
If a person is deemed to be a control person and thus an
"underwriter" who receives Reorganized KCS Convertible Preferred Stock pursuant
to the Plan, resales by such
47
<PAGE> 58
person 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.
Whether or not any particular person would be deemed to be an
"underwriter" of Reorganized KCS Convertible Preferred Stock to be issued
pursuant to the Plan, or an "affiliate" of Reorganized KCS, would depend upon
various facts and circumstances applicable to that person. Accordingly, the
Debtors 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 DEBTORS MAKE NO REPRESENTATIONS OR AGREEMENTS CONCERNING THE RIGHT OF
ANY PERSON TO TRADE IN REORGANIZED KCS CONVERTIBLE PREFERRED STOCK TO BE
DISTRIBUTED PURSUANT TO THE PLAN. ACCORDINGLY, THE DEBTORS RECOMMEND THAT
POTENTIAL RECIPIENTS OF SECURITIES CONSULT THEIR OWN COUNSEL CONCERNING WHETHER
THEY MAY FREELY TRADE SUCH SECURITIES.
Pursuant to the Plan, certificates evidencing shares of
Reorganized KCS Convertible Preferred Stock received by holders of five percent
(5%) or more of the outstanding Reorganized 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 SHARES OF CONVERTIBLE PREFERRED STOCK 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
48
<PAGE> 59
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 legended securities as provided
above may instead receive certificates evidencing Reorganized KCS Convertible
Preferred Stock 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 shares of Reorganized KCS Convertible
Preferred Stock 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 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 certificate evidencing shares of Reorganized KCS
Convertible Preferred Stock bearing such legend may present such certificate to
the transfer agent for such shares for exchange for one or more certificates not
bearing such legend or for transfer to a new holder without such legend at such
time as (a) such shares 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 shares 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
certificate issued to the transferee will not bear such legend, unless otherwise
specified in such opinion.
Forms of the Reorganized Debtors' By-laws, Reorganized Debtors'
Certificates of Incorporation, Renewal Notes Commitment, Reorganized KCS
Convertible Preferred Stock 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
from the Debtors by contacting Steve Vacek at Weil, Gotshal & Manges LLP, 700
Louisiana, Suite 1600, Houston, Texas 77002, Telephone: (713) 546-5189, Fax:
(713) 224-9511.
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
49
<PAGE> 60
INCORPORATED BY REFERENCE HEREIN, PRIOR TO VOTING TO ACCEPT OR REJECT THE PLAN.
A. VARIANCES FROM PROJECTIONS
A fundamental premise of the Plan is the implementation and
realization of Reorganized Debtors' proposed business plan, as reflected in the
Projections annexed hereto as Exhibit F and the assumptions underlying such
Projections. The Projections reflect numerous assumptions concerning the
anticipated future performance of Reorganized Debtors and, with respect to
prevailing market and economic conditions, that are beyond the control of
Reorganized Debtors and that may not materialize. The Projections include, 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 and to expand the Reorganized
Debtors' reserve base, drilling success rates and the ability to control future
capital and operating expenses. The Debtors believe the assumptions underlying
the Projections are reasonable. Unanticipated events and circumstances occurring
subsequent to the preparation of the Projections likely will affect the actual
financial results of the Reorganized Debtors, possibly materially and adversely.
Therefore, the actual results achieved throughout the periods covered by the
Projections necessarily 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 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 historically have been volatile and are expected by the Debtors
to continue to be volatile in the future. Prices for oil and gas are subject to
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 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 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. Current price levels may not be sustained, and
predictions of future oil and gas price movements cannot be made with certainty.
A decline in oil and gas prices likely would 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, a significant amount of the Debtors' oil and gas sales are made in
the spot market and not pursuant to long-term fixed price contracts. With the
objective of reducing price risk, the Debtors have, and may continue to enter
into hedging transactions with respect to a portion of its expected future
production. The degree of risk reduction and mitigation of the effect of a
substantial and extended decline in oil and gas prices by hedging transactions
is difficult to predict and is contingent upon the terms of the transactions.
Any substantial or extended decline in the prices of oil or gas almost certainly
would have a material adverse effect on the Debtors' financial condition and
results of operations.
50
<PAGE> 61
C. RISKS OF HEDGING TRANSACTIONS
In order to manage its exposure to price risks in the marketing of
its oil and gas, the Debtors in the past have entered into, and expect to
continue to enter into, oil and gas price hedging arrangements with respect to a
portion of their expected production. These arrangements may include futures
contracts and options sold on 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
hedged, (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' futures contracts fail to
perform, (iv) the Debtors fail to make timely deliveries or (v) a sudden,
unexpected event materially impacts oil or gas prices.
D. DEPENDENCE ON ACQUIRING AND FINDING ADDITIONAL RESERVES
The Debtors' 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 may be
inconclusive or subject to varying interpretations. Acquisitions may not be
available at attractive prices, the Debtors' acquisition and exploration
activities or planned development projects may not result in significant
additional reserves, and the Debtors may not have anticipated or sustained
success at drilling economically productive wells. Without successfully
acquiring or developing additional reserves, the Debtors' proved reserves and
revenues will decline.
E. EXPLORATION AND DEVELOPMENT RISKS
Exploratory drilling and development drilling are subject to many
risks, including the risk no commercially productive reservoirs will be
encountered. New wells drilled by the Debtors may not be productive and the
Debtors may not 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.
F. 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 financed
the capital expenditures with cash flow from
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operations, asset divestitures, and funds from long-term debt financing,
including bank financing secured by its oil and gas assets. The Debtors
anticipate that its 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 and as necessary in the
years beyond 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 credit
available under the Secured Bank Renewal Notes, 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 is not
sufficient to satisfy their capital expenditure requirements, additional debt or
equity financing may not be available to meet these requirements.
G. ACQUISITION RISKS
Acquisitions of oil and gas businesses, working interests in
properties and volumetric production payments have been an important element of
the Debtors' business, and the Debtors will continue to seek acquisitions in the
future. 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
Debtors may assume environmental and other liabilities in connection with
acquired businesses and properties.
H. 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.
I. 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,
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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 the levels of insurance
maintained by the Debtors will be adequate to cover any losses or liabilities.
The Debtors cannot 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.
J. 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. This Disclosure Statement includes estimates of oil and gas reserves
prepared by Netherland, Sewell & Associates, Inc. Reserve engineering is a
partially 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 contain
assumptions that substantial capital expenditures by the Debtors will be
required to develop such reserves. Although 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
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attributable to the Debtors' properties. The net present value discounted at a
10% discount factor ("PV-10") is the asset value attributable to the reserve
estimates at the specified prices. This calculation is not intended to be in
accordance with applicable requirements of the Securities and Exchange
Commission which utilizes flat pricing assumptions. Although the prices used are
believed to be representative of current market conditions, actual future prices
and costs may be materially higher or lower. Actual discounted 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 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 costs in connection with development and
production of oil and gas properties. In addition, the 10% discount factor,
which is 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 Debtors and their properties or the oil and
gas industry in general.
K. 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 its future operations. A
significant portion of the Debtors' cash flow from operations must be dedicated
to the payment of interest on its indebtedness and dividends on preferred stock
issued pursuant to the Plan and will not be available for other purposes. The
covenants contained in the Resources Facility and the Medallion Facility, as
amended by the Plan, and the Senior Indenture require the Debtors to meet
certain financial tests. Other restrictions may 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
Resources Facility and the Medallion Facility, as amended by the Plan, or the
Senior Indenture. Failure to do so may result in a default and could lead to the
acceleration of the Debtors' indebtedness under the Resources Facility and the
Medallion Facility, as amended by the Plan, and the Senior Indenture, as
applicable. Moreover, if the Debtors' reserve value were to decrease as a result
of lower oil and gas prices, decreased reserves or otherwise, the borrowing base
under the Resources Facility and the Medallion Facility, as amended by the Plan,
could be reduced and could restrict the Debtors' future growth and could result
in requirements for repayment of outstanding debt thereunder.
L. CHANGE OF CONTROL
Section 10.16 of the Senior Indenture (Purchase of Securities Upon
Change of Control) provides that:
[u]pon the occurrence of a Change of Control [KCS] shall be
obligated to make an offer to purchase all of the then Outstanding Securities,
in whole or in part, from the [holders of Senior Notes] in integral multiples of
$1000, at a purchase price ... equal to 101% of the
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aggregate principal amount of such [s]ecurities, plus accrued and unpaid
interest, if any, ... in accordance with [certain procedures].
As defined by the Senior Indenture, a 'Change of Control' occurs
if:
any event or series of events [results in] (a) any "person" or
"group" (as such terms are defined in Sections 13(d) and 14(d) of the
[Securities Exchange Act of 1934, as amended from time to time (the "Exchange
Act")]), is or becomes the "beneficial owner" (as defined in rule 13d-3 under
the Exchange Act), directly or indirectly, of more than 50% of the total [equity
interests pursuant to which holders thereof have the general voting power under
ordinary circumstances to elect at least a majority of the board of directors,
managers or trustees of the subject company ("Voting Stock")][.]
Section 13(d)(3) and 14(d)(2) of the Exchange Act both define a
syndicate or group to exist "when two or more people [act] as a partnership,
limited partnership, syndicate, or other group for the purpose of acquiring,
holding or disposing of securities of an issuer[.]" In determining the existence
of a 'group' a court, under the applicable statutory provisions, will look for
evidence of a common objective and a subsequent act in furtherance of that
objective by a member of the proposed group. See, e.g., Bath Indus. Inc. v.
Blot, 427 F.2d 97 (7th Cir. 1970).
Under the Plan, the full conversion of Reorganized KCS Convertible
Preferred Stock into Reorganized KCS Common stock would result in the holders of
Reorganized KCS Convertible Preferred Stock representing approximately 32.37% of
the Voting Stock of Reorganized KCS, subject to dilution by the exercise of
options issued under the New Employee and Director Stock Option Plan. If, after
such conversion, any single holder or group of holders of the Voting Stock of
Reorganized KCS is deemed a "person" or "group", and is the "beneficial owner",
directly or indirectly, of more than 50% of the total Voting Stock of the
Reorganized KCS, the change of control provision of section 10.16 of the Senior
Indenture will be triggered.
The Debtors are not aware of any single holder of Senior
Subordinated Notes Claims who will receive under the Plan sufficient shares of
Reorganized KCS Convertible Preferred Stock (assuming full conversion) to become
the beneficial owner of more than 50% of the Voting Stock of Reorganized KCS and
as a result trigger the change of control provision of the Senior Indenture.
M. ABSENCE OF PUBLIC MARKET
The Reorganized KCS Convertible Preferred Stock will constitute a
new issue of securities for which there is no established trading market.
Reorganized KCS does not intend to list the Reorganized KCS Convertible
Preferred Stock on any national securities exchange or to seek the admission of
the Reorganized KCS Convertible Preferred Stock 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 Reorganized KCS Convertible Preferred Stock, the ability of
the holders of Reorganized KCS Convertible Preferred Stock to sell their
Reorganized KCS Convertible Preferred Stock or the price at which the holders
would be able to sell their Reorganized KCS Convertible Preferred Stock. Future
trading prices of the Reorganized KCS Convertible Preferred Stock will depend on
many factors,
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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.
N. EFFECTIVE SUBORDINATION OF THE SENIOR NOTES AND REORGANIZED KCS
CONVERTIBLE PREFERRED STOCK
Reorganized KCS' obligations under the Resources Facility and the
Medallion Facility, as amended by the Plan, will be secured by first priority
liens and mortgages and junior liens and 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 Senior Notes only after all indebtedness outstanding under
the Resources Facility and the Medallion Facility, as amended by the Plan, 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 Senior Notes or Reorganized
KCS Convertible Preferred Stock, then outstanding. The indebtedness under the
Resources Facility and the Medallion Facility, as amended by the Plan, will
become due prior to the time the principal obligations under the Senior Notes
become due. Furthermore, the assets of Reorganized KCS would be available to pay
the liquidation preference on the Reorganized KCS Convertible Preferred Stock
only after all indebtedness outstanding on the Senior Notes has been paid in
full, and in such event there may not be sufficient assets remaining to pay any
or all of such liquidation preference.
O. 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.
P. 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 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.
A more thorough discussion of certain laws and regulations that
may impact the Debtors' operations is contained in the 1999 10-K annexed hereto
as Exhibit C.
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Q. PENDING LITIGATION AND OTHER LEGAL PROCEEDINGS
Please refer to the 1999 10-K and the June 30, 2000 10-Q annexed
hereto as Exhibits B and C, respectively, for a discussion of pending litigation
and legal proceedings involving the Debtors.
R. 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 2 (Secured Bank Claims), Class 5
(Senior Subordinated Notes Claims) and Class 6 (General Unsecured Claims), and
Equity Interests in Class 7 (KCS Common Stock Equity Interests) as of the Record
Date are authorized 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.
The Debtors have retained The Altman Group, Inc. as their 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 10:00 P.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 with sufficient time for them to process it and
return it to The Altman Group, Inc. by the voting deadline.
Any Ballot executed and received timely but which does not
indicate an acceptance or rejection of the Plan will be deemed an acceptance of
the Plan. If you have any questions concerning voting procedures, 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.
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C. ACCEPTANCE BY CLASSES OF CLAIMS OR EQUITY INTERESTS
Under the Bankruptcy Code, acceptance of a chapter 11 plan 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 chapter 11 plan vote to accept
the plan. Thus, acceptance of the Plan by Classes 2 (Secured Bank Claims), 5
(Senior Subordinated Notes Claims) and 6 (General Unsecured Claims) will occur
only if at least two-thirds in dollar amount and a majority in number of the
holders of Claims in these Classes that timely return their Ballots vote in
favor of acceptance.
Under the Bankruptcy Code, acceptance of a chapter 11 plan 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 chapter 11 plan vote to accept the
plan. Thus, acceptance of the Plan by Class 7 (KCS Common Stock Equity
Interests) will occur only if at least two-thirds in amount of the holders of
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 Debtors may seek to confirm the Plan even if one or more
Classes of Claims or Equity 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, 2001, at 9:30 a.m., Eastern Time, and continuing on January 31, 2001 in the
United States Bankruptcy Court for the District of Delaware, 824 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
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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.; and (iv) 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 Debtors believe that Claims in Classes 2, 5, and 6 and Equity
Interests in Classes 7 and 8 are impaired under 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 Debtors believe 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
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with clauses (i) or (iii) hereof, or (iii) the impaired secured creditor
realizes the "indubitable equivalent" of its Claim under the Plan.
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 Equity
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 Equity 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 Equity
Interest or (y) the value of the Equity Interest, or (ii) the holders of
Equity Interests that are junior to the dissenting class of equity
interests will not receive or retain any property under the Plan on
account of such junior interest.
The Debtors believe 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 Debtors will demonstrate at the Confirmation Hearing 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 chapter 11
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 Debtors analyzed their ability to meet their
obligations under the Plan and prepared projections for the Reorganized Debtors
(the "Projections") that include the remainder of 2000 and for the three-year
period ending 2003. The Debtors project that they will have an estimated $33
million of cash on hand and available to consummate the Plan. The December 31,
2000 balance sheet included in the Projections is an assumed post-effective date
balance sheet. The Projections, and the significant assumptions on which they
are based, are set forth in Exhibit F annexed hereto. Based upon the estimated
cash on hand to consummate the Plan and such Projections, the Debtors believe
they will have sufficient assets to satisfy their obligations under the Plan and
confirmation of the Plan is not likely to be followed by liquidation or the need
for further financial reorganization.
The Projections are based on the assumption that the Plan will be
confirmed by the Bankruptcy Court and, for projection purposes, that the
Effective Date of the Plan will be December 1, 2000.
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3. "Best Interests" Test
With respect to each impaired Class of Claims and Equity
Interests, confirmation of the Plan requires 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, 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 which 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 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 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 Debtors believe 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.
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The Debtors also believe 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 Debtors' Liquidation Analysis is annexed hereto as Exhibit E.
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. Reference should be
made to the Liquidation Analysis for a complete discussion and presentation of
the Liquidation Analysis. The Liquidation Analysis was prepared by management of
the Debtors with the assistance of their financial advisors.
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 Debtors have evaluated alternatives to the Plan, including the
liquidation of the Debtors. After studying these alternatives, the Debtors have
concluded 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 Debtors' analysis leading to its 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 chapter 11 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 their 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 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 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 any other party in
interest could attempt to formulate a different plan. Such a plan might involve
either a reorganization and continuation of the Debtors' business or an orderly
liquidation of their assets. The Debtors believe the Plan, as described herein,
enables holders of Claims and Equity Interests to realize the greatest equitable
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 Debtors believe 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.
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 (SUCH AS HOLDERS WHO DID NOT
ACQUIRE THEIR CLAIM ON ORIGINAL ISSUE), NOR DOES THE DISCUSSION DEAL WITH TAX
ISSUES PECULIAR 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.
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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 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 10 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 10 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.
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2. Holders of Allowed Administrative Expense Claims (Unclassified)
and Professional Compensation and Reimbursement Claims (Unclassified)
Holders of Allowed Administrative Expense Claims and Allowed
Professional Compensation and Reimbursement Claims generally will be paid in
full in Cash on, or subsequent to, the Effective Date. Such holders who are
subject to tax 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 Other Priority Claims (Class 1) and Other Secured
Claims (Class 3)
A holder of an Allowed Other Priority Claim will be paid in full
on, or subsequent to, the Effective Date. A holder of an Allowed Other Secured
Claim will either be paid in full or will have its claim reinstated. If the
holder of an Other Priority Claim or an Other Secured Claim 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 such Claim (excluding amounts paid in respect
of accrued but unpaid interest) and (b) the amount of Cash received (excluding
amounts paid in respect of accrued but unpaid interest). 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 its method of
accounting. If the holder of an Allowed Other Secured Claim has its claim
reinstated, there will be no tax consequences as a result thereof.
4. Holders of Secured Bank Claims (Class 2)
Under the Plan, a holder of an Allowed Secured Bank Claim will
receive Secured Bank Renewal Notes and may receive Cash. The tax treatment
accorded to the exchange of Allowed Secured Bank Claims for Secured Bank Renewal
Notes will depend on whether such exchange constitutes a substantial
modification of a debt instrument within the meaning of the Treasury
Regulations. If the exchange does not constitute a substantial modification of a
debt instrument, then no gain or loss will be recognized and the holder's basis
and holding period in the Allowed Secured Bank Claim will carry over to the
Secured Bank Renewal Note. The amount of Cash (if any) received in respect of
accrued but unpaid interest, fees and charges will be taxed as ordinary income,
except to the extent previously included in income by a holder under its method
of accounting.
If the exchange of Allowed Secured Bank Claims for Secured Bank
Renewal Notes constitutes a substantial modification of a debt instrument under
Treasury Regulations, then whether such modification will cause a holder to
recognize gain or loss on the exchange for federal income tax purposes will
depend on whether the Allowed Secured Bank Claim and the Secured Bank Renewal
Notes constitute "stock or securities" for federal income tax purposes. Due to
the short-term nature of the Allowed Secured Bank Claims, Debtors do not believe
that such Claims will constitute "stock or securities" for federal income tax
purposes. In such case, a holder will recognize gain or loss in an amount equal
to the difference between (i) the holder's basis in its Allowed Secured Bank
Claim (excluding amounts paid in respect of accrued but unpaid interest); and
(ii) the amount of Cash and the adjusted issue price of any Secured Bank Renewal
Notes received (excluding amounts paid in respect of accrued but unpaid
interest). The amount received in respect of claims for accrued but unpaid
interest, fees and charges will be
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taxed as ordinary income, except to the extent previously included in income by
a holder under its method of accounting.
If the exchange constitutes a substantial modification of a debt
instrument under Treasury Regulations and the Allowed Secured Bank Claim and the
Secured Bank Renewal Notes constitute "stock or securities" for federal income
tax purposes, then the exchange will constitute a recapitalization, and hence a
reorganization, within the meaning of the Tax Code. In such case, no loss will
be recognized by any such exchanging holder. However, if such holder realizes a
gain on the exchange, then such gain will be recognized for tax purposes, but
not in excess of the amount of Cash (excluding Cash paid in respect of accrued
but unpaid interest) received in the exchange. Such a holder will take a basis
in the Secured Bank Renewal Notes received equal to its basis in the Allowed
Secured Bank Claim, increased by the amount of gain (if any) recognized on the
exchange and decreased by the amount of Cash (excluding Cash paid in respect of
accrued but unpaid interest) received. The amount received in respect of accrued
but unpaid interest, fees and charges will be taxed as ordinary income, except
to the extent previously included in income by a holder under its method of
accounting.
5. Holders of Reinstated Senior Notes (Class 4)
A holder of a Senior Notes Claim will have its Senior Notes
reinstated and will receive cash. Such holder will not realize any gain or loss
for federal income tax purposes because the transactions will not give rise to a
significant modification of the Senior Notes within the meaning of the Treasury
Regulations. Such a holder will be deemed to be in receipt of interest income
for federal income tax purposes to the extent that (a) any amounts received are
paid to such holder in respect of a claim for accrued but unpaid interest and
(b) such holder has not previously included such amounts in income under its
method of accounting. Such interest income will be taxed as ordinary income.
6. Holders of Senior Subordinated Notes Claims (Class 5)
On the Effective Date, holders of Senior Subordinated Notes Claims
will receive Reorganized KCS Preferred Stock. Such exchange will constitute a
recapitalization, and hence a reorganization, within the meaning of the Tax Code
because the Senior Subordinated Notes and Reorganized KCS Preferred Stock will
constitute "stock or securities" for federal income tax purposes. Therefore, no
loss will be recognized by any such exchanging holder. Because a holder will not
receive Cash or other property on the Effective Date, no gain will be
recognized. A holder's basis in its Allowed Senior Subordinated Notes Claim will
carry over to the Reorganized KCS Preferred Stock (excluding any Reorganized KCS
Preferred Stock received in respect of accrued but unpaid interest). The basis
of any Reorganized KCS Preferred Stock received in respect of a claim for
accrued but unpaid interest will equal its fair market value on the Effective
Date. The amount received in respect of accrued but unpaid interest, fees and
charges will be taxed as ordinary income, except to the extent previously
included in income by a holder under its method of accounting.
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7. Holders of Allowed General Unsecured Claims (Class 6)
Holders of Allowed General Unsecured Claims 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 KCS Common Stock Equity Interests (Class 7)
Holders of KCS Common Stock Equity Interests will realize no gain
or loss as a result of implementation of the Plan.
9. Holders of Employee and Director Stock Option Plans Equity
Interests (Class 8)
Holders of Employee and Director Stock Option Plans 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
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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 granted by the court or pursuant to a plan
approved by the court (the "bankruptcy exclusion rules"). Pursuant to the Plan,
all Claims will be satisfied in full (in Cash, Secured Bank Renewal Notes or
Reorganized KCS Convertible Preferred Stock) or reinstated. Accordingly, there
will be no COD income upon implementation of the Plan.
2. 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 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. To the best of the Debtors' knowledge,
those owner shifts did not give rise to any section 382 change of ownership
which would limit the utilization of the Company's net operating loss carryovers
prior to implementation of the Plan. However, the Debtors 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 is permitted to value the
equity of the corporation for purposes of applying the formula
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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.
Based on their returns as filed and upon estimates for the 1999
taxable year, the Debtors believe they have an NOL of approximately $242 million
as of December 31, 1999. The Debtors do not believe that they 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 I.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.
3. 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 Debtors, however, do
not believe that the consequence of such items (if any) would have a material
effect on them.
4. 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.
XV.
CONCLUSION AND RECOMMENDATION
The Debtors believe the Plan is in the best interests of all
Creditors and holders of Equity Interest and urges the holders of all Claims and
Equity Interests who receive ballots to
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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.
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<TABLE>
<S> <C> <C>
Dated: Houston, Texas
October __, 2000
Respectfully submitted,
KCS ENERGY, INC.
(for itself and on behalf of each of its affiliated
Debtors)
By:
-------------------------------------------------------
Name: James W. Christmas
Title: President and Chief Executive Officer
----------------------------------------------------------
Neil B. Glassman (No. 2087)
Jeffrey M. Schlerf (No. 3047)
Steven M. Yoder (No. 3885)
THE BAYARD FIRM
222 Delaware Avenue, Suite 900
P.O. Box 25130
Wilmington, Delaware 19899
Telephone: (302) 655-5000
Fax: (302) 658-6395
Harvey R. Miller
Martin J. Bienenstock
Michael P. Kessler (admitted in Texas only)
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Fax: (212) 310-8007
ATTORNEYS FOR DEBTORS AND DEBTORS
IN POSSESSION
</TABLE>
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EXHIBIT A
PLAN OF REORGANIZATION
<PAGE> 83
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
<TABLE>
<CAPTION>
In re: Chapter 11
<S> <C>
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.
-----------------------------------------
</TABLE>
DEBTORS' THIRD AMENDED JOINT PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
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., as chapter 11 debtors and debtors in possession
(collectively, the "Debtors") propose the following 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 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.
<PAGE> 84
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 Bank Lenders means the banks that participated in the Medallion
Facility and the Resources Facility.
1.4 Bankruptcy Code means title 11 of the United States Code, as
amended from time to time, as applicable to the Chapter 11 Cases.
1.5 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.
1.6 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.
1.7 Benefit Plans means all benefit plans, policies and programs,
including all savings plans and retirement pension plans, sponsored by KCS.
1.8 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.
1.9 Cash means lawful currency of the United States of America.
1.10 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.
1.11 Claim has the meaning set forth in section 101(5) of the Bankruptcy
Code.
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1.12 Class means a category of holders of Claims or Equity Interests as
set forth in Article III of the Plan.
1.13 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.
1.14 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.
1.15 Confirmation Date means the date on which the Bankruptcy Court
signs the Confirmation Order.
1.16 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.
1.17 Confirmation Order means the order of the Bankruptcy Court
confirming the Plan.
1.18 Creditors' Committee means the statutory committee of unsecured
claim holders appointed in the Chapter 11 Cases pursuant to section 1102 of the
Bankruptcy Code.
1.19 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 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 disclosure statement relating to the
Plan, including all exhibits and schedules thereto, as approved by the
Bankruptcy Court pursuant to section 1125 of the Bankruptcy Code.
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1.23 Disputed means, with reference to any Claim, 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; 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 any Claim the
liquidation or disposition of which is pending before a court or tribunal of
competent jurisdiction as of the Commencement Date or which is otherwise
disputed or contested, or becomes disputed or contested, by one or more of the
Debtors.
1.24 Distribution Record Date means the day that is 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 Employee and Director Stock Option Plans means the stock option
plans adopted prior to the Commencement Date permitting KCS to grant options to
its employees and directors to acquire shares of KCS Common Stock.
1.27 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.
1.28 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.
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1.29 General Unsecured Claim means any Claim other than a Secured Claim,
Administrative Expense Claim, Priority Tax Claim, Other Priority Claim, Senior
Notes Claim, or Senior Subordinated Notes Claim.
1.30 Indenture Trustees means the Senior Indenture Trustee and the
Senior Subordinated Indenture Trustee when described collectively.
1.31 Indentures means, when referenced collectively, the Senior
Indenture and the Senior Subordinated Indenture.
1.32 KCS means KCS Energy, Inc., a Delaware corporation.
1.33 KCS Common Stock means the shares of common stock of KCS
authorized, issued and outstanding as of the record date determined by the
Bankruptcy Court for purposes of voting on the Plan.
1.34 Lien has the meaning set forth in section 101(37) of the Bankruptcy
Code.
1.35 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.
1.36 New Employee and Director Stock Option Plan means the stock option
plan to be adopted on the Effective Date permitting the Debtors to grant to
their employees and directors options and other rights to acquire shares of
Reorganized KCS Common Stock representing up to 10% of all issued and
outstanding shares of Reorganized KCS Common Stock on a fully-diluted basis. The
New Employee and Director Stock Option Plan will be substantially in the form
contained in the Plan Supplement.
1.37 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.
1.38 Other Secured Claim means any Secured Claim other than a Secured
Bank Claim.
1.39 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.
1.40 Plan Supplement means the forms of documents referenced in the Plan
and attached thereto.
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1.41 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.
1.42 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.
1.43 Renewal Notes Commitment means the commitment to amend the
Resources Facility and Medallion Facility under such terms as may be agreed to
by the Debtors and a group of bank lenders.
1.44 Reorganized Debtors means Reorganized KCS Energy, Inc., Reorganized
Proliq, Inc., Reorganized KCS Energy Marketing, Inc., Reorganized KCS
Resources, Inc. a/k/a KCS Mountain Resources, Inc., Reorganized KCS Medallion
Resources, Inc., Reorganized Medallion California Properties, Inc.,
Reorganized Medallion Gas Services, Inc., Reorganized KCS Energy Services,
Inc., Reorganized KCS Michigan Resources, Inc. and Reorganized National
Enerdrill Corp.
1.45 Reorganized Debtors' By-laws means the amended and restated By-laws
of the Reorganized Debtors which will be substantially in the form contained in
the Plan Supplement.
1.46 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.
1.47 Reorganized KCS means KCS, or any successor thereto by merger,
consolidation or otherwise, on and after the Effective Date.
1.48 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.
1.49 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.
1.50 Reorganized KCS Common Stock means the authorized, issued and
outstanding shares of common stock of Reorganized KCS upon the Effective Date
and thereafter. Aside from the condition of its issuance, the Reorganized KCS
Common Stock will be identical in all respects to the KCS Common Stock.
1.51 Reorganized KCS Convertible Preferred Stock means the convertible
preferred stock of Reorganized KCS bearing a fixed, preferred dividend, and
having a stated value and liquidation preference per share of $1000 plus accrued
interest on $1000
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principal amount of Senior Subordinated Notes as of the Effective Date,
authorized and to be issued pursuant to the Plan, and substantially in the form
and having the terms contained in the Plan Supplement. In addition, the
liquidation preference will be effective in the event of a sale of all or
substantially all of the assets of Reorganized KCS.
1.52 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.
1.53 Secured Bank Claims means Claims arising from the Resources
Facility and the Medallion Facility.
1.54 Secured Bank Renewal Notes means the amendments to the Resources
Facility and Medallion Facility pursuant to the Plan and in accord with the
terms of the Renewal Notes Commitment.
1.55 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.
1.56 Senior Indenture means the indenture governing the 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.
1.57 Senior Indenture Trustee means State Street Bank and Trust Company,
or any successor thereto, in its capacity as Indenture Trustee of the Senior
Indenture, dated as of January 15, 1996.
1.58 Senior Notes means the Series A and Series B 11% Senior Notes due
January 15, 2003 issued pursuant to the Senior Indenture.
1.59 Senior Subordinated Indenture means the indenture governing the
Senior Subordinated Notes, dated as of January 15, 1998.
1.60 Senior Subordinated Indenture Trustee means U.S. Bank, N.A. in its
capacity as Indenture Trustee of the Senior Subordinated Indenture, dated as
of January 15, 1998.
1.61 Senior Subordinated Notes means the 8.875% Senior Subordinated
Notes due January 15, 2008 issued pursuant to the Senior Subordinated Indenture.
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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 used 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.
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 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
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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 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 Priority Tax Claim, together with interest at a fixed
annual rate equal to 8%, 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--Senior Notes Claims
Class 5--Senior Subordinated Notes Claims
Class 6--General Unsecured Claims
Class 7--KCS Common Stock Equity Interests
Class 8--Employee and Director Stock Option Plans Equity Interests
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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.
Class 1 is not impaired under the Plan.
4.2 Secured Bank Claims (Class 2).
The Secured Bank Claims will be deemed Allowed Claims solely for purposes
of the Plan in the aggregate principal amount of $107,094,888.90, plus interest
accrued, and fees and other charges incurred since the Commencement Date, minus
payments made to the Bank Lenders pursuant to interim and final orders
authorizing and restricting the Debtors' use of cash collateral and granting the
Bank Lenders adequate protection.
The Allowed Secured Bank Claims shall be restructured as follows, or as
otherwise agreed with the Bank Lenders and provided to the Court and parties in
interest:
a. Issuance of Secured Bank Renewal Notes. On the Effective Date
the Reorganized KCS shall execute and deliver to the agents of the holders of
the Secured Bank Claims two renewal promissory notes, the Resources Facility
Renewal Note being in the principal amount of $75 million and the Medallion
Facility Renewal Note being in the principal amount of $40 million (together,
the "Secured Bank Renewal Notes" and individually the "Resources Facility
Renewal Note" and "Medallion Facility Renewal Note"). The Secured Bank Renewal
Notes and the liens securing such notes shall have the following additional
terms:
(i) Interest payable on the Resources Facility Renewal Note
shall be calculated and paid on the same basis as set forth in the
Resources Facility First Amended and Restated Credit Agreement and
interest payable on the Medallion Facility Renewal Note shall be
calculated and paid on the same basis as set forth in the Medallion
Facility First Amended and Restated Credit Agreement, or such other
interest rate as may be agreed upon by the Debtors and the Lenders.
(ii) Principal payable on the Resources Facility Renewal Note
shall be paid on the same basis and on the same dates as set forth
in the Resources Facility First Amended and Restated Credit
Agreement and principal payable on the Medallion Facility Renewal
Note shall be paid on
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the same basis and on the same dates as set forth in the Medallion
Facility First Amended and Restated Credit Agreement, provided,
however, that such principal payments shall continue through the
Extended Maturity Date (defined below).
(iii) The maturity date shall be extended to the earlier of 90
days prior to the maturity of the Senior Notes or three years from the
Effective Date (the "Extended Maturity Date").
b. Liens.
(i) The Resources Facility Renewal Note shall be secured by
all validly attached properly perfected liens securing the Resources
Facility as of the Effective Date, and the Medallion Facility
Renewal Note shall be secured by all validly attached properly
perfected liens securing the Medallion Facility as of the Effective
Date. Such liens shall continue to be evidenced by the existing
documents evidencing such liens, including such documents currently on
file in the relevant recording offices, except as such documents shall
be amended or modified on the Effective Date to reflect the terms of
the Plan.
(ii) In addition, the Resources Facility Renewal Note shall be
secured by a second, junior and inferior lien to the Medallion
Facility on all property securing the Medallion Facility.
c. Credit Agreement. On the Effective Date, the Reorganized Debtors
shall execute an amended and restated credit agreement which shall replace the
existing First Amended and Restated Credit Agreement relating to the Medallion
Facility and an amended and restated credit agreement which shall replace the
existing First Amended and Restated Credit Agreement relating to the Resources
Facility (together, the "Second Amended and Restated Credit Agreements"), and
which shall be in the forms of the First Amended and Restated Credit Agreements,
as amended and revised by the Plan. The Second Amended and Restated Credit
Agreements will be substantially in the form contained in the Plan Supplement.
d. On the Effective Date the Debtors shall distribute to the agents
for the holders of the Secured Bank Claims, Cash sufficient to pay all accrued
and unpaid interest (at the non-default rate) on the Secured Bank Claims through
the Effective Date.
Class 2 is impaired under the Plan.
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.
Class 3 is not impaired under the Plan.
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4.4 Senior Notes Claims (Class 4).
Senior Notes Claims are Claims arising from the Debtors' obligations under
the Senior Notes. The Senior Notes Claims shall be deemed Allowed Claims solely
for purposes of the Plan in the aggregate amount of $174,750,000. On the
Effective Date, the holders of Senior Notes shall receive Cash in the amount of
all accrued and unpaid interest (at the non-default rate) on such notes as of
the last scheduled interest payment date under the Senior Indenture prior to the
Effective Date. In addition, the Senior Notes and Senior Indenture shall be
reinstated.
The unconditional guarantees of the Senior Notes by all Debtors other than
KCS, as provided by Article XIII of the Senior Indenture, shall be reinstated
and shall become the unconditional guarantees of all reinstated Senior Notes by
all Reorganized Debtors other than Reorganized KCS. Without limitation to the
foregoing, the maturity date of the reinstated Senior Notes shall not be
altered. All actions required to consummate the Plan and the actions KCS
contemplates taking on the Effective Date that impact the Senior Indenture shall
be valid and authorized under the reinstated Senior Indenture.
Holders of Senior Notes and the Senior Indenture Trustee shall have no
right, pursuant to a subordination agreement or otherwise, to attach or
otherwise acquire distributions made to holders of Senior Subordinated Notes
under the Plan, because the Senior Indenture and Senior Subordinated Indenture
do not provide for attachment of securities distributed to the Senior
Subordinated Noteholders that are subordinated at least to the same extent as
the Senior Subordinated Notes.
Class 4 is not impaired under the Plan. If the Bankruptcy Court determines
the payment of interest on accrued and unpaid interest is required to leave
Class 4 unimpaired under the Plan, the Debtors shall pay such additional
interest.
4.5 Senior Subordinated Notes Claims (Class 5).
Senior Subordinated Notes Claims are Claims arising from the Debtors'
obligations under the Senior Subordinated Notes. The Senior Subordinated Notes
Claims will be deemed Allowed Claims solely for purposes of the Plan in the
aggregate amount of $141,640,625 plus accrued interest from July 15, 2000, to
the Effective Date.
Each holder of a Senior Subordinated Note will receive one share of
Reorganized KCS Convertible Preferred Stock with a liquidation preference and
stated value of $1000 plus accrued interest in respect of such note as of the
Effective Date for every $1000 in principal amount of such note. The Reorganized
KCS Convertible Preferred Stock will bear a fixed, preferred dividend of 7.50%
per annum and will be convertible into shares of Reorganized KCS Common Stock
representing approximately 32.37% of such common stock. The ownership interest
of holders of Reorganized KCS Convertible Preferred Stock upon conversion of
such stock into Reorganized KCS Common stock may be diluted by the exercise of
options granted under the New Employee and Director Stock Option Plan. In
addition, the liquidation preference will be effective in the event of a sale of
all or substantially all of the assets of Reorganized KCS.
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The terms of the Reorganized KCS Convertible Preferred Stock have been
designed to provide holders of Allowed Senior Subordinated Notes Claims with
property of a value, as of the Effective Date, at least equal to the Allowed
amount of such Claims. The value of the distribution to holders of Allowed
Senior Subordinated Notes Claims is based, in part, on the valuation of the
Reorganized Debtors attached as Exhibit E to the Disclosure Statement. The
valuation of the Reorganized Debtors may be adjusted prior to the Confirmation
Date by result of, among other things, discovery of additional reserves through
the Debtors' ongoing exploration program. If the Bankruptcy Court determines a
different valuation of the Reorganized Debtors, the dividend rate on the
Reorganized KCS Convertible Preferred Stock will be adjusted in order to provide
holders of Allowed Senior Subordinated Notes Claims with property of a value, as
of the Effective Date, at least equal to the Allowed Amount of such Claims.
Additional details of the terms of the Reorganized KCS Convertible
Preferred Stock, including conversion rights, ranking, redemption and voting
rights, will be substantially the same as the terms set forth in the Summary of
Reorganized KCS Convertible Preferred Stock Terms, annexed to the Disclosure
Statement as Exhibit B.
If the Bankruptcy Court determines the payment of interest on accrued and
unpaid interest is required to deem holders of Class 5 Claims paid in full, the
Debtors will increase the liquidation preference and stated value of the shares
of Reorganized KCS Convertible Preferred Stock by the amount of such additional
interest.
The Reorganized KCS Convertible Preferred Stock will be substantially in
the form contained in the Plan Supplement and shall be subordinated to the
Senior Notes at least to the same extent as the Senior Subordinated Notes.
Class 5 is impaired under the Plan.
4.6 General Unsecured Claims (Class 6).
Allowed General Unsecured Claims shall be paid in full in Cash
without interest 90 days after the Effective Date by the Reorganized Debtor or
Reorganized Debtors obligated on such Claim. As of the Commencement Date, the
General Unsecured Claims are estimated to be approximately $700,000.
Class 6 is impaired under the Plan.
4.7 KCS Common Stock Equity Interests (Class 7).
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. Each share of KCS Common Stock constitutes an Allowed KCS
Common Stock Equity Interest. The holders of KCS Common Stock Equity Interests
will retain their Pro Rata Share of 29,265,810 shares of Common Stock which will
constitute 100% of the authorized, issued and outstanding shares of Reorganized
KCS on the Effective Date.
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The KCS Common Stock Equity Interests' Pro Rata Share of the authorized,
issued and outstanding shares of Reorganized KCS Common Stock will be diluted if
the Reorganized KCS Convertible Preferred Stock is converted. Assuming
Reorganized KCS Convertible Preferred Stock is fully converted into Reorganized
KCS Common Stock, the dilution will result in holders of KCS Common Stock Equity
Interests retaining approximately 67.63% of the authorized, issued and
outstanding shares of Reorganized KCS. The ownership interest of holders of KCS
Common Stock Equity Interests also may be diluted by the exercise of options
granted under the New Employee and Director Stock Option Plan.
Class 7 is impaired under the Plan.
4.8 Employee and Director Stock Option Plans Equity Interests
(Class 8).
On the Effective Date, the Employee and Director Stock Option Plans Equity
Interests and each issued and unexercised option issued under the Employee and
Director Stock Option Plans shall be cancelled, and each holder of Employee and
Director Stock Option Plans Equity Interests shall not receive or retain any
property, interest in property or interest in KCS Common Stock on account of
such Employee and Director Stock Option Plans options.
Class 8 is impaired under the Plan.
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 3 (Other Secured Claims)
and Class 4 (Senior Notes Claims) is not impaired 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 2 (Secured Bank Claims), Class 5 (Senior Subordinated Notes
Claims), Class 6 (General Unsecured Claims) and Class 7 ( KCS Common Stock
Equity Interests) is impaired by the Plan and the holders of Claims in Classes
2, 5 and 6 and Interests in Class 7 are entitled to vote to accept or reject the
Plan.
Class 8 (Employee and Director Stock Option Plans 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.
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Article VI
MEANS OF IMPLEMENTATION
6.1 Secured Bank Renewal Notes.
On the Effective Date, the Secured Bank Renewal Notes and documents
referred to therein shall be executed and delivered and the undrawn funds under
such notes shall be available for use by the Debtors in accordance with the
terms thereof.
6. 2 Issuance of New Securities.
The issuance of Reorganized KCS Convertible Preferred Stock by Reorganized
KCS shall be authorized, upon confirmation of the Plan, without the need for any
further corporate action. The Reorganized KCS Common Stock to be issued upon a
conversion of Reorganized KCS Convertible Preferred Stock and pursuant to the
New Employee and Director Stock Option Plan shall be authorized upon
confirmation of the Plan under the Reorganized KCS Certificate of Incorporation
and the Reorganized KCS By-laws.
6.3 Cancellation of Existing Securities and Agreements.
On the Confirmation Date, without need for further corporate action, the
KCS Employee and Director Stock Option Plans, and the options issued and
unexercised thereunder, shall be cancelled and will have no further force or
effect. In addition, the Senior Subordinated Notes and Senior Subordinated
Indenture, except for purposes of effectuating the distributions under the Plan,
will be cancelled on the Effective Date and will have no further force or
effect; provided, however, that the rights of the Senior Subordinated Indenture
Trustee set forth in Section 6.6 of the Senior Subordinated Indenture 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 its counsel. On and after the
Effective Date, the Senior Subordinated Trustee shall have no further
obligations to the Debtors or the holders of any of the Senior Subordinated
Notes except those expressly set forth in the Plan.
6.4 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 current members disclosed in the Disclosure Statement or an
amendment or supplement to the Disclosure Statement or such other filing as may
be made 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 with the
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Bankruptcy Court. The selection of officers of Reorganized Debtors after the
Effective Date shall be as provided in their respective certificates of
incorporation and bylaws.
(c) Liquidity Provisions. The Debtors shall make all reasonable efforts
necessary to ensure an active and fully-valued public market for the trading of
Reorganized 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, registering newly issued shares of Reorganized 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. Reorganized KCS expects to file with the Securities and
Exchange Commission, promptly following the Effective Date, a registration
statement on form S-8, or other appropriate form under the Securities Act, to
register Reorganized KCS Common Stock issuable upon exercise of options granted
under the New Employee and Director Stock Option Plan and to use its reasonable
efforts in such registration statement to remain effective until the exercise or
expiration of such options.
(d) Rights Offering
The Reorganized KCS, in its discretion, may raise additional capital
through, without limitation, an offering to holders of securities of Reorganized
KCS of rights to subscribe for newly issued Reorganized KCS securities
contemporaneously with or after consummation of the Plan, subject to applicable
laws, rules and regulations.
6.5 Confirmation Under Section 1129(b) of the Bankruptcy Code
If any impaired class rejects the Plan, the Debtors may request
confirmation of the Plan pursuant to Bankruptcy Code section 1129(b).
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.
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7.2 Distribution Record Date for Holders of Senior Notes Claims and
Senior Subordinated Notes Claims.
The Distribution Record Date shall be the date for determining the holders
of Allowed Senior Notes Claims and Allowed Senior Subordinated Notes Claims
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 Senior Notes or Senior Subordinated Notes occurring after the Distribution
Record Date for purposes of distributions under the Plan. The Reorganized
Debtors and the Indenture Trustees or their 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 Senior Notes and Senior Subordinated Notes as of the close of business on
the Distribution Record Date.
7.3 Surrender of Instruments.
As a condition to receiving any distribution under the Plan, each holder
of Senior Subordinated Notes must surrender such Senior Subordinated Notes to
the Reorganized Debtors or their designee. Any holder of Senior Subordinated
Notes who fails to (a) surrender such Senior Subordinated Notes, 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
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 Reorganized Debtors shall satisfy all of their
obligations to Houlihan Lokey Howard & Zukin pursuant to its prepetition
retention agreement, as amended.
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
17
<PAGE> 100
Debtors or their 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;
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 Senior Notes
Claims and Senior Subordinated Notes Claims shall be made by a distribution
agent or the Debtors. The Debtors may make such distribution directly to the
Senior Indenture Trustee and the Senior Subordinated Indenture Trustee, as
appropriate. Shares of Reorganized KCS Convertible Preferred Stock delivered to
the Senior Subordinated Indenture Trustee will be registered and issued in the
names of the respective holders of the Senior Subordinated Notes, or as
otherwise directed by such holders.
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 securities or Cash in lieu thereof shall be
distributed. For purposes of distribution, fractional shares will be rounded
down to the next whole number.
7.8 Setoffs and Recoupment.
The Debtors may, but shall not be required to, set off against or recoup
from any Claim and the payments to be made pursuant to the Plan in respect of
such Claim (other than Senior Notes Claims, Senior Subordinated Notes Claims or
Secured Bank Claims), any claims of any nature whatsoever that the Debtors may
have against the claimant, but neither the failure to do so nor the allowance of
any Claim hereunder shall constitute a waiver or release by the Debtors of any
such claim it may have against such claimant.
7.9 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.
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7.10 Exculpation.
The Debtors, the Reorganized Debtors, the 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.
7.11 Allocation Relating to Senior Subordinated Notes.
All distributions to holders of Senior Subordinated Notes Claims shall be
allocated first to the portion of each of such Claims representing the principal
amount and then to the remainder of such Claim.
7.12 Change of Control
Under the terms of the Plan, no change of control will occur under the
Debtors current contracts because holders of KCS Common Stock Equity Interests
will continue to own more than half of the outstanding common stock of the
Reorganized KCS at the Effective Date.
7.13 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 any Debtor disputes 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)
any Debtor may elect, at its 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 any Debtor,
as Debtor in
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Possession, of any rejection, avoidance, recovery, subordination, or other power
(or defense) available to it 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 such Debtor, 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 a Debtor, as Debtor in Possession, of any rejection, avoidance,
recovery, subordination, or other power (or defense) available to it under
applicable provisions of the Bankruptcy Code.
(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) 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 obtained in accordance with subsection 8.1(a) of the Plan
and applicable non-bankruptcy law 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 any Debtor or Reorganized Debtor 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. 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, (b) forty-five (45) days after the proof of claim is filed with the
Bankruptcy Court, and (c) such date as may be fixed by 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 Claim unless and until such Disputed Claim becomes an Allowed
Claim.
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8.4 Distributions After Allowance.
If 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.
Article IX
PROVISIONS GOVERNING EXECUTORY
CONTRACTS AND UNEXPIRED LEASES
On the Effective Date, all executory contracts and unexpired leases of the
Debtors shall be assumed other than those executory contracts and unexpired
leases that the Debtors shall have previously rejected or shall list on a
schedule filed with the Bankruptcy Court prior to the commencement of the
Confirmation Hearing. Entry of the Conformation 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 Debtors,
and there shall not be a stay or injunction in effect with respect thereto.
(b) Secured Bank Renewal Notes. The closing and funding pursuant to
the Secured Bank Renewal Notes 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 Debtors in their absolute discretion.
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Article XI
EFFECT OF CONFIRMATION
11.1 Vesting of Assets.
On the Confirmation 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 Confirmation 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,
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.
11.3 Discharge of Debtors.
Except as otherwise provided herein, pursuant to Bankruptcy Code section
1141(d)(1), on the Confirmation Date all Claims against and Equity Interests in
any of the Debtors will be discharged and released. Except as otherwise provided
herein, on the Confirmation 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, against any claims or causes of
action as provided in the Debtors' certificates of incorporation, bylaws, or
applicable state or federal law, will survive
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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. There are no
indemnification claims currently pending against any of the Debtors and the
Debtors 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.
11.6 Limited Release.
On the Effective Date, the Debtors hereby release the officers and
directors of the Debtors holding office at any time prior to the Effective Date,
the lenders under the DIP Cash Collateral Agreement, each holder of KCS Common
Stock Equity Interests, the 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.
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 matters.
(c) To ensure distributions to holders of Allowed Claims and Allowed
Equity Interests are accomplished as provided herein.
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(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.
(f) To issue orders in aid of execution of the Plan of Reorganization
as authorized by section 1142 of the Bankruptcy Code.
(g) To consider any amendments to or modifications of the Plan.
(h) To cure any defect or omission, or reconcile any inconsistency, in
any order of the Bankruptcy Court, including, without limitation, the
Confirmation Order.
(i) 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.
(j) To hear and determine disputes arising in connection with the
interpretation, implementation or enforcement of the Plan, the Confirmation
Order, any transactions or payments contemplated hereby or any agreement,
instrument or other document governing or relating to any of the foregoing.
(k) To hear and determine matters concerning state, local and federal
taxes in accordance with sections 346, 505 and 1146 of the Bankruptcy Code.
(l) To hear any other matter not inconsistent with the Bankruptcy Code.
(m) To hear and determine all disputes involving the existence, scope
and nature of the discharges granted under section 11.3 hereof.
(n) To issue injunctions and effect any other actions that may be
necessary or desirable to restrain any interference by any entity with the
consummation or implementation of the Plan.
(o) To enter a final decree closing these Chapter 11 Cases.
(p) To determine any dispute under the Senior Indenture or Senior
Subordinated Indenture.
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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.
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.
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
25
<PAGE> 108
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 the Bankruptcy Code or other federal law is
applicable, or to the extent an Exhibit hereto 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.
13.8 Notices.
All notices, requests, and demands to or upon the Debtors 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:
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
The Bayard Firm
222 Delaware Avenue, Suite 900
Wilmington, Delaware 19899
Attention: Neil B. Glassman
Telephone: (302) 655-5000
Telecopier: (302) 668-6395
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Dated: Houston, Texas
October __, 2000
Respectfully submitted,
KCS ENERGY, INC.
(for itself and on behalf of each of its
affiliated Debtors)
By:
---------------------------------
Name: James W. Christmas
Title: President and Chief Executive
Officer
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<PAGE> 110
EXHIBIT B
SUMMARY OF REORGANIZED KCS CONVERTIBLE PREFERRED STOCK TERMS
<PAGE> 111
GENERAL
Each holder of a Senior Subordinated Note will receive one share of
Reorganized KCS Convertible Preferred Stock with a liquidation preference and
stated value of $1000 plus accrued interest in respect of such note as of the
Effective Date for every $1000 in principal amount of such note.
The terms of the Reorganized KCS Convertible Preferred Stock have been
designed to provide holders of Allowed Senior Subordinated Notes Claims with
property of a value, as of the Effective Date, at least equal to the Allowed
amount of such Claims. The value of the distribution to holders of Allowed
Senior Subordinated Notes Claims is based, in part, on the valuation of the
Reorganized Debtors attached hereto in Exhibit E. The valuation of the
Reorganized Debtors may be adjusted prior to the Confirmation Date by result
of discovery of additional reserves through the Debtors' ongoing exploration
program. If the Bankruptcy Court determines a different valuation of the
distribution to Class 5, the dividend rate on the Reorganized KCS Convertible
Preferred Stock will be adjusted in order to provide holders of Allowed Senior
Subordinated Notes Claims with property of a value, as of the Effective Date,
at least equal to the Allowed Amount of such Claims.
If the Bankruptcy Court determines the payment of interest on accrued and
unpaid interest is required to deem holders of Class 5 Claims paid in full,
the Debtors will increase the liquidation preference and stated value of the
shares of Reorganized KCS Convertible Preferred Stock by the amount of such
additional interest.
RANKING
The Reorganized KCS Convertible Preferred Stock will, with respect to dividend
distributions and distributions upon the liquidation, winding-up and
dissolution of Reorganized KCS, rank (i) senior to all Reorganized KCS Common
Stock and each other class of capital stock or series of preferred stock
established after the date of the certificate of designation by the board of
directors, the terms of which do not expressly provide that it ranks senior to
or on a parity with the Reorganized KCS Convertible Preferred Stock as to
dividend distributions and distributions upon the liquidation, winding-up and
dissolution of Reorganized KCS (collectively referred to with Reorganized KCS
Common Stock as "Junior Securities"); (ii) on a parity with any class of
capital stock or series of preferred stock issued by the Company established
after the date of the certificate of designation by the board of directors,
the terms of which expressly provide that such class or series will rank on a
parity with the Reorganized KCS Convertible Preferred Stock as to dividend
distributions and distributions upon the liquidation, winding-up and
dissolution of Reorganized KCS (collectively referred to as "Parity
Securities"); and (iii) junior to each class of capital stock or series of
preferred stock issued by the Company established after the date of the
certificate of designation by the board of directors the terms of which
expressly provide that such class or series will rank senior to the
Reorganized KCS Convertible Preferred Stock as to dividend distributions and
distributions upon liquidation, winding-up and dissolution of the Company
(collectively referred to as "Senior Securities") and which receives the
requisite approval of the holders of the Reorganized KCS Convertible Preferred
Stock.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Reorganized
KCS Convertible Preferred Stock with respect to any dividend period unless all
dividends for all preceding dividend periods have been declared and paid, or
declared and a sufficient sum set apart for the payment of such dividend, upon
all outstanding shares of Senior Securities.
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<PAGE> 112
DIVIDENDS
The holders of shares of the Reorganized KCS Convertible Preferred Stock will
be entitled to receive, when, as and if dividends are declared by the board of
directors out of funds of Reorganized KCS legally available therefore,
cumulative dividends from the issue date of the Reorganized KCS Convertible
Preferred Stock accruing at the rate per annum of 7.50% of the liquidation
preference per share, payable quarterly in arrears on each March 31, June 30,
September 30 and December 31, commencing on March 31, 2001. Dividends are
payable in cash. If any such date is not a Business Day, such payment shall be
made on the next succeeding Business Day to the holders of record as of the
next preceding March 16, June 15, September 15 and December 16.
Dividends on the Reorganized KCS Convertible Preferred Stock will accrue
whether or not Reorganized KCS has earnings or profits, whether or not there
are funds legally available for the payment of such dividends and whether or
not dividends are declared. Dividends will accumulate to the extent they are
not paid on the dividend payment date for the period to which they relate. The
certificate of designation will provide that Reorganized KCS will take all
actions required or permitted under Delaware corporate law to permit the
payment of dividends on the Reorganized KCS Convertible Preferred Stock,
including, without limitation, through the revaluation of its assets in
accordance with Delaware corporate law to make or keep funds legally available
for the payment of dividends.
No dividend shall be declared or paid upon, or any sum set apart for the
payment of dividends upon any outstanding share of the Reorganized KCS
Convertible Preferred Stock with respect to any dividend period unless all
dividends for all preceding dividend periods have been declared and paid, or
declared and a sufficient sum set apart for the payment of such dividend, upon
all outstanding shares of Reorganized KCS Convertible Preferred Stock. Unless
full cumulative dividends on all outstanding shares of Reorganized KCS
Convertible Preferred Stock for all past dividend periods shall have been
declared and paid, or declared and a sufficient sum for the payment thereof
set apart, then: (i) no dividend shall be declared or paid upon, or any sum
set apart for the payment of dividends upon, any shares of Junior Securities;
(ii) no other distribution shall be declared or made upon, or any sum set
apart for the payment of any distribution upon, any shares of Junior
Securities, other than a distribution consisting solely of Junior Securities;
(iii) no shares of Junior Securities shall be purchased, redeemed or otherwise
acquired or retired for value (excluding an exchange for shares of other
Junior Securities) by Reorganized KCS or any of its subsidiaries; and (iv) no
monies shall be paid into or set apart or made available for a sinking or
other like fund for the purchase, redemption or other acquisition or
retirement for value of any shares of Junior Securities by Reorganized KCS or
any of its subsidiaries. Holders of the Reorganized KCS Convertible Preferred
Stock will not be entitled to any dividends in excess of the full cumulative
dividends as herein described.
Future credit agreements or other agreements relating to indebtedness to which
Reorganized KCS or any if its subsidiaries becomes a party may contain
restrictions on the ability of the Company to pay dividends on the Reorganized
KCS Convertible Preferred Stock.
OPTIONAL REDEMPTION
Reorganized KCS may not redeem the Reorganized KCS Convertible Preferred Stock
before January 1, 2003. Thereafter, the Reorganized KCS Convertible Preferred
Stock may be redeemed for cash, in whole or in part, at the option of
Reorganized KCS at a redemption price equal to 100.0% of the liquidation
preference, together with accumulated and unpaid dividends (including
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<PAGE> 113
an amount equal to a prorated dividend for any partial dividend period), if
any, to the date of redemption, upon not less than 30 nor more than 60 days'
prior written notice.
No optional redemption may be authorized or made unless, prior to giving the
applicable redemption notice, all accumulated and unpaid dividends for periods
ended prior to the date of such redemption notice shall have been paid in
cash. In the event of partial redemptions of Reorganized KCS Convertible
Preferred Stock, the shares to be redeemed will be determined pro rata or by
lot, as determined by Reorganized KCS.
MANDATORY REDEMPTION
Unless it has already been redeemed or converted, the Reorganized KCS
Convertible Preferred Stock will be mandatorily redeemed by Reorganized KCS in
cash on January 1, 2008, at a redemption price equal to 100% of the
liquidation preference, together with accumulated and unpaid dividends to the
mandatory redemption date.
PROCEDURE FOR REDEMPTION
On and after a redemption date, unless Reorganized KCS defaults in the payment
of the applicable redemption price, dividends will cease to accrue on shares
of Reorganized KCS Convertible Preferred Stock called for redemption and all
rights of holders of such shares will terminate except for the right to
receive the redemption price, without interest. However, if Reorganized KCS
shall not have previously given a notice of redemption and not have segregated
and irrevocably set apart an amount in cash equal to the full redemption price
in trust for the benefit of holders of the Reorganized KCS Convertible
Preferred Stock called for redemption, then at the close of business on the
day on which such funds are so segregated and set apart, the holder of the
shares to be redeemed shall cease to be stockholders of Reorganized KCS and
shall be entitled, subject to the rights of conversion, to receive only the
redemption price for their shares on the redemption date.
Reorganized KCS will make a public announcement of the redemption (including a
statement of the form of consideration Reorganized KCS will use to effect the
same) and send a written notice thereof by first class mail to each holder of
record of shares of Reorganized KCS Convertible Preferred Stock not fewer than
30 days nor more than 60 days prior to the date fixed for such redemption.
Shares of Reorganized KCS Convertible Preferred Stock issued and reacquired
will, upon compliance with the applicable requirements of law, have the status
of authorized but unissued shares of Reorganized KCS preferred stock
undesignated as to series and may with any and all other authorized but
unissued shares of Reorganized KCS preferred stock be designated or
redesignated and issued, as part of any series of Reorganized KCS preferred
stock.
CONVERSION RIGHTS
Each share of Reorganized KCS Convertible Preferred Stock will be convertible
at any time, unless previously redeemed, at the option of the holder thereof
into Reorganized KCS Common Stock at a conversion rate equal to the
liquidation preference per share of Reorganized KCS Convertible Preferred
Stock divided by the conversion price then applicable, except that the right
to convert shares of Reorganized KCS Convertible Preferred Stock called for
redemption will terminate at the close of business on the business day
preceding the redemption date and will be
3
<PAGE> 114
lost if not exercised prior to that time, unless Reorganized KCS defaults in
making the payment due upon redemption. The initial conversion price is $9.35
per share.
The conversion price will be subject to adjustment from time to time as
follows:
(1) Stock split and combinations. In case we, at any time or from time to time
after the issuance date of the shares of preferred stock (a) subdivide or
split the outstanding shares of Reorganized KCS Common Stock, (b) combine or
reclassify the outstanding shares of Reorganized KCS Common Stock into a
smaller number of shares or (c) issue by reclassification of the shares of
Reorganized KCS Common Stock any shares of the capital stock of Reorganized
KCS, then the conversion price in effect immediately prior to that event or
the record date for that event, whichever is earlier, will be adjusted so that
the holder of any shares of Reorganized KCS Convertible Preferred Stock
thereafter surrendered for conversion will be entitled to receive the number
of shares of Reorganized KCS Common Stock or of other securities of
Reorganized KCS which the holder would have owned or have been entitled to
receive after the occurrence of any of the events described above, had those
shares of Reorganized KCS Convertible Preferred Stock been surrendered for
conversion immediately before the occurrence of that event or the record date
for that event, whichever is earlier.
(2) Stock Dividends in common stock. In case Reorganized KCS, at any time or
from time to time after the issuance date of the shares of preferred stock,
pay a dividend or make a distribution in shares of Reorganized KCS Common
Stock on any class of Reorganized KCS capital stock other than dividends or
distributions of shares of Reorganized KCS Common Stock or other securities
with respect to which adjustments are provided in paragraph (1) above, the
conversion price will be adjusted so that the holder of each share of
Reorganized KCS Convertible Preferred Stock will be entitled to receive, upon
conversion of that share, the number of shares of Reorganized KCS Common Stock
determined by multiplying (a) the conversion price by (b) a fraction, the
numerator of which will be the number of shares of Reorganized KCS Common
Stock outstanding and the denominator of which will be the sum of that number
of shares and the total number of shares issued in that dividend or
distribution.
(3) Issuance of rights or warrants. In case Reorganized KCS issues to all
holders of Reorganized KCS Common Stock rights or warrants entitling those
holders to subscribe for or purchase Reorganized KCS Common Stock at a price
per share less than the current market price, the conversion price in effect
immediately before the close of business on the record date fixed for
determination of shareholders entitled to receive those rights or warrants
will be reduced by multiplying the conversion price by a fraction, the
numerator of which is the sum of the number of shares of Reorganized KCS
Common Stock outstanding at the close of business on that record date and the
number of shares of Reorganized KCS Common Stock that the aggregate offering
price of the total number of shares of Reorganized KCS Common Stock so offered
for subscription or purchase would purchase at the current market price and
the denominator of which is the sum of the number of shares of Reorganized KCS
Common Stock outstanding at the close of business on that record date and the
number of additional shares of Reorganized KCS Common Stock so offered for
subscription or purchase. For purposes of this paragraph (3), the issuance of
rights or warrants to subscribe for or purchase securities convertible into
shares of Reorganized KCS Common Stock will be deemed to be the issuance of
rights or warrants to purchase shares of Reorganized KCS Common Stock into
which those securities are convertible at an aggregate offering price equal to
the sum of the aggregate offering price of those securities and the minimum
aggregate amount, if any, payable upon conversion of those securities into
shares of Reorganized KCS Common Stock. This adjustment will be made
successively whenever any such event occurs. For purposes of this paragraph
and paragraph (4), "current
4
<PAGE> 115
market price" means the average of the daily closing prices for the five
consecutive trading days selected by the Reorganized KCS board of directors
beginning not more than 20 trading days before, and ending not later than the
date of the applicable event described in this paragraph and the date
immediately preceding the record date fixed in connection with that event.
(4) Distribution of indebtedness, securities or assets. In case Reorganized
KCS distributes to all holders of Reorganized KCS Common Stock, whether by
dividend or in a merger, amalgamation or consolidation or otherwise, evidences
of indebtedness, share of capital stock of any class or series, other
securities, cash or assets, other than Reorganized KCS Common Stock, rights or
warrants referred to in paragraph (3) above or an ordinary dividend payable
exclusively in cash and other than as a result of a fundamental change
described in paragraph (5) below, the conversion price in effect immediately
before the close of business on the record date fixed for determination of
shareholders entitled to receive that distribution will be reduced by
multiplying the conversion price by a fraction, the numerator of which is the
current market price on that record date less the fair market value, as
determined by the Reorganized KCS board of directors, of the portion of those
evidences of indebtedness, shares of capital stock, other securities, cash and
assets so distributed applicable to one share of Reorganized KCS Common Stock
and the denominator of which is the current market price. This adjustment will
be made successively wherever any such event occurs.
(5) Fundamental changes. For purposes of this paragraph (5), "fundamental
change" means any transaction or event, including any merger, consolidation,
sale of assets, tender or exchange offer, reclassification, compulsory share
exchange or liquidation, in which all or substantially all outstanding shares
of Reorganized KCS Common Stock are converted into or exchanged for stock,
other securities, cash or assets. If a fundamental change occurs, the holder
of each share of Reorganized KCS Convertible Preferred Stock outstanding
immediately before that fundamental change occurred, will have the right upon
any subsequent conversion to receive, but only of funds legally available to
Reorganized KCS, to the extent required by applicable law, the kind and amount
of stock other securities, cash and assets that that holder would have
received if that share had been converted immediately prior to the fundamental
change.
Reorganized KCS will not, however, be required to give effect to any
adjustment in the conversion price unless and until the net effect of one or
more adjustments, each of which will be carried forward until counted toward
adjustment, will have resulted in a change of the conversion price by at least
1%, and when the cumulative net effect of more than one adjustment so
determined will be to change the conversion price by at least 1%, that change
in the conversion price will be given effect. In the event that, at any time
as a result of the provisions of this section, the holder of shares of
Reorganized KCS Convertible Preferred Stock upon subsequent conversion become
entitled to receive any shares of Reorganized KCS capital stock other than
Reorganized KCS Common Stock, the number of those other shares so receivable
upon conversion of shares of preferred stock will thereafter be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions contained in this section.
There will be no adjustment to the conversion price in case of the issuance of
any shares of Reorganized KCS stock in a merger, reorganization, acquisition,
reclassification, recapitalization or other similar transaction except as
provided in this section.
If Reorganized KCS takes a record of the holders of Reorganized KCS Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, and after this and before the distribution to shareholders of
Reorganized KCS legally abandon the plan to pay or deliver that
5
<PAGE> 116
dividend or distribution, then no adjustment in the number of shares of
Reorganized KCS Common Stock issuable upon conversion of shares of Reorganized
KCS Convertible Preferred Stock or in the conversion price then in effect will
be required by reason of the taking of that record.
The holder of record of a share of Reorganized KCS Convertible Preferred Stock
at the close of business on a record date with respect to the payment of
dividends on the Reorganized KCS Convertible Preferred Stock will be entitled
to receive such dividends with respect to such share of Reorganized KCS
Convertible Preferred Stock on the corresponding dividend payment date,
notwithstanding the conversion of such share after such record date and prior
to such dividend payment date. A share of Reorganized KCS Convertible
Preferred Stock surrendered for conversion during the period from the close of
business on any record date for the payment of dividends to the opening of
business of the corresponding dividend payment date must be accompanied by a
payment in cash, Reorganized KCS Common Stock or a combination thereof,
depending on the method of payment that Reorganized KCS has chosen to pay the
dividend, in an amount equal to the dividend payable on such dividend payment
date, unless such share of Reorganized KCS Convertible Preferred Stock has
been called for redemption on a redemption date occurring during the period
from the close of business on any record date for the payment of dividends to
the close of business on the business day immediately following the
corresponding dividend payment date. The dividend payment with respect to a
share of Reorganized KCS Convertible Preferred Stock called for redemption on
a date during the period from the close of business on any record date for the
payment of dividends to the close of business on the business day immediately
following the corresponding dividend payment date will be payable on such
dividend payment date to the record holder of such share on such record date,
notwithstanding the conversion of such share after such record date and prior
to such dividend payment date. No payment or adjustment will be made upon
conversion of shares of Reorganized KCS Convertible Preferred Stock for
accumulated and unpaid dividends or for dividends with respect to the
Reorganized KCS Common Stock issued upon such conversion.
VOTING RIGHTS
Holders of record of shares of the Reorganized KCS Convertible Preferred Stock
will have no voting rights, except as required by law and as provided in the
certificate of designation. The certificate of designation will provide that
upon the accumulation of accrued and unpaid dividends on the outstanding
Reorganized KCS Convertible Preferred Stock in an amount equal to six
quarterly dividends, whether or not consecutive, the holders of a majority of
the outstanding shares of Reorganized KCS Convertible Preferred Stock voting
together with any other subsequently issued Parity Securities then entitled to
voting rights will be entitled to elect such number of members to the board of
directors constituting at least 20% of the then existing board of directors
before such election, rounded to the nearest whole number, provided, however,
that such number shall be no less than one nor greater than two, and the
number of members of the board of directors will be immediately and
automatically increased by one or two, as the case may be. Voting rights
arising as a result of dividend arrearages will continue until such time as
all dividends in arrears on the Reorganized KCS Convertible Preferred Stock
are paid in full and all other dividend arrearages that trigger voting rights
have been cured or waived, at which time the term of office of any such
members of the board of directors so elected shall terminate and such
directors shall be deemed to have resigned.
In addition, the certificate of designation provides that the Company will not
authorize any class of Senior Securities or any obligation or security
convertible or exchangeable into or evidencing a right to purchase shares of
any class or series of Senior Securities, without the approval of holders
6
<PAGE> 117
of 50% of the shares of Reorganized KCS Convertible Preferred Stock then
outstanding, voting or consenting, as the case may be, as one class. The
certificate of designation also provides that Reorganized KCS may not amend
the certificate of designation so as to affect adversely the specified rights,
preferences, privileges or voting rights of holders of shares of the
Reorganized KCS Convertible Preferred Stock or authorize the issuance of any
additional shares of Reorganized KCS Convertible Preferred Stock, without the
approval of the holders of at least 50% of the then outstanding shares of
Reorganized KCS Convertible Preferred Stock voting or consenting, as the case
may be, as one class; provided, however, that the Company may not amend the
change of control provisions of the certificate of designation (including the
related definitions) without the approval of the holders of at least 66 2/3%
of the then outstanding shares of Reorganized KCS Convertible Preferred Stock
voting or consenting, as the case may be, as one class. The certificate of
designation also provides that, except as set forth above with respect to
Senior Securities, (a) the creation, authorization or issuance of any shares
of Junior Securities, Parity Securities or Senior Securities or (b) the
increase or decrease in the amount of authorized capital stock of any class,
including any preferred stock, shall not require the consent of the holders of
Reorganized KCS Convertible Preferred Stock and shall not be deemed to affect
adversely the rights, preferences, privileges, special rights or voting rights
of holders of shares of Reorganized KCS Convertible Preferred Stock. The
consent of the holders of Reorganized KCS Convertible Preferred Stock will not
be required for Reorganized KCS to authorize, create (by way of
reclassification or otherwise) or issue any Parity Securities or any
obligation or security convertible or exchangeable into or evidencing a right
to purchase, shares of any class or series of Parity Securities.
MERGER, CONSOLIDATION AND SALE OF ASSETS
Without the vote or consent of the holders of a majority of the then
outstanding shares of Reorganized KCS Convertible Preferred Stock, Reorganized
KCS may not consolidate or merge with or into, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its assets
to, any person unless (a) the entity formed by such consolidation or merger
(if other than Reorganized KCS) or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (in any such case,
the "resulting entity") is a corporation organized and existing under the laws
of the United States or any State thereof or the District of Columbia; (b) if
Reorganized KCS is not the resulting entity, the Reorganized KCS Convertible
Preferred Stock is converted into or exchanged for and becomes shares of such
resulting entity, having in respect of such resulting entity the same (or more
favorable) powers, preferences and relative, participating, optional or other
special rights thereof that the Reorganized KCS Convertible Preferred Stock
had immediately prior to such transaction; and (c) immediately after giving
effect to such transaction, no dividend arrearages which trigger voting rights
have occurred and are continuing. The resulting entity of such transaction
shall thereafter be deemed to be the issuer of the Reorganized KCS Convertible
Preferred Stock or securities into which it is converted for all purposes of
the certificate of designation.
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
Reorganized KCS or reduction or decrease in its capital stock resulting in a
distribution of assets to the holders of any class or series of its capital
stock, each holder of shares of the Reorganized KCS Convertible Preferred
Stock will be entitled to payment out of the assets of Reorganized KCS
available for distribution of an amount equal to the liquidation preference
per share of Reorganized KCS Convertible Preferred Stock held by such holder,
plus accrued and unpaid dividends and preferred stock liquidated damages (as
defined), if any, to the date fixed for liquidation, dissolution,
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<PAGE> 118
winding-up or reduction or decrease in capital stock, before any distribution
is made on any Junior Securities, including, without limitation, Reorganized
KCS Common Stock. After payment in full of the liquidation preference and all
accrued dividends and preferred stock liquidated damages, if any, to which
holders of Reorganized KCS Convertible Preferred Stock are entitled, such
holders will not be entitled to any further participation in any distribution
of assets of Reorganized KCS. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of Reorganized KCS, the amounts payable
with respect to the Reorganized KCS Convertible Preferred Stock and all other
Parity Securities are not paid in full, the holders of the Reorganized KCS
Convertible Preferred Stock and the Parity Securities will share equally and
ratably in any distribution of assets of Reorganized KCS in proportion to the
full liquidation preference and accumulated and unpaid dividends and preferred
stock liquidated damages, if any, to which each is entitled. However, neither
the voluntary sale, conveyance, exchange or transfer (for cash, shares of
stock, securities or other consideration) of all or substantially all of the
property or assets of Reorganized KCS nor the consolidation or merger of
Reorganized KCS with or into one or more entities will be deemed to be a
voluntary or involuntary liquidation, dissolution or winding-up of Reorganized
KCS or reduction or decrease in capital stock, unless such sale, conveyance,
exchange or transfer shall be in connection with a liquidation, dissolution or
winding-up of the business of Reorganized KCS or reduction or decrease in
capital stock.
8
<PAGE> 119
EXHIBIT C
KCS ENERGY, INC. ANNUAL REPORT ON FORM 1999 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1999
<PAGE> 120
EXHIBIT D
KCS ENERGY, INC., QUARTERLY REPORT ON FORM 10-Q
FOR THREE MONTHS ENDED JUNE 30, 2000
<PAGE> 121
EXHIBIT E
LIQUIDATION ANALYSIS
<PAGE> 122
LIQUIDATION ANALYSIS
THE DEBTORS' LIQUIDATION ANALYSIS IS AN ESTIMATE OF THE PROCEEDS THAT MAY BE
GENERATED AS A RESULT OF A HYPOTHETICAL CHAPTER 7 LIQUIDATION OF THE ASSETS OF
THE DEBTORS. Underlying the liquidation analysis are a number of estimates and
assumptions that are inherently subject to significant economic, competitive
and operational uncertainties and contingencies beyond the control of the
Company or a chapter 7 trustee. Additionally, various liquidation decisions,
which are based upon certain assumptions and estimates employed in determining
the liquidation values of the Company's assets, will impact the actual amount
of the proceeds which would be realized were the Company to undergo an actual
liquidation. The actual amounts of claims against the estate could vary
significantly from the Company's estimate, depending on the claims asserted
during the pendency of the chapter 7 case. This liquidation analysis does not
include liabilities that may arise as a result of liquidation, certain new tax
assessments or other potential claims. This analysis also does not include
potential recoveries from avoidance actions. Therefore, the actual liquidation
value of KCS could vary materially from the estimates provided herein.
The liquidation analysis set forth below was based on the estimated values of
KCS's assets immediately prior to the proposed Effective Date. To the extent
operations through such date are different than estimated, the asset values
may change. These values have not been subject to any review, compilation or
audit by any independent accounting firm.
<TABLE>
<CAPTION>
($ in Millions)
Recovery Liquidation
PROCEEDS FROM LIQUIDATION Percentage Proceeds
------------------- ----------------------
Value Lower Higher Lower Higher
<S> <C> <C> <C> <C> <C> <C> <C>
Proved Oil and Gas Reserves
Proved Developed Producing Oil and Gas Reserves $291.5 85.0% - 95.0% $247.8 - $276.9
Proved Developed Non-Producing Oil and Gas Reserves 66.4 70.0% - 80.0% 46.5 - 53.1
Proved Undeveloped Oil and Gas Reserves 63.2 45.0% - 55.0% 28.4 - 34.7
VPP Reserves 49.1 85.0% - 95.0% 41.7 - 46.6
$470.2 $364.4 $411.4
Probable & Possible Oil and Gas Reserves $129.5 15.0% - 20.0% $19.4 - $25.9
Prospect Inventory $0.0 - $17.4
Non-Reserve Assets $27.0 40.0% - 50.0% $10.8 - $13.5
Accounts Receivable $28.8 80.0% - 90.0% $23.1 - $25.9
Other Current Assets $4.6 45.0% - 55.0% $2.1 - $2.5
---------------------------------------------------------------------------------------------------------------------------
TOTAL PROCEEDS AVAILABLE FOR DISTRIBUTION $419.8 - $496.7
---------------------------------------------------------------------------------------------------------------------------
TOTAL PROCEEDS AVAILABLE FOR DISTRIBUTION, MID-POINT $458.3
Unrestricted Cash $28.7
------
NET LIQUIDATION PROCEEDS $486.9
PRESENT VALUE OF NET LIQUIDATION PROCEEDS AS
OF EFFECTIVE DATE $464.3
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED ESTIMATED
ALLOCATION OF PROCEEDS CLAIM RECOVERY RECOVERY %
--------- --------- ----------
<S> <C> <C> <C>
Chapter 7 Administrative Claims
Trustee Fees $13.7 $13.7 100.0%
Wind-down Expenses $4.6 $4.6 100.0%
Professional Fees $5.6 $5.6 100.0%
----- ----- ------
$23.9 $23.9 100.0%
PROCEEDS AVAILABLE FOR PAYMENT OF SECURED CLAIMS $440.3
Secured Claims
Bank Debt $77.0 $77.0 100.0%
Hedge Obligations $24.3 $24.3 100.0%
----- ----- ------
$101.3 $101.3 100.0%
PROCEEDS AVAILABLE FOR PAYMENT OF ADMINISTRATIVE CLAIMS $339.1
Chapter 11 Administrative Claims
Administrative Expense $9.2 $9.2 100.0%
----- ----- ------
$9.2 $9.2 100.0%
PROCEEDS AVAILABLE FOR PAYMENT OF GENERAL UNSECURED CLAIMS $329.9
Trade Claims $31.5 $28.8 91.5%
11.0% Senior Notes due 2003 $182.4 $182.4 100.0%
8.875% Senior Subordinated Notes due 2008 $146.8 $118.7 80.9%
------ ------ ------
Total General Unsecured Claims $360.6 $329.9 91.5%
PROCEEDS AVAILABLE FOR DISTRIBUTION TO EQUITY $0.0
</TABLE>
<PAGE> 123
SUMMARY OF RECOVERIES BY CLASS
<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% 91.5%
Senior Notes Class 4 100.0% 100.0%
Senior Subordinated Notes Class 5 100.0% 80.9%
Equity Class 7 NA 0.0%
</TABLE>
FOOTNOTES TO LIQUIDATION ANALYSIS
Proved Oil and Gas Reserves
Proved oil and gas reserves and future net revenue are estimated and reported
annually by the Company. In addition, the Company engaged Netherland, Sewell
and Associates, Inc. (NSAI) to provide a mid-year (June 30) reserve estimate.
NSAI is an independent petroleum engineering consulting firm that prepared the
Company's annual reserve report as of December 31, 1999 for the SEC filings
required for public companies. The Company has also retained Huddleston &
Co., Inc. to analyze the value of these oil and gas reserves.
The Company's estimate of the value associated with the proved reserves was
calculated based on current NYMEX prices as of September 15, 2000 for years
2000, 2001, 2002, and 2003. These prices were escalated 3% per annum through
2009 and held constant thereafter. Gas prices were adjusted for BTU content,
gas gathering fees, compression expense and regional basis. Oil prices were
adjusted by lease for gravity, transportation fees, and regional price
differences. The resultant values encompass the estimated value of the
Company's pipelines, gathering systems, gas processing plants, compressors and
other assets necessary to produce the reserves.
Probable & Possible Oil and Gas Reserves
KCS engaged NSAI to prepare an analysis of these reserve categories as of June
30, 2000. The probable and possible reserves are unrisked. The value of these
reserves was calculated by Huddleston & Co., Inc. using the NSAI reserve
estimates and the same pricing as used in estimating the value of the Proved
Oil and Gas Reserves.
Prospect Inventory
The Company has a significant inventory of prospects and leads in the Gulf
Coast, Mid-Continent, and to a lesser extent, Rocky Mountain areas. The Gulf
Coast prospects offer the most significant reserve potential. Specifically,
the Company is pursuing moderate risk, higher potential projects in South
Texas, South Louisiana and the Mississippi Salt Basin. The Company has
retained Huddleston & Co., Inc. to analyze the value of the prospect inventory
of the Company as of June 2000. Huddleston & Co., Inc. believes the Company's
prospect inventory is fairly valued at $17.4 million.
Other Non-Reserve Assets
Includes trucks, computers, furniture inventory, acreage, emission credits and
seismic assets not included in the reserve values.
<PAGE> 124
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 drilling, pre-paid insurance, deposits and other
current assets.
Net Liquidation Proceeds
Net Liquidation Proceeds have been discounted back to the Effective Date in
order to make the recoveries to creditors and equity holders comparable under
the Plan and as a result of a chapter 7 case. The analysis assumes a six month
liquidation period and a 10.0% discount rate.
Trustee Fees
Section 326 of the Bankruptcy Code limits the chapter 7 trustee fees to 3.0%
of all monies disbursed or tuned over in 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.
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 $5.6 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 $77.0 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 1.7, 3.0, 2.5, 2.0, 1.7, and 1.1 BCFE
in the six months ended December 31, 2000 and years 2001-2005, respectively,
at $2.055/MMBTU. 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. Furthermore,
the Company has entered into a swap agreement for approximately 0.2 BCFE for
the period October 31, 2000 to March 31, 2001 at $5.04/MMBTU.
Trade Claims
Represents accounts payable and accrued liabilities.
<PAGE> 125
Other Unsecured Claims
Other unsecured claims consist of $150.0 million of Senior Notes plus accrued
interest of $32.4 million and $125.0 million of Senior Subordinated Notes plus
accrued interest of $21.8 million as of December 31, 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 11 case is converted to chapter 7
on the Effective Date.
<PAGE> 126
EXHIBIT F
PROJECTIONS
<PAGE> 127
PROJECTIONS
RESPONSIBILITY FOR AND PURPOSE OF THE PROJECTIONS
As a condition of confirmation of a plan, the Bankruptcy Code requires, among
other things, that the bankruptcy court determine that confirmation is not
likely to be followed by a liquidation or the need for further financial
reorganization of the debtor. In connection with the development of the Plan,
and for purposes of determining whether the Plan satisfies feasibility
standards, the Debtors' management has, through the development of financial
projections (the "Projections"), analyzed the ability of the Debtors to meet
their obligations under the Plan and maintain sufficient liquidity and capital
resources to conduct their business. The Projections were also prepared to
assist each holder of a Claim in Classes 2, 5 and 6 and each holder of an
Equity Interest in Class 7 in determining whether to accept or reject the
Plan.
The Projections should be read in conjunction with the assumptions,
qualifications and footnotes to tables containing the Projections set forth
herein, the historical consolidated financial information (including the notes
and schedules thereto) and the other information set forth in KCS's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 and on Form
10-Q for the fiscal quarter ended June 30, 2000. The Projections were prepared
in good faith based upon assumptions believed to be reasonable and applied in
a manner consistent with past practice. Most of the assumptions about the
operations of the business after the assumed Effective Date that are utilized
in the Projections were prepared in September 2000 and were based, in part, on
economic, competitive, and general business conditions prevailing at the time.
While as of the date of this Disclosure Statement such conditions have not
materially changed, any future changes in these conditions may materially
impact the ability of the Debtors to achieve the Projections.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARDS COMPLYING WITH THE
GUIDELINES FOR PROSPECTIVE FINANCIAL STATEMENTS PUBLISHED BY THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. KCS'S INDEPENDENT PUBLIC ACCOUNTANT
HAS NEITHER COMPILED NOR EXAMINED THE ACCOMPANYING PROSPECTIVE FINANCIAL
INFORMATION TO DETERMINE THE REASONABLENESS THEREOF AND, ACCORDINGLY, HAS NOT
EXPRESSED AN OPINION OR ANY OTHER FORM OF ASSURANCE WITH RESPECT THERETO.
THE DEBTORS DO NOT, AS A MATTER OF COURSE, PUBLISH PROJECTIONS OF THEIR
ANTICIPATED FINANCIAL POSITION, RESULTS OF OPERATIONS OR CASH FLOWS.
ACCORDINGLY, THE DEBTORS DO NOT INTEND TO, AND DISCLAIM ANY OBLIGATION TO (A)
FURNISH UPDATED PROJECTIONS TO HOLDERS OF CLAIMS OR EQUITY INTERESTS PRIOR TO
THE EFFECTIVE DATE OR TO HOLDERS OF NEW COMMON STOCK OR ANY OTHER PARTY AFTER
THE EFFECTIVE DATE, (B) INCLUDE SUCH UPDATED INFORMATION IN ANY DOCUMENTS THAT
MAY BE REQUIRED TO BE FILED WITH THE SEC, OR (C) OTHERWISE MAKE SUCH UPDATED
INFORMATION PUBLICLY AVAILABLE.
THE PROJECTIONS PROVIDED IN THE DISCLOSURE STATEMENT HAVE BEEN PREPARED
EXCLUSIVELY BY THE DEBTORS' MANAGEMENT. THESE PROJECTIONS, WHILE PRESENTED
WITH NUMERICAL SPECIFICITY, ARE NECESSARILY BASED ON A VARIETY OF ESTIMATES
AND ASSUMPTIONS WHICH, THOUGH CONSIDERED REASONABLE BY MANAGEMENT, MAY NOT BE
REALIZED, AND ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE
DEBTORS' CONTROL. THE
<PAGE> 128
DEBTORS CAUTION 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 SUBSEQUENT 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 Debtors have 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 31, 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 31, 2000,
there is no guarantee that, among other things, the trade creditors will
support KCS as projected. A material reduction in trade credit and terms could
materially impact KCS's ability to achieve the projected results. Further, if
the Effective Date does not occur by December 31, 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, management 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. General Economic Conditions
The Projections were prepared assuming that economic conditions in
the markets served by KCS do not differ significantly over the next three
fiscal years from current economic conditions. Inflation in revenues and costs
are assumed to remain relatively low.
e. Revenues
Revenues are based on the twelve-month NYMEX price strips as of
September 15, 2000 for natural gas and NYMEX WTI crude oil prices for the
years 2000, 2001, 2002, and 2003. These prices
<PAGE> 129
were escalated 3% per annum through 2009 and held constant thereafter and were
adjusted by regional basis differentials. Projected revenues also reflect the
impact of existing commodity price hedges. Additionally, projected revenues
are based upon the Company's assessment of future production, taking into
consideration timing and risk factors, and assume continued capital
investments in drill wells which yield economic results similar to those
drilled in 1999. The assumed increases in revenues are based upon the
assumptions as to general market conditions referred to above, certain growth
rate assumptions, and through current and future new reserve development and
acquisition.
f. Lifting and Operating Expenses (LOE) and Production Taxes
LOE and production taxes are projected to be consistent with current
levels for proved reserves plus estimates for incremental costs projected to
be incurred when new proved reserves are brought into production. In addition,
they reflect the sale of certain higher cost properties as part of the
Company's ongoing asset rationalization program.
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 2000, adjusted for the effect of
selling certain higher cost properties.
h. Income Taxes
The Debtor anticipates having substantial NOL carry forwards on the
Effective Date, which will be used to offset future domestic income. The
Debtor is therefore assumed to have no income tax expense during the
projection period.
i Working Capital
Working capital components have been estimated based upon underlying
production levels and the analysis of historical averages.
j. Capital Expenditures
Capital expenditures consist primarily of 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,
consistent with management's business plan, can be supported by the capital
structure and forecast operating results of Reorganized KCS. The Projections
assume an average finding and development cost of $1.20 per Mcfe in 2001 and
escalating 5 percent per annum thereafter for the Gulf Coast region ($1.75 per
Mcfe in 2000) and $1.05 per Mcfe in 2001 and escalating 5 percent per annum
thereafter ($0.95 per Mcfe in 2000) for the Mid-Continent region. The finding
and development cost for VPP investments is based on a targeted 18.0% internal
rate of return and NYMEX prices in effect in the year such investments are
made.
k. 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.
l. Interest Expense
Interest expense reflects interest on the New Credit Facility and
interest on the $150.0 million of Senior Notes. Interest on the Senior Notes
shall be payable semiannually in cash and interest on the New Credit Facility
shall be payable monthly in cash.
<PAGE> 130
m. New Credit Facility
Reorganized KCS is assumed to enter into a new revolving credit
facility with an initial draw of $83.6 million with interest at LIBOR plus
3.0%.
n. Refinancing of Senior Notes
The Senior Notes are assumed to be refinanced in 2003 at a cost of
$5.0 million. The cost is assumed to be amortized evenly over 7 years.
<PAGE> 131
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information, statements contained in this Disclosure
Statement and incorporated by reference, including the projections in this
section, may be considered "forward-looking statements" within the meaning of
federal securities law. Such forward-looking statements are subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. Potential risks and uncertainties include, but are not limited to,
general economic and business conditions, the competitive environment in which
KCS operates and will operate, the success or failure of KCS in implementing
its current business and operational strategies, the business risk involved in
drilling oil and gas wells, the uncertainty of natural gas and crude oil
prices, the level of vendor trade support, labor relations and labor costs,
the ability of KCS to maintain and improve its revenues and margins, the
liquidity of KCS on a cash flow basis (including the ability to comply with
the financial covenants of its credit arrangements and to fund its capital
expenditure program). For additional information about KCS and relevant risk
factors, see Section X, Certain Factors To Be Considered.
FINANCIAL PROJECTIONS
The financial projections prepared by management are summarized in the
following tables. The projections assume that the Old Senior Subordinated
Notes are exchanged for New Convertible Preferred Stock. The tables consist of
an actual balance sheet, income statement, and cash flow statement for the
fiscal year 1999 and a projected balance sheet, income statement, and cash
flow statement for the fiscal years 2000 through 2003.
All captions in the attached projections do not correspond exactly to KCS's
historical external reporting; some captions have been combined for
presentation.
<PAGE> 132
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 $ 178,084 $ 196,465 $ 206,078 $ 197,176
Lease Operating Expenses (26,624) (25,439) (23,977) (26,127) (26,025)
Production Taxes (3,524) (5,880) (7,202) (6,763) (6,090)
General & Administrative (9,847) (8,000) (7,983) (8,222) (8,469)
Restructuring Expenses (1,886) - - - -
DD&A (50,967) (46,342) (46,201) (65,392) (77,058)
------------ -------------- ------------- ------------- ------------
Total Expenses (92,848) (85,662) (85,363) (106,504) (117,642)
------------ -------------- ------------- ------------- ------------
Operating Income 43,643 92,423 111,102 99,575 79,534
Interest & Other Income 702 550 200 200 200
Interest Expense (40,005) (27,727) (24,648) (21,778) (19,721)
------------ -------------- ------------- ------------- ------------
Subtotal 4,340 65,246 86,654 77,997 60,013
Restructuring Expenses (a) - (22,194) - - -
------------ -------------- ------------- ------------- ------------
Pre-tax Income 4,340 43,052 86,654 77,997 60,013
Federal & State Income Taxes - - - - -
------------ -------------- ------------- ------------- ------------
Net Income 4,340 43,052 86,654 77,997 60,013
Preferred Stock Dividends - - (11,007) (11,007) (11,007)
------------ -------------- ------------- ------------- ------------
Income for Common $ 4,340 $ 43,052 $ 75,647 $ 66,990 $ 49,007
------------ -------------- ------------- ------------- ------------
Average Shares Outstanding 29,266 29,266 29,266 29,266 29,266
Basic Earnings per Share $ 0.15 $ 1.47 $ 2.58 $ 2.29 $ 1.67
Fully-diluted Shares Outstanding 29,266 43,274 43,274 43,274 43,274
Fully-diluted Earnings per Share $ 0.15 $ 0.99 $ 2.00 $ 1.80 $ 1.39
EBITDA (b) $ 97,198 $ 139,315 $ 157,503 $ 165,167 $ 156,792
EBITDA/Interest 2.62 5.85 7.19 8.38 8.25
Total Debt/EBITDA 3.93 1.68 1.29 1.14 1.20
</TABLE>
(a) Includes non-cash write-off of unamortized debt expenses of Subordinated
Notes and Old Bank Loans and fiscal year 2000 interest not accrued on
Subordinated Debt in accordance with GAAP.
(b) Excludes restructuring expenses and extraordinary items.
<PAGE> 133
KCS ENERGY, INC.
PROJECTED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash $ 10,584 $ 5,000 $ 5,000 $ 5,000 $ 5,000
Accounts Receivable 21,941 37,162 40,673 41,623 39,473
Other 7,571 4,271 4,271 4,271 4,271
----------- ----------- ----------- ---------- -----------
Total Current Assets 40,096 46,433 49,944 50,894 48,744
Property, Plant & Equipment, net 236,967 255,125 300,196 354,014 401,288
Other Assets 7,869 4,813 2,063 - 4,286
----------- ----------- ----------- ---------- -----------
Total Assets $ 284,932 $ 306,370 $ 352,203 $ 404,907 $ 454,317
=========== =========== =========== ========== ===========
Current Liabilities:
Accounts Payable & Accrued Liabilities $ 24,602 $ 23,372 $ 24,073 $ 24,465 $ 24,868
Accrued Interest on Notes 26,444 7,563 7,563 7,563 7,563
----------- ----------- ----------- ---------- -----------
Total Current Liabilities 51,046 30,934 31,636 32,027 32,430
----------- ----------- ----------- ---------- -----------
Deferred Taxes - - - - -
Other Long-term Liabilities 1,910 1,910 1,910 1,910 1,910
----------- ----------- ----------- ---------- -----------
Total Other Long-term Liabilities 1,910 1,910 1,910 1,910 1,910
----------- ----------- ----------- ---------- -----------
Long-Term Debt:
11.000% Senior Notes 149,724 150,000 150,000 150,000 150,000
8.875% Subordinated Notes 125,000 - - - -
Bank Debt 107,095 83,561 53,045 38,368 38,368
----------- ----------- ----------- ---------- -----------
Total Long-Term Debt 381,819 233,561 203,045 188,368 188,368
----------- ----------- ----------- ---------- -----------
Preferred Stock - 146,756 146,756 146,756 146,756
Common Equity (149,843) (106,791) (31,144) 35,846 84,853
----------- ----------- ----------- ---------- -----------
Total Equity (149,843) 39,965 115,612 182,602 231,609
----------- ----------- ----------- ---------- -----------
Total Liabilities & Equity $ 284,932 $ 306,370 $ 352,203 $ 404,907 $ 454,317
=========== =========== =========== ========== ===========
</TABLE>
<PAGE> 134
KCS ENERGY, INC.
PROJECTED STATEMENTS OF SOURCES AND USES OF FUNDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Income to Common $ 4,340 $ 43,052 $ 75,647 $ 66,990 $ 49,007
Depreciation, Depletion & Amortization 50,967 46,342 46,201 65,392 77,058
Deferred Taxes - - - - -
Other Non-cash items, net 2,862 8,557 2,750 2,063 714
----------- ---------- ---------- ----------- ------------
Cash Flow 58,169 97,951 124,598 134,445 126,779
Repayment of Accrued Interest Expense - (18,882) - - -
Changes in Working Capital (a) 13,294 (13,151) (2,810) (558) 2,554
----------- ---------- ---------- ----------- ------------
Funds from Operations 71,463 65,918 121,789 133,887 129,333
----------- ---------- ---------- ----------- ------------
Funds Used in Investing Activities:
Capital Expenditures
Oil & Gas Properties (60,000) (65,000) (120,773) (133,709) (133,833)
Other Assets 840 (500) (500) (500) (500)
Proceeds from Asset Sales 27,718 1,000 30,000 15,000 10,000
----------- ---------- ---------- ----------- ------------
Funds Used in Investing Activities (31,442) (64,500) (91,273) (119,209) (124,333)
----------- ---------- ---------- ----------- ------------
Cash Flows from Financing Activities:
Change in Bank Debt and Senior Notes (28,605) (23,258) (30,515) (14,677) -
Conversion of Subordinated Notes - (125,000) - - -
Issuance of Common Equity 21 - - -
Issuance Preferred Stock - 146,756 - - -
Dividends Paid (585) - - - -
Deferred Financing Costs & Other (1,144) (5,500) - - (5,000)
----------- ---------- ---------- ----------- ------------
Net Cash from Financing Activities (30,313) (7,002) (30,515) (14,677) (5,000)
----------- ---------- ---------- ----------- ------------
Increase (Decrease) in Cash $ 9,708 $ (5,584) $ - $ - $ -
=========== ========== ========== =========== ============
</TABLE>
(a) Excluding change in Accrued Interest.
<PAGE> 135
EXHIBIT G
REORGANIZATION VALUE
<PAGE> 136
REORGANIZATION VALUATION
A. ESTIMATED LIQUIDATION VALUE OF ASSETS
As a condition to confirmation of the Plan, section 1129(a)(7)(A)(ii) of the
Bankruptcy Code requires that each holder of a Claim or Equity Interest in an
impaired class of Claims or Equity Interests that has not voted to accept the
Plan must receive on account of such Claim or Equity Interest consideration of
a value on the Effective Date not less than that which it would receive if KCS
was liquidated under chapter 7 of the Bankruptcy Code. The information
contained in Exhibit C attached to this Disclosure Statement provides a
summary of the liquidation values of KCS's assets, on a consolidated basis,
assuming a chapter 7 liquidation in which a trustee appointed by the
Bankruptcy Court would liquidate the assets of KCS. Reference should be made
to the Liquidation Analysis annexed as Exhibit C to this Disclosure Statement
for a complete discussion and presentation of such liquidation analysis. The
Liquidation Analysis was prepared by the Company and Houlihan Lokey.
Underlying the Liquidation Analysis are a number of estimates and assumptions
that, although developed and considered reasonable by the management of KCS,
are inherently subject to significant economic and competitive uncertainties
and contingencies beyond the control of KCS 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 KCS was actually to be the subject of such a liquidation. The
chapter 7 liquidation period is assumed to be a period of six months following
the operations of the Debtors in their Chapter 11 Cases for six months. This
period would allow for the collection of receivables, the sale of assets, and
the winding down of operations.
B. REORGANIZATION VALUE
KCS has been advised by Houlihan Lokey with respect to the value of
Reorganized KCS. Houlihan Lokey has undertaken its valuation analysis for the
purpose of determining the value available to distribute to creditors and
Equity Interest holders pursuant to the Plan and to analyze the relative
recoveries to creditors and Equity Interest holders thereunder. The analysis
is based on the Company's financial projections as well as current market
conditions and statistics. The values are as of an assumed Effective Date of
December 31, 2000 and are based upon information available to and analyses
undertaken by Houlihan Lokey in September 2000. As of June 2000, the Company
has retained Huddleston & Co., Inc. to analyze the value of the oil and gas
reserves and certain other assets of the Company. The value of Reorganized KCS
reflects the enterprise value of Reorganized KCS which includes (i) the going
concern value of KCS's business and (ii) the excess unrestricted cash
available to the Company on the Effective Date. Based upon the foregoing
assumptions, the reorganization value of Reorganized KCS is assumed for
purposes of the Plan by KCS, based on advice from Houlihan Lokey, to be
approximately $550.0 million to $650.0 million, with a mid-point value of
$600.0 million.
Based on a mid-point going concern enterprise value of Reorganized KCS of
$600.0 million, KCS has employed an assumed range of common equity values for
Reorganized KCS of approximately $181.0 million to $281.0 million, with a
midpoint of $231.0 million. Based on the aforementioned range of equity values
for Reorganized KCS and the 29,265,810 shares of Common Stock presently
outstanding, the value per share of the Common Stock is estimated to range
from $6.20 to $9.60, with a mid-point of $7.90.
In developing a conclusion regarding the enterprise value of Reorganized KCS,
Houlihan Lokey utilized four different going-concern valuation approaches: (i)
the asset approach, (ii) the market multiple approach, (iii) the comparative
transaction approach and (iv) the discounted cash flow approach. The asset
approach calculated the value of the enterprise as the sum of the value of its
assets; however, the asset approach does not assume that the Company's assets
are sold under a forced liquidation. Consequently, the Company is able to
realize greater value in its assets. Proved and probable reserves were valued
at their PV-10 value and risk adjusted by reserve category, utilizing pricing
assumptions consistent with those used for purposes of calculating the
liquidation value of KCS. Prospect reserves were valued by Huddleston & Co.,
Inc. For assets other than reserves, this approach involved the determination
of the recoverable value of the individual asset values based on recent
transactions for similar assets in the marketplace and/or the projected book
value of the assets at the Effective Date.
The market multiple approach involves the multiplication of various earnings
and cash flow measures by appropriate risk-adjusted multiples. Multiples were
determined through an analysis of certain publicly-traded companies, selected
on the basis of operational and economic similarity with the principal
business operations of the Company. Earnings and cash flow multiples were
calculated for the comparative companies based upon daily trading prices. A
comparative risk analysis between KCS and the public companies formed the
basis for the selection of appropriate risk-adjusted multiples for the
<PAGE> 137
Company. The risk analysis incorporates both quantitative and qualitative risk
factors, which relate to, among other things, the nature of the industry in
which KCS and other comparative companies are engaged.
The comparative transaction approach involves the multiplication of various
earnings and cash flow measures by appropriate risk-adjusted multiples.
Multiples were determined through an analysis of acquisitions of companies
that have an operational and economic similarity with the principal business
operations of the Company. Earnings and cash flow multiples were calculated
based upon the transaction prices and the trailing earnings and cash flow
levels of the target companies.
In employing the discounted cash flow approach, the Company's financial
projections were analyzed on a "debt-free" basis (before cash payments to
equity and interest-bearing debt investors) in order to develop a value
indication for Reorganized KCS. A provision for the value of the Company at
the end of the forecast period, or terminal value, was also made. The present
value of the cash flows and the terminal value are determined using a
risk-adjusted rate of return or "discount rate." The discount rate, in turn,
was determined by analyzing rates of return on alternative investment
opportunities on investments in companies with similar risk characteristics to
KCS. The discount rate was based on the weighted average cost of capital
("WACC") for companies engaged in operations similar to the Company's.
Adjustments to the WACC and its calculation were made for the various sizes of
the comparable companies. The foregoing valuations are based on a number of
additional assumptions, including a successful reorganization of KCS's
business and finances in a timely manner, the probability of achievement of
the forecasts reflected in the financial projections, the projected amount of
available unrestricted cash at the Effective Date, the availability of certain
tax attributes, the continuation of current market conditions through the
Effective Date and the Plan becoming effective in accordance with its terms.
Estimates of value do not purport to be appraisals or necessarily reflect the
values that may be realized if assets are sold through a formal sales process.
The estimates of value represent hypothetical reorganization values of
Reorganized KCS as the continuing owner and operator of its business and
assets. Such estimates reflect computations of the estimated reorganization
value of Reorganized KCS through the application of various valuation
techniques and do not purport to reflect or constitute appraisals, liquidation
values or estimates of the actual market value that may be realized through
the sale of any securities to be issued pursuant to the Plan, which may be
significantly different than the amounts set forth herein. The value of an
operating business such as the Company's business is subject to uncertainties
and contingencies that are difficult to predict and will fluctuate with
changes in factors affecting the financial condition and prospects of such a
business. AS A RESULT, THE ESTIMATE OF THE RANGE OF REORGANIZATION VALUES AND
THE GOING CONCERN VALUE OF KCS'S BUSINESS SET FORTH HEREIN IS NOT NECESSARILY
INDICATIVE OF ACTUAL OUTCOMES, WHICH MAY BE SIGNIFICANTLY MORE OR LESS
FAVORABLE THAN THOSE SET FORTH HEREIN. BECAUSE SUCH ESTIMATE IS INHERENTLY
SUBJECT TO UNCERTAINTIES, NEITHER KCS, HOULIHAN LOKEY, NOR ANY OTHER PERSON
ASSUMES RESPONSIBILITY FOR ITS ACCURACY. IN ADDITION, THE MARKET VALUATION OF
NEWLY ISSUED SECURITIES SUCH AS THE NEW CONVERTIBLE PREFERRED STOCK IS SUBJECT
TO ADDITIONAL UNCERTAINTIES AND CONTINGENCIES, ALL OF WHICH ARE DIFFICULT TO
PREDICT. Actual market prices of such securities at issuance will depend upon,
among other things, prevailing interest rates, conditions in the financial
markets, the anticipated initial securities holdings of prepetition creditors,
some of which may prefer to liquidate their investment rather than hold it on
a long-term basis, and other factors that generally influence the prices of
securities. It should be noted that there is presently no trading market for
the New Convertible Preferred Stock and there can be no assurance that such a
trading market will develop.
In preparing a range of the estimated reorganization value of Reorganized KCS
and the going concern value of KCS's business, Houlihan Lokey: (i) reviewed
certain historical financial information of KCS for recent years and interim
periods, (ii) reviewed certain internal financial and operating data of KCS,
including financial projections provided by management relating to its
business and prospects, (iii) met with certain members of senior management of
KCS to discuss operations and future prospects, (iv) reviewed publicly
available financial data and considered the market values of public companies
deemed, generally comparable to the operating business of KCS, (v) reviewed
the financial terms to the extent publicly available of certain acquisitions
of companies that Houlihan Lokey believes are comparable to the operating
business of KCS, (vi) considered certain economic and industry information
relevant to the operating business, and (vii) conducted such other analyses as
Houlihan Lokey deemed appropriate. Although Houlihan Lokey conducted a review
and analysis of KCS's business, operating assets and liabilities and business
plans, Houlihan Lokey assumed and relied on the accuracy and completeness of
all financial and other information furnished to it by KCS and publicly
available information. In addition, Houlihan Lokey did not independently
verify management's projections in connection with such valuation and no
independent evaluations or appraisals of KCS's assets were sought or were
obtained in connection therewith.
THERE CAN BE NO ASSURANCE THAT THE COMMON STOCK WILL TRADE AT THE ESTIMATED
REORGANIZATION EQUITY VALUE PER SHARE. IN ADDITION, THE MATHEMATICAL
COMPUTATION METHODOLOGY USED DOES NOT ACCOUNT FOR THE POTENTIAL DILUTIVE
IMPACT OF THE
<PAGE> 138
MANAGEMENT OPTIONS. FINALLY ACTUAL TRADING VALUES FOR THE COMMON STOCK
FREQUENTLY DIFFER MATERIALLY FROM THOSE VALUES DERIVED FROM MATHEMATICAL
COMPUTATIONS. ACCORDINGLY, THE FOREGOING COMPUTATION OF VALUE CANNOT BE RELIED
UPON AS A MEASURE OF REALIZABLE VALUE OF THE COMMON STOCK.
THE VALUATIONS HEREIN REPRESENT ESTIMATED REORGANIZATION VALUES AND DO NOT
NECESSARILY REFLECT VALUES THAT COULD BE ATTAINABLE IN PUBLIC OR PRIVATE
MARKETS. THE EQUITY VALUES ASCRIBED IN THE ANALYSIS DO NOT PURPORT TO BE
ESTIMATES OF THE POST-REORGANIZATION MARKET TRADING VALUES. SUCH TRADING
VALUE, IF ANY, MAY BE MATERIALLY DIFFERENT FROM THE REORGANIZATION EQUITY
VALUE ASSOCIATED WITH THE VALUATION ANALYSIS.
