ganized corporation in satisfaction of all or part of a claim of a class which held securities of a higher dignity.

The plan now before the Court for approval must conform with the mandates of the Court of Appeals and with tentative rulings made by the Court on various points raised during the course of the plan proceedings.

Both the Trustees' sale plan and the Kern plan contemplate full payment in cash to all priority and administrative claimants, to public creditors of Inland and to the public noteholders of American Fuel. Therefore, these creditor groups are not affected and the plans accord them fair and equitable treatment.

In the light of the cash alternative proposed in the Kern plan for the Kentucky Fuel creditors predicated upon an assumed minimum bid for the properties of the debtors, excluding cash, of $7,333,000, the Trustees' sale plan embodying the Texas Gas offer of purchase of the physical properties which would result in a lower cash distribution to the Kentucky Fuel creditors, should not be approved as fair and equitable.

The Kern plan combines a sale technique with a possible distribution of new stock by the reorganized company to the extent that an election to take such stock is made by the Kentucky Fuel creditors. The alternative offers made to the Kentucky Fuel creditors are in our opinion fair and equitable. The Kentucky Fuel creditor electing to take stock will receive the equivalent of his proportionate interest in the assets of the estates. The minimum cash alternative is based upon an assumed upset bid of $7,333,000 for the assets of the estate, other than cash and cash items. This upset figure, while it is less than our 1952 valuation, which, as indicated above, we now consider to be conservative, appears to be within the range of reasonable value and we recommend that it be found by the Court to be a fair upset price.

In the event the reorganized corporation is the successful bidder, the Kentucky Fuel public creditors not electing to take stock will receive cash in proportion to their holdings on the basis of the upset price plus net cash and cash items retained by the Trustee. If some other person is the successful bidder, then all Kentucky Fuel public creditors will receive cash in the same proportion and on the same basis but with due recognition of the higher bid.

The proposed distribution as between the Kentucky Fuel publicly held bonds and debentures is on the basis of 92% to the bonds and 8% to the debentures. This allocation is predicated upon a compromise arrangement between representatives of both classes

In re Inland Gas Corporation, 187 F. 2d 813 (1951) and 211 F. 2d 381 (1954).

of securities in 1952 prior to the submission of the Trustees' 1953 plan. In our 1952 Advisory Report, the issue as to the priority of these two classes was discussed and the Commission concluded that the participation accorded to the debentures under the suggested compromise, fell within the range of fairness and that the terms of the compromise were fair and equitable. We see no reason to change our views.

It is to be noted that, if the bid for the property results in full payment of the Kentucky Fuel public bondholders, any excess of stock or cash would first be allocated to the Kentucky Fuel public debenture holders until they receive payment in full. This appears to be fair treatment under the terms of the compromise.

Since the minimum sale price is not sufficient to discharge the claims in full of the public creditors of Kentucky Fuel, the failure to provide any participation in the plan to subordinated creditors and the stockholders of the estates does not render the plan unfair. To discharge the Kentucky Fuel public creditors' claims in full would require the assets, other than cash and cash items, to be valued at a figure in excess of $10,300,000. Such a figure does not accord with our views on valuation. However, should any purchaser bid more than this sum, the excess remaining would be distributable to the remaining security holders, in accordance with their interest to be determined by the Court.

The Kern plan does not propose preemptive rights for the common stock of the reorganized company. We believe that the interests of stockholders will be best served by giving them the right to purchase their proportionate share of any new issue of common stock sold for cash. In our view, fairness requires that the plan be amended to provide for a preemptive rights provision in the certificate of incorporation of the reorganized company. We recognize, however, that the mechanics of such a provision may under certain circumstances impede or delay the raising of new funds by the company in the capital markets. Hence, the preemptive rights provision might be limited to new issues not offered for sale to the general public.

V. FEASIBILITY

Chapter X of the Bankruptcy Act requires that before a plan of reorganization may be approved it must be found by the Court to be feasible. In order to meet this requirement, it is necessary to show that the reorganized company will emerge with a sound capitalization. The plan proposals relating to American Fuel and Kentucky Fuel which provide for prompt liquidation of these

companies, under Court supervision, through merger or otherwise, raise no problem as to feasibility. The Trustees' plan which provides for the sale of the fixed assets of Inland and three of the small subsidiaries of American Fuel, and the liquidation of accounts receivable and accounts payable of such companies, appears to offer no problem as to feasibility. That portion of the Kern plan which provides for a possible sale of the properties and net current assets, other than cash and cash items, also appears to offer no problem as to feasibility.

Under the Kern plan, Inland as reorganized will have a capital structure consisting of the new note in the principal amount of $3,800,000 and common stock which, on the basis of the upset price of $7,333,000 for the properties and net current assets other than cash items, would be expected to have a book equity of approximately $3,839,000 in the event the acquired assets are recorded at the upset cost to the reorganized company. If such acquisition cost is higher than the upset price the book equity would be expected to be correspondingly higher. The secured note will mature in annual installments of $250,000 each for fourteen years, with a final payment of $300,000 and will be subject to prepayment. A prepayment during the first three years will require a redemption premium of 44% of principal amount with smaller premiums required thereafter. Anticipated revenues available for debt service, dividends and return of capital appear adequate to retire the debt, pay appropriate dividends and effect the return of capital over the estimated remaining life of the reorganized company. The proposed debt and its terms therefore appear to be reasonable.

It is pointed out, however, that the Kern plan makes it possible for underwriters to direct the reorganized company to apply available cash, to the extent "economically feasible and legally permissible," or subject to approval of the Court, and possibly of the holder of the secured note, to execute a bank loan in an amount presently undisclosed. The proceeds of this loan together with any such cash, would be paid to the Trustee for distribution to Kentucky Fuel creditors electing to take cash. It is conceivable that the underwriters could, under the terms of this provision, require the reorganized company to weaken its cash position unduly. Hence, it is our view that this provision should be subject to Court approval. As to the possible bank loan, depending on its amount and terms it could have an adverse affect upon feasibility. If such a loan were to be a temporary loan, made, for example, for the purpose of providing the reorganized company with cash,

pending the collection of accounts receivable, and if such loan were to be repaid not from future earnings but from assets existing at the date of confirmation of the plan, no adverse effect upon feasibility could be expected to result. If, however, such a loan were to be repaid from future earnings and the principal amount, interest rate and maturity dates were such as to add materially to the financial burden of servicing the debt of the reorganized company, its execution might impair the ability of the new company to carry out an appropriate development program and to pay a reasonable dividend on the new common stock. To avoid this possibility it is recommended that the long-term debt of the reorganized company be limited to the lesser of a maximum of $4,500,000 or such amount as would not create a debt ratio in excess of 50% of the total capitalization of the reorganized company. Any temporary loan of the reorganized company should be limited to an amount which can be paid through the collection of accounts receivable existing at the time of consummation of the plan.

If the Kern plan were revised in accordance with the foregoing recommendation it would in our opinion be feasible.

By the Commission (Chairman Demmler and Commissioners Rowen, Adams, Armstrong and Goodwin).