The confirmation of the Prepackaged Plan converted approximately $7.4 million in
debt, approximately $700,000 in accrued interest, 1,150,664 shares of preferred
stock and 17,942,108 shares of common stock of NEGI into approximately 4.2
million shares of Key Common Stock. In addition, Key issued an aggregate of
970,000 shares of Common Stock through a rights offering to former preferred and
common shareholders for approximately $1.8 million in cash.
The sum of the allowed claims plus post-petition liabilities exceeded the value
of preconfirmation assets. Also, Key experienced a change in control as
pre-reorganization equity holders received less than 50% of the new Key Common
Stock issued pursuant to the Prepackaged Plan.
As a result of these circumstances, Key was required to adopt AICPA SOP 90-7
("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code. SOP 90-7 requires that a new reporting entity be created and
assets and liabilities be recorded at their fair values. This accounting
treatment is referred to in this report as "fresh start reporting". "Fresh start
reporting" reorganization value was determined with the assistance of
independent advisors. The methodology employed involved estimation of values
(i.e., the market values of Key's assets, liabilities and equity), taking into
account a discounted cash flow analysis. The discounted cash flow analysis was
based on ten-year cash flow projections prepared by management. Cash flows were
discounted at a debt-free cost of equity of 10.0%. Terminal value calculation
was based on 50% of the discounted ten-year cash flow projection assumed above.
The ten-year cash flow projections were based on estimates and assumptions about
circumstances and events that have not yet taken place. Such estimates and
assumptions are inherently subject to significant economic and competitive
uncertainties and contingencies beyond the control of Key, including, but not
limited to, those with respect to the future courses of Key's business activity.
Accordingly, there will usually be differences between projections and actual
results because events and circumstances frequently do not occur as expected,
and those differences may be material.
The "fresh start reporting" referred to above was reflected as of November 30,
1992. Commencing with the seven months ended June 30,1993, consolidated
financial statements have been prepared as if Key is a new reporting entity. A
black line, therefore, separates the seven month period ended June 30, 1993 from
prior period information since it has not been prepared on a comparable basis of