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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-02599
PROSPECTUS
KCS ENERGY, INC.
OFFER TO EXCHANGE
11% SENIOR NOTES DUE 2003, SERIES B
FOR ALL OUTSTANDING 11% SENIOR NOTES DUE 2003, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON JUNE 5, 1996, UNLESS EXTENDED
------------------------
KCS Energy, Inc., a Delaware corporation (the "Parent"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying letter of transmittal (the "Letter of Transmittal," and
together with this Prospectus, the "Exchange Offer"), to exchange $1,000
principal amount of its 11% Senior Notes due 2003, Series B (the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement (as defined herein)
of which this Prospectus constitutes a part, for each $1,000 principal amount of
its outstanding 11% Senior Notes due 2003, Series A (the "Old Notes"), of which
$150,000,000 principal amount is outstanding. The form and terms of the Exchange
Notes are identical in all material respects to the form and terms of the Old
Notes except for certain transfer restrictions and registration rights relating
to the Old Notes. The Exchange Notes will evidence the same debt as the Old
Notes and will be issued under and be entitled to the benefits of the Indenture
(as defined herein). The Exchange Notes and the Old Notes are collectively
referred to herein as the "Notes."
The Exchange Notes will be senior unsecured obligations of the Parent
ranking pari passu in right of payment with all existing and future senior
Indebtedness (as defined herein) of the Parent and senior to all future
Subordinated Indebtedness (as defined herein) of the Parent. The Exchange Notes
will be unconditionally guaranteed (the "Subsidiary Guarantees") on a senior
unsecured basis by each of the Parent's current and certain of the Parent's
future subsidiaries (the "Subsidiary Guarantors"), and the Subsidiary Guarantees
will rank pari passu in right of payment with all existing and future senior
unsecured Indebtedness of the Subsidiary Guarantors. The Exchange Notes and
Subsidiary Guarantees will be effectively subordinated to secured Indebtedness
of the Parent and the Subsidiary Guarantors, respectively, with respect to the
assets securing such Indebtedness, including Indebtedness of certain Subsidiary
Guarantors under the Bank Credit Facilities (as defined herein) that is secured
by liens on substantially all of the assets of such Subsidiary Guarantors and
guaranteed by the Parent. As of March 31, 1996, approximately $27.3 million of
Indebtedness was outstanding under the Bank Credit Facilities, not including
$11.1 million reserved pursuant to existing letters of credit. See "Description
of the Notes."
The Parent will accept for exchange any and all Old Notes that are validly
tendered on or prior to 5:00 p.m., New York City time, on the date the Exchange
Offer expires, which will be June 5, 1996, unless the Exchange Offer is
extended. See "The Exchange Offer -- Expiration Date; Extensions; Amendment."
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the business day prior to the Expiration Date (as defined herein),
unless previously accepted for exchange. The Exchange Offer is not conditioned
upon any minimum principal amount of Old Notes being tendered for exchange.
However, the Exchange Offer is subject to certain conditions which may be waived
by the Parent and to the terms and provisions of the Registration Rights
Agreement (as defined herein). Old Notes may be tendered only in denominations
of $1,000 principal amount and integral multiples thereof. The Parent has agreed
to pay the expenses of the Exchange Offer. See "The Exchange Offer."
(Cover continued on next page.)
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SEE "RISK FACTORS" ON PAGE 14 OF THIS PROSPECTUS FOR A DESCRIPTION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE
NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 8, 1996.
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The Exchange Notes will bear interest at the rate of 11% per annum, payable
semi-annually on January 15 and July 15 of each year, commencing July 15, 1996.
Holders of Exchange Notes of record on July 1, 1996 will receive interest on
July 15, 1996 from the date of issuance of the Exchange Notes, plus an amount
equal to the accrued interest on the Old Notes from the date of issuance of the
Old Notes, January 25, 1996, to the date of exchange thereof. Interest on the
Old Notes accepted for exchange will cease to accrue upon issuance of the
Exchange Notes.
The Old Notes were sold by the Parent on January 25, 1996 to the Initial
Purchasers (as defined herein) in a transaction not registered under the
Securities Act in reliance upon Section 4(2) of the Securities Act. The Old
Notes were thereupon offered and sold by the Initial Purchasers only to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) and to a limited number of institutional "accredited investors" (as defined
in Rule 501(a)(1),(2),(3) or (7) under the Securities Act), each of whom agreed
to comply with certain transfer restrictions and other conditions. Accordingly,
the Old Notes may not be offered, resold or otherwise transferred in the United
States unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is available.
The Exchange Notes are being offered hereunder in order to satisfy the
obligations of the Parent under the Registration Rights Agreement entered into
with the Initial Purchasers in connection with the offering of the Old Notes.
See "The Exchange Offer" and "Registration Rights Agreement."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "SEC") to third parties, including Exxon Capital
Holdings Corporation, SEC No-Action Letter (available April 13, 1989), Morgan
Stanley & Co. Inc., SEC No-Action Letter (available June 5, 1991) (the "Morgan
Stanley Letter") and Mary Kay Cosmetics, Inc., SEC No-Action Letter (available
June 5, 1991), the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer may be offered for resale, resold and otherwise transferred
by the respective holders thereof (other than a "Restricted Holder," being (i) a
broker-dealer who purchased Old Notes exchanged for such Exchange Notes directly
from the Parent to resell pursuant to Rule 144A or any other available exemption
under the Securities Act or (ii) a person that is an affiliate of the Parent
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holder's business and such holder is not participating in, and has no
arrangement with any person to participate in, the distribution (within the
meaning of the Securities Act) of such Exchange Notes. Eligible holders wishing
to accept the Exchange Offer must represent to the Parent that such conditions
have been met. Holders who tender Old Notes in the Exchange Offer with the
intention to participate in a distribution of the Exchange Notes may not rely
upon the Morgan Stanley Letter or similar no-action letters. See "The Exchange
Offer -- General." Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. A broker-dealer
that delivers such a prospectus to purchasers in connection with such resales
will be subject to certain of the civil liability provisions under the
Securities Act and will be bound by the provisions of the Registration Rights
Agreement (including certain indemnification rights and obligations). This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Parent
has agreed that it will make this Prospectus and any amendment or supplement to
this Prospectus available to any broker-dealer for use in connection with any
such resale for a period of six months after consummation of the Exchange Offer.
See "Plan of Distribution."
The Parent will not receive any proceeds from the Exchange Offer.
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to the liquidity of
any markets that may develop for the Exchange Notes or as to the ability of or
price at which the holders of Exchange Notes would be able to sell their
Exchange Notes. Future trading prices of the Exchange Notes will depend on many
factors, including, among others, prevailing interest rates, the Company's
operating results and the market for similar securities. The Company does not
intend to apply for listing of the Exchange Notes on any securities exchange.
Smith Barney Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Nomura
Securities International, Inc. and PaineWebber Incorpo-
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rated (together, the "Initial Purchasers") have informed the Company that they
currently intend to make a market for the Exchange Notes. However, they are not
so obligated, and any such market making may be discontinued at any time without
notice. Accordingly, no assurance can be given that an active public or other
market will develop for the Exchange Notes or as to the liquidity of or the
trading market for the Exchange Notes.
The Exchange Notes will be available initially only in book-entry form. The
Parent expects that the Exchange Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Note (as defined herein), which will be
deposited with, or on behalf of, The Depository Trust Company (the "Depositary"
or "DTC") and registered in its name or in the name of Cede & Co., its nominee.
Beneficial interests in the Global Note representing the Exchange Notes will be
shown on, and transfers thereof will be effected through, records maintained by
the Depositary and its participants. After the initial issuance of the Global
Note, Exchange Notes in certificated form will be issued in exchange for the
Global Note only on the terms set forth in the Indenture. See "Book-Entry;
Delivery and Form."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE PARENT ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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Available Information.............................................................. 4
Incorporation of Certain Documents by Reference.................................... 4
Prospectus Summary................................................................. 5
Risk Factors....................................................................... 14
The Company........................................................................ 20
Private Placement.................................................................. 21
Use of Proceeds.................................................................... 21
Capitalization..................................................................... 22
Pro Forma Financial Information.................................................... 23
Pro Forma Condensed Statement of Consolidated Income............................... 24
Pro Forma Condensed Consolidated Balance Sheet..................................... 25
Notes to Unaudited Pro Forma Condensed Statement of Consolidated Income............ 26
Selected Financial Information..................................................... 27
The Exchange Offer................................................................. 28
Description of the Notes........................................................... 35
Registration Rights Agreement...................................................... 62
Transfer Restrictions on Old Notes................................................. 63
Book Entry; Delivery and Form...................................................... 64
Certain Federal Income Tax Considerations.......................................... 66
Plan of Distribution............................................................... 68
Legal Matters...................................................................... 68
Accountants........................................................................ 68
Reserve Engineers.................................................................. 69
Glossary of Oil and Gas Terms...................................................... 70
Financial Statements............................................................... F-1
</TABLE>
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AVAILABLE INFORMATION
The Parent is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information, with the SEC.
Such reports, proxy statements and other information filed by the Parent may be
inspected and copied at the public reference facilities maintained by the SEC,
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549; and at the
following regional offices of the SEC: 7 World Trade Center, Suite 1300, New
York, New York 10048; and CitiCorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can also be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, at prescribed rates. The Parent's common stock ("Common
Stock") is traded on the New York Stock Exchange. The Parent's reports, proxy
statements and other information concerning the Parent can be inspected and
copied at the offices of the New York Stock Exchange, 20 Broad Street, New York,
New York 10005. While any Notes that are "restricted securities" within the
meaning of Rule 144(a)(3) under the Exchange Act remain outstanding, the Parent
will make available, upon request, to any holder and any prospective purchaser
of Notes, the information required pursuant to Rule 144A(d)(4) under the
Securities Act during any period in which the Parent is not subject to Section
13 or 15(d) of the Exchange Act. Any such request should be directed to the
Secretary of the Parent, 379 Thornall Street, Edison, New Jersey 08837,
telephone number (908) 632-1770.
This Prospectus constitutes a part of a registration statement on Form S-4
(the "Registration Statement") filed by the Parent with the SEC under the
Securities Act. As permitted by the rules and regulations of the SEC, this
Prospectus does not contain all of the information contained in the Registration
Statement and the exhibits and schedules thereto and reference is hereby made to
the Registration Statement and the exhibits and schedules thereto for further
information with respect to the Parent and the securities offered hereby.
Statements contained herein concerning the provisions of any documents filed as
an exhibit to the Registration Statement or otherwise filed with the SEC are not
necessarily complete, and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Parent hereby incorporates by reference into this Prospectus the
following documents or information filed with the SEC: (i) the Parent's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995, (ii) the
Parent's Transition Report on Form 10-K for the transition period from October
1, 1995 to December 31, 1995 (including annual report for the fiscal year ended
December 31, 1995) (the "Form 10-K"); (iii) the Parent's Current Report on Form
8-K dated January 25, 1996 relating to the issuance and sale of the Old Notes;
(iv) the Parent's Current Report on Form 8-K dated April 18, 1996 relating to
certain litigation results; and (v) all documents filed by the Parent pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the date of
this Prospectus and prior to the termination of the offering made hereby. Any
statement contained herein or in any documents incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purpose of this Prospectus to the extent that a subsequent statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The term "Consolidated Financial Statements" refers to the Consolidated
Financial Statements and the notes thereto incorporated by reference from the
Form 10-K and the term "Management's Discussion and Analysis" refers to the
Management's Discussion and Analysis of Financial Condition and Results of
Operations incorporated by reference from the Form 10-K.
THIS PROSPECTUS IS ACCOMPANIED BY A COPY OF THE FORM 10-K.
THIS PROSPECTUS MAY INCORPORATE DOCUMENTS BY REFERENCE FILED BY THE PARENT
ON OR AFTER THE DATE OF THIS PROSPECTUS WHICH ARE NOT PRESENTED HEREIN OR
DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR
ORAL REQUEST FROM THE SECRETARY OF THE PARENT AT ITS PRINCIPAL EXECUTIVE OFFICES
LOCATED AT 379 THORNALL STREET, EDISON, NEW JERSEY 08837, TELEPHONE NUMBER (908)
632-1770. IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS PRIOR TO THE
EXPIRATION DATE, ANY REQUEST SHOULD BE MADE BY MAY 25, 1996.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE PARENT OR THE EXCHANGE AGENT. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY (AS DEFINED HEREIN) SINCE
THE DATE HEREOF. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF
TRANSMITTAL, OR BOTH TOGETHER, CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus
and in the documents incorporated herein by reference. Unless the context
otherwise requires, "Company" refers to KCS Energy, Inc. and its consolidated
subsidiaries, and "Parent" refers only to KCS Energy, Inc. See "Glossary of Oil
and Gas Terms" for definitions of certain terms used herein.
THE COMPANY
KCS Energy, Inc. is an independent energy company primarily engaged in the
acquisition, exploration, development and production of natural gas and crude
oil. The Company 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 late 1960s. Since December 1990, the Company has
increased its proved oil and gas reserves 395%, a compound annual rate of 49%,
to 186.1 Bcfe at December 31, 1995. During this five-year period, the Company
also increased production 392%, a compound annual rate of 49%, and replaced 400%
of its production, primarily through a combination of development drilling and
acquisition activities. As of December 31, 1995, the pre-tax present value of
the Company's estimated future net revenues ("PV-10") was $291.1 million.
The Company's operations to date have been focused on properties in the
Gulf Coast region. The Company's recently completed Rocky Mountain Acquisition
(as defined) has expanded the Company's operations into certain major producing
basins in Wyoming, Colorado and Montana. At December 31, 1995, the Company had
working interests in 901 producing wells (413 of which it operates). The Company
augments its working interest ownership of properties with a volumetric
production payment program that covers properties located primarily in the
offshore Gulf Coast region and, with the recent Michigan Acquisition (as
defined), in the Niagaran Reef trend in Michigan. At December 31, 1995,
approximately 76% of the Company's proved reserves were natural gas,
approximately 78% of total proved reserves were classified as proved developed,
and the average reserve life (based on 1995 pro forma production) was estimated
to be 7.2 years.
The Company's largest single producing field is the Bob West Field in south
Texas, which accounted for approximately 34% of the Company's production during
1995 from its interests in 48 wells (18 of which it operates). Substantially all
of the Company's natural gas sold from the Bob West Field is covered by a
take-or-pay contract with Tennessee Gas Pipeline Company that runs through
January 1999 and is currently the subject of litigation. (See "Risk
Factors -- Tennessee Gas Litigation" and Note 7 to Consolidated Financial
Statements.)
The Company also operates a natural gas transportation business and an
energy marketing and services business, which together contributed less than 5%
of the Company's operating income during 1995. The natural gas transportation
business consists of approximately 500 miles of pipelines, including a 150-mile
intrastate pipeline system and related gathering lines located between Houston
and Dallas, Texas and 16 natural gas gathering systems in Texas, Montana and
Louisiana. Through its energy marketing and services business, the Company buys
and resells natural gas directly to industrial and commercial end users and also
offers energy supply, transportation and risk management services.
BUSINESS STRATEGY
The Company has grown through a balanced strategy of reserve acquisitions
and exploratory and development drilling. The Company plans to continue to
broaden its reserve base and increase production and cash flow through (i) the
acquisition of attractively priced producing properties that also provide
additional development or exploratory potential, (ii) the acquisition of natural
gas and crude oil reserves through its volumetric production payment program,
(iii) the exploitation and development of its existing asset base, and (iv) the
pursuit of a balanced exploration program that includes a number of
high-potential opportunities.
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To implement its strategy, the Company intends to take advantage of several
key strengths, including (i) a high quality, diversified reserve base, (ii) a
significant inventory of attractive development and exploratory drilling
opportunities within the Company's large property base and undeveloped acreage
position, (iii) established relationships with a broad base of industry partners
that continually provide the Company with opportunities to participate in a
diverse group of exploration prospects without expending the resources that
would be required to develop comparable prospects internally, (iv) a streamlined
administrative and operating cost structure that emphasizes a lean staff and
extensive arrangements with independent contractors, and (v) a volumetric
production payment program.
A volumetric production payment is comparable to a term royalty interest in
oil and gas properties and gives the Company 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 Company's volumetric
production payments vary, the Company is generally entitled to receive delivery
of its scheduled oil and gas volumes at agreed delivery points, free of
development and lease operating expenses and, in certain cases, free of state
severance taxes. The Company believes its volumetric production payment program
diversifies its reserve base and achieves attractive rates of return while
minimizing the Company's exposure to certain development, operating and reserve
volume risks because, among other things, reserve volumes scheduled to be
received pursuant to a volumetric production payment typically are substantially
less than the estimated proved reserves underlying such payment.
ACQUISITION ACTIVITIES
In November 1995, the Company completed a $33 million acquisition of
interests in 531 gross (301 net) wells (321 of which it operates) in six
producing basins, primarily in Wyoming, Colorado and Montana (the "Rocky
Mountain Acquisition"). These properties added proved reserves of approximately
41 Bcf of natural gas and 4.3 MMbbls of oil to the Company's reserve base. This
acquisition provides the Company with an existing operation and infrastructure
in a new geographic area with high percentage working interests in properties
that the Company believes contain a significant number of development drilling,
workover and recompletion opportunities, as well as additional exploratory
opportunities. Approximately one half of the natural gas production from the
acquired properties is subject to multi-year contracts with local utility
companies at prices that are currently in excess of spot market prices. The
Company has budgeted $10 million for development drilling and other enhancement
activities on these properties in 1996.
In December 1995, the Company acquired reserves in the northern and
southern Niagaran Reef trend in Michigan for $31 million, including a volumetric
production payment covering certain reserves, escalating working interests in
related properties and participation rights and an overriding royalty interest
in the exploration program discussed below (collectively, the "Michigan
Acquisition"). The volumetric production payment covers reserves totaling 13.7
Bcf of natural gas and 1.1 MMbbls of oil to be delivered according to a
pre-determined schedule through January 31, 2006, with approximately 16% of
these volumes to be delivered in 1996. These reserves will be produced from 89
wells located in the Niagaran Reef trend operated by a subsidiary of Hawkins Oil
and Gas, Inc. ("Hawkins"). The operator will bear all development and lease
operating expenses attributable to these reserves. The separately acquired
working interests add 3.1 Bcf of natural gas and 219 Mbbls of oil to the
Company's proved reserves. The Company also acquired the right to participate in
a three-year exploration program and an overriding royalty interest covering
150,000 gross (56,250 net) acres in the center of the Niagaran Reef trend and to
use 17,000 miles of proprietary seismic data in the area.
EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company has participated in several significant discoveries, including
the Bob West Field, the Langham Creek Area and the Laurel Ridge Field, all in
the onshore Gulf Coast region. The Bob West Field was discovered in 1989 and
through December 31, 1995 had produced cumulative gross natural gas reserves of
approximately 247.1 Bcf. The Bob West Field is one of the largest natural gas
discoveries in Texas in the past twenty years and represents approximately 17%
of the Company's proved reserves. During the three years ended December 31,
1995, the Company participated in the drilling of 40 wells in this field with a
100%
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success rate. The Langham Creek Area, where the Company made a discovery in
1994, represents approximately 4% of the Company's proved reserves. To date, the
Company has participated in the drilling of eight wells in this field with a
100% success rate and is currently drilling a ninth well. Two discovery wells
were drilled by the Company in the Laurel Ridge Field, the most recent of which
was completed in December 1995.
The Company's 1996 budget for exploration activities is approximately $15
million. These activities will continue to be focused primarily on properties in
the onshore Gulf Coast region, where the Company plans to participate in the
drilling of approximately 30 wells and continue significant 3-D and 2-D seismic
data acquisition and analysis. In addition, the Company intends to further
analyze the undeveloped acreage it acquired in the Rocky Mountain Acquisition
for possible exploration prospects as well as to participate in the exploration
program in Michigan. The Company's policy is to commit no more than one-third of
its operating cash flow to exploration activities and generally no more than
$750,000 to any single well. During the last three years, the Company
participated in the drilling of 58 exploratory wells with a 50% success rate.
The 1996 budget for development activities is approximately $22 million.
The Company has identified approximately 85 development well locations and at
least 70 recompletion opportunities, which it believes will be substantially
completed by 1998, subject to the availability of capital resources. The
majority of future development work will focus primarily on the properties
acquired in the Rocky Mountain Acquisition, the Langham Creek Area discovery
(where the Company has a 6,260 gross 2,755 net) acreage position) and the Laurel
Ridge Field discovery (where the Company has a 3,656 gross 1,279 net) acreage
position).
THE PRIVATE PLACEMENT AND USE OF PROCEEDS
The Old Notes were sold by the Company on January 25, 1996 to the Initial
Purchasers and were thereupon offered and sold by the Initial Purchasers only to
certain qualified buyers. The net proceeds to the Company from the sale of the
Old Notes were approximately $145 million after deducting expenses of the
offering. These proceeds were utilized by the Company to reduce by $120 million
the outstanding indebtedness under the Bank Credit Facilities and to repay a $25
million note sold to a third party in November 1995. See "Private Placement" and
"Capitalization."
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $150,000,000 principal
amount of Exchange Notes for up to $150,000,000 principal amount of Old Notes.
The form and terms of the Exchange Notes are identical in all material respects
to the form and terms of the Old Notes except that the Exchange Notes have been
registered under the Securities Act and will not contain certain transfer
restrictions and hence are not entitled to the benefits of the Registration
Rights Agreement relating to the contingent increases in the interest rate
provided for pursuant thereto. The Exchange Notes will evidence the same debt as
the Old Notes and will be issued under and be entitled to the benefits of the
Indenture governing the Old Notes. The Old Notes and the Exchange Notes are
collectively referred to herein as the "Notes." See "Description of Exchange
Notes."
The Exchange Offer............ Each $1,000 principal amount of Exchange Notes
will be issued in exchange for each $1,000
principal amount of outstanding Old Notes. As
of the date hereof, $150,000,000 principal
amount of Old Notes are issued and
outstanding. The Parent will issue the
Exchange Notes to tendering holders of Old
Notes on or promptly after the Expiration
Date.
Resale........................ The Company believes that the Exchange Notes
issued pursuant to the Exchange Offer
generally will be freely transferable by the
holders thereof without registration or any
prospectus delivery requirement under the
Securities Act, except for certain Re-
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stricted Holders who may be required to
deliver copies of this Prospectus in
connection with any resale of the Exchange
Notes issued in exchange for such Old Notes.
See "The Exchange Offer -- General" and "Plan
of Distribution."
Expiration Date............... 5:00 p.m., New York City time, on June 5, 1996,
unless the Exchange Offer is extended, in
which case the term "Expiration Date" means
the latest date to which the Exchange Offer
is extended. See "The Exchange
Offer -- Expiration Date; Extensions;
Amendments."
Interest on the Notes......... The Exchange Notes will bear interest payable
semi-annually on January 15 and July 15 of
each year, commencing July 15, 1996. Holders
of Exchange Notes of record on July 1, 1996
will receive interest on July 15, 1996 from
the date of issuance of the Exchange Notes,
plus an amount equal to the accrued interest
on the Old Notes from the date of issuance of
the Old Notes, January 25, 1996, to the date
of exchange thereof. Consequently, assuming
the Exchange Offer is consummated prior to
the record date in respect of the July 15,
1996 interest payment for the Old Notes,
holders who exchange their Old Notes for
Exchange Notes will receive the same interest
payment on July 15, 1996 that they would have
received had they not accepted the Exchange
Offer. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance
of the Exchange Notes. See "The Exchange
Offer -- Interest on the Exchange Notes."
Procedures for Tendering Old
Notes......................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal,
or such facsimile, together with the Old
Notes to be exchanged and any other required
documentation to the Exchange Agent at the
address set forth herein and therein or
effect a tender of Old Notes pursuant to the
procedures for book-entry transfer as
provided for herein. See "The Exchange
Offer -- Procedures for Tendering."
Special Procedures for
Beneficial Holders............ Any beneficial holder whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender in the
Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on the beneficial holder's
behalf. If such beneficial holder wishes to
tender directly, such beneficial holder must,
prior to completing and executing the Letter
of Transmittal and delivering the Old Notes,
either make appropriate arrangements to
register ownership of the Old Notes in such
holder's name or obtain a properly completed
bond power from the registered holder. The
transfer of record ownership may take
considerable time. See "The Exchange
Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures.................... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes and a properly completed
Letter of
8
<PAGE> 9
Transmittal or any other documents required
by the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date, or who
cannot complete the procedure for book-entry
transfer on a timely basis, may tender their
Old Notes according to the guaranteed
delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights............. Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time,
on the business day prior to the Expiration
Date, unless previously accepted for
exchange. See "The Exchange
Offer -- Withdrawal of Tenders."
Termination of the Exchange
Offer......................... The Parent may terminate the Exchange Offer if
it determines that the Exchange Offer
violates any applicable law or interpretation
of the staff of the SEC. Holders of Old Notes
will have certain rights against the Company
under the Registration Rights Agreement
should the Parent fail to consummate the
Exchange Offer. See "The Exchange
Offer -- Termination" and "Registration
Rights Agreement."
Acceptance of Old Notes and
Delivery of Exchange Notes.... Subject to certain conditions (as summarized
above in "Termination of the Exchange Offer"
and described more fully in "The Exchange
Offer -- Termination"), the Parent will
accept for exchange any and all Old Notes
which are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time,
on the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration
Date. See "The Exchange Offer -- General."
Exchange Agent................ Fleet National Bank is serving as exchange
agent (the "Exchange Agent") in connection
with the Exchange Offer. The mailing address
of the Exchange Agent is: Fleet National
Bank, 777 Main Street, MSN CT/MO/0224,
Hartford, Connecticut 06115, Attention:
Corporate Trust Operations. Hand deliveries
and deliveries by overnight courier should be
addressed to Fleet National Bank, 777 Main
Street, MSN CT/MO/0224, Hartford, Connecticut
06115, Attention: Corporate Trust Operations.
For information with respect to the Exchange
Offer, the telephone number for the Exchange
Agent is (860) 986-1271 and the facsimile
number for the Exchange Agent is (860) 986-
7908.
Certain Tax Considerations.... The exchange pursuant to the Exchange Offer
will generally not be a taxable event for
federal income tax purposes. See "Certain
Federal Income Tax Considerations."
Use of Proceeds............... There will be no cash proceeds payable to the
Company from the issuance of the Exchange
Notes pursuant to the Exchange Offer. See
"Use of Proceeds." For a discussion of the
use of the net proceeds received by the
Company from the sale of the Old Notes, see
"Private Placement."
9
<PAGE> 10
TERMS OF THE OLD NOTES AND THE EXCHANGE NOTES
Securities.................... $150,000,000 principal amount of 11% Senior
Notes due 2003.
Maturity Date................. January 15, 2003.
Interest Payment Dates........ Interest on the Notes will be payable
semi-annually on January 15 and July 15 of
each year, commencing July 15, 1996.
Optional Redemption........... The Notes will be redeemable at the option of
the Parent, in whole or in part, at any time
on or after January 15, 2000, at the
redemption prices set forth herein, together
with accrued interest to the date of
redemption. In the event the Parent
consummates a Public Equity Offering on or
prior to January 15, 1999, the Parent may at
its option use all or a portion of the
proceeds from such offering to redeem up to
$35 million principal amount of the Notes at
a redemption price equal to 111% of the
aggregate principal amount thereof, together
with accrued interest to the date of
redemption, provided that at least $115
million in aggregate principal amount of
Notes remain outstanding immediately after
such redemption. See "Description of the
Notes -- Redemption."
Mandatory Redemption.......... None.
Guarantees.................... The Notes will be unconditionally guaranteed on
a senior unsecured basis by each of the
Parent's current and certain of the Parent's
future subsidiaries, and such Subsidiary
Guarantees will rank pari passu in right of
payment with all existing and future senior
unsecured Indebtedness of the Subsidiary
Guarantors. See "Description of the
Notes -- Subsidiary Guarantees of Notes."
Ranking....................... The Notes will be senior unsecured obligations
of the Parent ranking pari passu in right of
payment with all existing and future senior
Indebtedness of the Parent and senior to all
future Subordinated Indebtedness of the
Parent. The Notes and the Subsidiary
Guarantees, however, will be effectively
subordinated to secured Indebtedness of the
Parent and the Subsidiary Guarantors,
respectively, with respect to the assets
securing such Indebtedness, including
Indebtedness of certain Subsidiary Guarantors
under the Bank Credit Facilities which is
secured by liens on substantially all of the
assets of such Subsidiary Guarantors and
guaranteed by the Parent. Certain of the
Subsidiary Guarantors are the primary
obligors under the Bank Credit Facilities,
and as of March 31, 1996, approximately $27.3
million of Indebtedness was outstanding under
the Bank Credit Facilities, not including
$11.1 million reserved pursuant to existing
letters of credit. See "Description of the
Notes -- Ranking."
Change of Control............. Upon the occurrence of a Change of Control,
each holder of Notes will have the right to
require the Parent to purchase all or a
portion of such holder's Notes at a price
equal to 101% of the aggregate principal
amount thereof, together with accrued
interest to the date of purchase. See
"Description of the Notes -- Certain
Covenants -- Change of Control."
10
<PAGE> 11
Certain Covenants............. The Indenture contains certain covenants,
including covenants which limit: (i)
indebtedness; (ii) restricted payments; (iii)
issuances and sales of capital stock of
restricted subsidiaries; (iv) sale/leaseback
transactions; (v) transactions with
affiliates; (vi) liens; (vii) asset sales;
(viii) dividends and other payment
restrictions affecting restricted
subsidiaries; (ix) conduct of business; and
(x) mergers, consolidations and sales of
assets. See "Description of the
Notes -- Certain Covenants" and "-- Merger,
Consolidation and Sale of Assets."
Transfer Restrictions......... The Old Notes have not been registered under
the Securities Act and unless so registered
may not be offered or sold within the United
States to or for the benefit of United States
persons, except pursuant to an exemption
from, or in a transaction not subject to, the
registration requirements of the Securities
Act. See "Transfer Restrictions on Old
Notes." The Exchange Notes would in general
be freely tradeable after the Exchange Offer.
See "The Exchange Offer" and "Plan of
Distribution."
Registration Rights........... Pursuant to a registration rights agreement
(the "Registration Rights Agreement") by and
among the Parent, the Subsidiary Guarantors
and the Initial Purchasers, the Company
agreed (i) to file a registration statement
with the SEC (the "Exchange Offer
Registration Statement") with respect to an
Exchange Offer to exchange the Old Notes for
Exchange Notes within 90 days after the date
of original issuance of the Old Notes (which
was January 25, 1996) and (ii) to use
commercially reasonable best efforts to cause
such registration statement to become
effective under the Securities Act within 120
days after such issue date. The Registration
Statement of which this Prospectus is a part
constitutes such Exchange Offer Registration
Statement. In the event that applicable law
or interpretations of the staff of the SEC do
not permit the Company to file the Exchange
Offer Registration Statement or to effect the
Exchange Offer, or if certain holders of the
Notes notify the Company that they are not
permitted to participate in, or would not
receive freely tradeable Notes pursuant to,
the Exchange Offer, the Company will use
commercially reasonable best efforts to cause
to become effective a registration statement
(the "Shelf Registration Statement") with
respect to the resale of the Notes and to
keep the Shelf Registration Statement
effective until three years after the date of
original issuance of the Notes. The interest
rate on the Notes is subject to increase
under certain circumstances if the Company is
not in compliance with its obligations under
the Registration Rights Agreement. See
"Registration Rights Agreement."
RISK FACTORS
An investment in the Notes involves certain risks that an investor should
carefully evaluate in connection with an investment in the Notes. See "Risk
Factors."
11
<PAGE> 12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following table sets forth selected historical and pro forma financial
information for the Company and should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto, Management's
Discussion and Analysis and the information under "Pro Forma Financial
Information" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
PRO FORMA AS ADJUSTED
1993 1994 1995 1995(1) 1995(2)
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Oil and gas exploration and production....... $ 40,455 $ 66,076 $ 83,284 $ 95,269 $ 95,269
Energy marketing and services................ 249,017 260,704 359,620 359,620 359,620
Natural gas transportation................... 16,480 19,910 26,722 28,587 28,587
Intercompany................................. (1,663) (4,977) (19,661) (19,661) (19,661)
-------- -------- -------- -------- --------
Total................................. 304,289 341,713 449,965 463,815 463,815
-------- -------- -------- -------- --------
Operating costs and expenses:
Cost of gas sales............................ 253,435 265,076 356,186 356,186 356,186
Other operating and administrative
expenses................................... 15,018 18,285 18,669 22,772 22,772
Depreciation, depletion and amortization..... 8,036 19,740 39,209 43,597 43,597
-------- -------- -------- -------- --------
Total................................. 276,489 303,101 414,064 422,555 422,555
-------- -------- -------- -------- --------
Operating income............................... 27,800 38,612 35,901 41,260 41,260
Interest and other income, net................. 704 1,039 3,713 3,713 3,713
Interest expense............................... (1,983) (2,938) (7,732) (12,660) (17,715)
-------- -------- -------- -------- --------
Income before income taxes..................... 26,521 36,713 31,882 32,313 27,258
-------- -------- -------- -------- --------
Federal and state income taxes................. 7,910 12,556 10,576 10,727 8,957
-------- -------- -------- -------- --------
Net income..................................... $ 18,611 $ 24,157 $ 21,306 $ 21,586 $ 18,301
======== ======== ======== ======== ========
OTHER DATA:
EBITDA(3)(4)(5)................................ $ 35,836 $ 58,352 $ 75,110 $ 84,857 $ 84,857
Capital expenditures........................... $ 48,455 $ 74,953 $128,699 $ 128,699 $ 128,699
Ratio of EBITDA to interest expense(4)(5)...... 18.1x 19.9x 9.7x 6.7x 4.8x
Ratio of earnings to fixed charges(6).......... 13.49x 12.93x 5.05x 3.52x 2.52x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------
AS
ACTUAL ADJUSTED(7)
-------- -------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 5,846 $ 5,846
Working capital............................................................ 3,653 3,653
Oil and gas properties, net................................................ 204,958 204,958
Total assets(8)............................................................ 360,609 365,609
Long-term debt............................................................. 165,529 170,529
Total stockholders' equity................................................. 101,576 101,576
</TABLE>
- ---------------
(1) Gives effect to the Rocky Mountain and Michigan Acquisitions. See "Pro Forma
Financial Information."
(2) Gives effect to the sale of the Old Notes and the application of the net
proceeds therefrom. See "Private Placement" and "Pro Forma Financial
Information."
(3) EBITDA represents operating income before depletion, depreciation,
amortization, interest expense, and interest and other income. EBITDA is not
intended to represent cash flow and does not represent the measure of cash
available to the Company. EBITDA is not a generally accepted accounting
principle measure, although it does provide additional information for
evaluating the Company's ability to make payments on the Notes. EBITDA is
also not intended to be an alternative to net income as a measure of
operating results.
(4) If the amounts representing the difference between the Tennessee Gas
Contract price and the $3.00 per MMBtu interim agreement price were excluded
from revenue for the year ended December 31, 1994, EBITDA for that period
would have been $45.9 million and the ratio of EBITDA to interest expense
would have been 15.6x. See "Risk Factors -- Tennessee Gas Litigation" and
Management's Discussion and Analysis.
(5) If the amounts representing the difference between the Tennessee Gas
Contract price and the $3.00 per MMBtu interim agreement price were excluded
from revenue for the year ended December 31, 1995, EBITDA for that period
would have been $34.9 million and the ratio of EBITDA to interest expense
would have been 4.5x; and pro forma for the acquisitions EBITDA for 1995
would have been $44.6 million and the ratio of EBITDA to interest expense
would have been 3.5x; and the 1995 ratio of EBITDA to interest expense as
adjusted for the sale of Notes would have been 2.5x. See "Risk
Factors -- Tennessee Gas Litigation" and Management's Discussion and
Analysis.
(6) Income before income taxes plus fixed charges divided by fixed charges.
Fixed charges consist of interest expense and a portion of rent considered
to represent interest cost.
(7) Gives effect to the sale of the Old Notes and the application of the net
proceeds therefrom. See "Private Placement" and "Capitalization."
(8) Includes an approximately $56 million net receivable from Tennessee Gas at
December 31, 1995 that is the subject of litigation. See "Risk
Factors -- Tennessee Gas Litigation" and Management's Discussion and
Analysis.
12
<PAGE> 13
SUMMARY HISTORICAL OIL AND GAS RESERVE AND OPERATING DATA
The following table sets forth summary information with respect to
estimates of the Company's proved oil and gas reserves for each of the years in
the three year period ended December 31, 1995. For additional information
relating to the Company's oil and gas reserves and operating data, see
Management's Discussion and Analysis and the notes to the Consolidated Financial
Statements.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
RESERVE DATA:
Proved developed reserves:
Oil (Mbbls)................................................ 1,579 1,336 3,808
Natural gas (MMcf)......................................... 61,016 74,215 121,987
Total (MMcfe)........................................... 70,490 82,231 144,835
Proved undeveloped reserves:
Oil (Mbbls)................................................ 999 983 3,709
Natural gas (MMcf)......................................... 8,724 14,969 18,976
Total (MMcfe)........................................... 14,718 20,867 41,230
Total proved reserves:
Oil (Mbbls)................................................ 2,578 2,319 7,517
Natural gas (MMcf)......................................... 69,740 89,184 140,963
Total (MMcfe)........................................... 85,208 103,098 186,065
Estimated future net revenue before income taxes($000)(1).... $285,278 $307,533 $405,049
Present value of future net revenues before income
taxes($000)(2)............................................. $210,923 $248,217 $291,085
Standardized measure of discounted future net cash
flows($000)(3)............................................. $160,884 $179,660 $231,763
Reserve replacement percentage............................... 412.8% 242.3% 508.6%
Reserve life (in years)(4)................................... 10.6 8.2 7.2
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
NET PRODUCTION DATA:
Oil (Mbbls)..................................................... 179 211 196
Natural gas (MMcf):
Tennessee Gas Contract........................................ 4,472 6,851 6,924
Other......................................................... 2,505 4,453 12,205
------- ------- -------
Total...................................................... 6,977 11,304 19,129
Total (MMcfe)................................................... 8,051 12,570 20,305
OTHER DATA:
Average sales prices:
Oil ($ per Bbl)............................................... $ 17.57 $ 15.16 $ 17.28
Natural gas ($ per Mcf):
Tennessee Gas Contract..................................... 7.09 7.49 7.90
Other...................................................... 2.02 1.81 1.62
Average.................................................... 5.27 5.54 4.29
Average lifting cost ($ per Mcfe)............................... 0.62 0.56 0.33
</TABLE>
- ---------------
(1) Reflects future cash inflows less future production and development costs.
(2) Reflects estimated future net revenue before income taxes discounted at 10%
annually.
(3) Reflects present value of future net revenue before income taxes, less
future income taxes discounted at 10%.
(4) Reserve life at December 31, 1995 reflects 1995 pro forma production.
13
<PAGE> 14
RISK FACTORS
In addition to the other information set forth elsewhere in this Prospectus
and the documents incorporated herein by reference, the following factors should
be carefully evaluated in connection with an investment in the Notes.
TENNESSEE GAS LITIGATION
The Company, as one of the sellers, has been involved in certain litigation
with Tennessee Gas Pipeline Company ("Tennessee Gas"), as the buyer, regarding a
natural gas purchase contract covering certain producing acreage units within
the Bob West Field (the "Tennessee Gas Contract") that runs through January
1999. The Tennessee Gas Contract provides that Tennessee Gas will take or pay
for 85% of the sellers' delivery capacity from wells within these units at
certain defined prices. These prices are currently greatly in excess of spot
market prices ($8.17 per MMBtu during December 1995, plus reimbursement for
severance taxes, compared to average spot market prices for natural gas of $2.02
per MMBtu during that month). Tennessee Gas contested, among other things, both
the volume and price provisions of this contract. The trial court entered a
judgment in favor of the Company and other sellers with respect to all claims of
Tennessee Gas. The Texas Court of Appeals partially reversed the decision of the
trial court and, in August 1995, in initially upholding the decision of the
Court of Appeals, the Texas Supreme Court upheld the price provision and
remanded the case to the trial court to determine whether the volumes of natural
gas that have been delivered to Tennessee Gas were produced and delivered in
good faith and were not unreasonably disproportionate to a normal or otherwise
comparable prior output or to the expectation of the parties. However, on April
18, 1996, the Texas Supreme Court granted the sellers' motion for rehearing,
withdrew its prior opinion, and issued a new opinion reinstating the judgment of
the trial court in favor of the Company and other sellers with respect to all
claims of Tennessee Gas. Tennessee Gas filed a motion with the Texas Supreme
Court requesting additional time to file a motion for rehearing of the court's
most recent decision with respect to its new opinion, and the court has provided
Tennessee Gas with an extension that will expire on June 3, 1996. Pending a
final resolution of the litigation and pursuant to a series of interim
agreements between the parties in effect since October 1994, Tennessee Gas has
been purchasing monthly not less than 85% of the natural gas delivery capacity,
if available, and paying $3.00 per MMBtu. The excess of $3.00 per MMBtu over the
market price for natural gas delivered since August 1, 1995 (but not for the
earlier deliveries covered by the interim agreements) is refundable to Tennessee
Gas to the extent required by a final judgment against the Company. The
acceptance of the $3.00 per MMBtu has not constituted any waiver by the Company
of its claim for the full contract price for all natural gas taken by Tennessee
Gas. The latest interim agreement terminated on April 30, 1996. Therefore, the
terms of the Tennessee Gas Contract, in accordance with judicial rulings in the
case, now govern performance by each of the parties.
As of December 31, 1995, the Company had recorded cumulative revenue of
approximately $155 million for natural gas sold under the Tennessee Gas Contract
based on the prices as defined in the contract, of which approximately $112
million (approximately $61 million of which has actually been received by the
Company) is at issue in the litigation. In accordance with the provisions of
such contract, the Company has continued to accrue an accounts receivable amount
(which includes interest as provided for in the contract) due from Tennessee Gas
that reflects the difference between the amount that Tennessee Gas has paid for
natural gas under the interim agreements between the parties and the price that
would have been paid pursuant to the terms of the Tennessee Gas Contract. At
December 31, 1995, such receivable (which includes accrued interest income and
is net of deferred severance taxes and other payables) was $56.4 million. The
Company anticipates this amount will continue to increase. In the event the
Supreme Court of Texas once again grants rehearing in the case and reverses its
decision, and Tennessee Gas ultimately prevails in this litigation, and
depending on the amount of natural gas for which the courts determine that
Tennessee Gas should have paid the spot market price rather than the contract
price, the Company could be required (i) to write off a portion or all of its
account receivable that is attributable to Tennessee Gas and (ii) to return a
portion or all of the disputed amounts received (plus interest if it is awarded
by the courts) to Tennessee Gas.
If a second rehearing is granted and the most recent ruling of the Texas
Supreme Court in the litigation is set aside, and the outcome of the litigation
requires the Company to repay significant amounts to Tennessee
14
<PAGE> 15
Gas, the Company's liquidity and cash flow could be materially and adversely
affected. In such event, there can be no assurance that the Company would be
able to generate sufficient funds to repay (or finance a repayment of) the
amounts due to Tennessee Gas and continue to pay the principal of and interest
on the Notes. In such a circumstance the award of a significant judgment against
the Company could result in a default and lead to the acceleration of the
Company's indebtedness under the Bank Credit Facilities and the Indenture. If
Tennessee Gas is unsuccessful in its attempt to reverse the Texas Supreme
Court's most recent decision in the case, mandate will issue instructing the
lower court to enter a judgment in favor of the Company and its co-sellers, in
accordance with the Supreme Court's opinion.
The natural gas dedicated to the Tennessee Gas Contract is produced from
the Bob West Field. The PV-10 attributable to the Company's proved reserves in
the Bob West Field has been calculated based in part on the contract price with
Tennessee Gas and with the assumption that 85% of the Company's delivery
capacity from the specified units in the field will be sold at such price during
the life of the contract. At December 31, 1995, the PV-10 for the Bob West Field
was $115.2 million. If calculated using the $3.00 per MMBtu price in effect
pursuant to the interim agreements between the parties to the litigation instead
of the contract price, the PV-10 for the Bob West Field would have been $37.5
million. If calculated using December 31, 1995 spot market prices of $2.05 per
MMBtu instead of the contract price, the PV-10 for the Bob West Field would have
been $27.0 million. See Management's Discussion and Analysis and Note 7 to the
Consolidated Financial Statements.
CERTAIN PROVISIONS OF THE TENNESSEE GAS CONTRACT
Tennessee Gas has the right under the Tennessee Gas Contract, except as
modified by the interim agreements discussed above, to elect not to take natural
gas for any period of a contract year and to defer payment for its decision not
to take such natural gas until the end of the contract year (defined as January
31 of each year). A decision by Tennessee Gas not to take natural gas for a
significant period of time would result in the Company's natural gas production
subject to the Tennessee Gas Contract being shut-in for the relevant period and
could materially and adversely affect the Company's cash flow within a contract
year.
SUBSTANTIAL INDEBTEDNESS AND RESTRICTIONS
At March 31, 1996, the Company had approximately $177.3 million of
outstanding indebtedness (including the Old Notes) and $11.1 million reserved
pursuant to existing letters of credit under its Bank Credit Facilities. The
Company may incur additional indebtedness under the Bank Credit Facilities. The
Company's level of indebtedness will have several important effects on its
future operations. A significant portion of the Company's cash flow from
operations must be dedicated to the payment of interest on its indebtedness and
will not be available for other purposes. The covenants contained in the Bank
Credit Facilities and the Indenture will require the Company to meet certain
financial tests. Other restrictions will limit its ability to borrow additional
funds or to dispose of assets and may affect the Company's flexibility in
planning for and reacting to changes in its business, including possible
acquisition activities. The Company's 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 Company will be able to remain in compliance with the
financial ratios prescribed under the Bank Credit Facilities. Failure to do so
would result in a default and could lead to the acceleration of the Company's
indebtedness under the Bank Credit Facilities and the Indenture. Moreover, if
the Company's revenues were to decrease as a result of lower oil and gas prices,
decreased production or otherwise, the borrowing base under the Bank Credit
Facilities could be reduced and could lead to the acceleration of the Company's
indebtedness under the Bank Credit Facilities and the Indenture. See
Management's Discussion and Analysis and "Description of the Notes -- Certain
Covenants."
This level of indebtedness and the resulting restrictions on the Company
may pose substantial risks to holders of the Notes, including the possibility
that the Company might not generate sufficient cash flow to pay the principal of
and interest on the Notes.
15
<PAGE> 16
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
The Notes are the direct obligation of the Parent, a holding company whose
primary assets are the capital stock of its subsidiaries. As a result, the
Company's cash flow and consequent ability to service its debt will be dependent
upon the earnings and cash flow of its subsidiaries and the distribution of that
cash to the Parent. The Bank Credit Facilities impose certain limitations on the
ability of subsidiaries of the Parent to declare dividends or make distributions
or advances to the Parent in the event of default.
Apart from the Old Notes, all of the Company's existing indebtedness has
been incurred through the Bank Credit Facilities. The indebtedness under the
Bank Credit Facilities is at the subsidiary level, and is secured by
substantially all the assets of such subsidiaries. The lenders under the Bank
Credit Facilities have claims with respect to the assets constituting collateral
for the Bank Credit Facilities that are prior to the claims of holders of the
Notes. See Management's Discussion and Analysis. In the event of a default on
the Notes, or a bankruptcy, liquidation or reorganization of the Company, such
assets will be available to satisfy obligations under the Bank Credit Facilities
before any payment therefrom could be made on the Notes. Accordingly, the Notes
and the Subsidiary Guarantees will be effectively subordinated to claims of the
lenders under the Bank Credit Facilities to the extent of such pledged
collateral. As of March 31, 1996, the total debt outstanding under the Bank
Credit Facilities was $27.3 million, and an additional $11.1 million was
reserved pursuant to existing letters of credit.
EFFECTS OF CHANGING OIL AND GAS PRICES
The Company's future financial condition and results of operations are
highly dependent on the demand and prices received for the Company's oil and gas
production and on the costs of acquiring, developing and producing reserves. Oil
and gas prices have historically been volatile and are expected by the Company
to continue to be volatile in the future. Prices for oil and gas are subject to
wide fluctuation in response to relatively minor changes in the supply of and
demand for oil and gas, market uncertainty and a variety of additional factors
that are beyond the Company's control. These factors include political
conditions in the Middle East and elsewhere, the foreign supply of oil and gas,
the price of foreign imports, the level of consumer product demand, weather
conditions, domestic and foreign government regulations and taxes, the price and
availability of alternative fuels and overall economic conditions. Declines in
oil and gas prices may adversely affect the Company's cash flow, liquidity and
profitability. Lower oil and gas prices also may reduce the amount of the
Company's oil and gas that can be produced economically. It is impossible to
predict future oil and gas price movements with any certainty.
ESTIMATES OF 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 Company's
control. This Prospectus (including the documents incorporated herein by
reference) include independent engineering estimates of the Company's oil and
gas reserves and future net cash flows that are based on the reports of four
different firms. Petroleum engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
manner. Estimates of economically recoverable oil and gas reserves and of future
net cash flow necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulation by
governmental agencies, assumptions concerning future oil and gas prices, future
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 Company's reserves likely will vary from
estimates, and such variances may be material. In addition, the Company's
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 Company is a party,
operating and development costs and other factors.
16
<PAGE> 17
The PV-10 values referred to in this Prospectus (including the documents
incorporated herein by reference) should not be construed as the current market
value of the estimated oil and gas reserves attributable to the Company's
properties. In accordance with applicable requirements of the SEC, PV-10 is
generally based on prices and costs as of the date of the estimate, whereas
actual future prices and costs may be materially higher or lower. Actual future
net cash flows 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 expenses in connection with development and
production of oil and gas properties. In addition, the 10% discount factor,
which is required by the SEC to be used to calculate PV-10 for reporting
purposes, is not necessarily the most appropriate discount factor based on
interest rates in effect from time to time and risks associated with the Company
and its properties or the oil and gas industry in general.
RESERVE REPLACEMENT RISKS; SUBSTANTIAL CAPITAL REQUIREMENTS
The Company's prospects for future growth and profitability will depend
predominately on its ability to replace present reserves through exploratory
drilling and acquisitions as well as on its ability to successfully develop
additional reserves. The decision to purchase, explore or develop an interest or
property will depend in part on the evaluation of data obtained through
geophysical and geological analyses and engineering studies, the results of
which are often inconclusive or subject to varying interpretations. There can be
no assurance that the Company's acquisition and exploration activities or
planned development projects will result in significant additional reserves or
that the Company will have continuing success at drilling productive wells.
The Company has made, and likely will continue to make, substantial capital
expenditures in connection with the acquisition, exploration and development of
oil and gas properties. Historically, the Company has funded its capital
expenditures with funds from operations and long-term debt financing. The
Company anticipates that the net proceeds of the sale of the Notes, together
with its cash flow from operations and the availability of credit under the Bank
Credit Facilities, will be sufficient to meet the capital expenditures budgeted
for drilling and acquisition activities in 1996. Future cash flows and the
availability of credit are subject to a number of variables, such as the level
of production from existing wells, prices of oil and gas and the Company's
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
Company had no availability under its Bank Credit Facilities, the Company could
be limited in its ability to replace its reserves or to maintain production at
current levels, resulting in a decrease in production and revenue over time. If
the Company's cash flow from operations and availability under its Bank Credit
Facilities are not sufficient to satisfy its capital expenditure requirements,
there can be no assurance that additional debt or equity financing will be
available to meet these requirements.
COMPETITION
The oil and gas industry is highly competitive. The Company competes in the
areas of reserve acquisitions and the exploration, development, production and
marketing of oil and gas, as well as contracting for equipment and securing
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
Company.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, the
Company will be required to make an offer to purchase any or all of the
outstanding Notes at a price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any. In the event of such a Change
of Control, there can be no assurance that the Company would have sufficient
funds available to purchase any Notes tendered or that such repurchase would not
be prohibited by the terms of the Bank Credit Facilities or other senior
Indebtedness. See "Description of the Notes -- Certain Covenants -- Change of
Control."
17
<PAGE> 18
DRILLING, MARKETING AND ACQUISITION RISKS
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered, and there can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its 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 after drilling, operating, and other costs. The cost of
drilling, completing and operating wells is often uncertain. The Company's
drilling operations may be curtailed, delayed or canceled as a result of
numerous factors, many of which are beyond the Company's control, including
title problems, weather conditions, compliance with governmental requirements
and shortages or delays in the delivery of equipment and services.
The Company's ability to market its oil and gas production at commercially
acceptable prices is dependent on, among other factors, the availability and
capacity of gathering systems and pipelines, federal and state regulation of
production and transportation, general economic conditions, and changes in
supply and in demand.
Acquisitions of producing oil and gas properties and volumetric production
payments have been an important element of the Company's success, and the
Company will continue to seek acquisitions in the future. Even though the
Company performs a review (including a limited review of title and other
records) of the major properties it seeks to acquire that it believes is
consistent with industry practices, such reviews are inherently incomplete and
it is generally not feasible for the Company to review in-depth every property
and all records. Even an in-depth review may not reveal existing or potential
problems or permit the Company to become familiar enough with the properties to
assess fully their deficiencies and capabilities, and the Company often assumes
environmental and other liabilities in connection with acquired properties.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's 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 Company due to injury
or loss of life, severe damage to or destruction of property, natural resources
and equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. The Company's operations may be materially curtailed, delayed or
canceled as a result of numerous factors, including the presence of
unanticipated pressure or irregularities in formations, accidents, title
problems, weather conditions, compliance with governmental requirements and
shortages or delays in the delivery of equipment. In accordance with customary
industry practice, the Company maintains insurance against some, but not all, of
the risks described above. There can be no assurance that the levels of
insurance maintained by the Company will be adequate to cover any losses or
liabilities. The Company cannot predict the continued availability of insurance,
or availability at commercially acceptable premium levels.
GOVERNMENT REGULATION
The Company's business is subject to certain federal, state and local laws
and regulations relating to the drilling for and production, transportation and
marketing of oil and gas, as well as environmental and safety matters. Such laws
and regulations have generally become more stringent in recent years, often
imposing greater liability on an increasing number of parties. Because the
requirements imposed by such laws and regulations are frequently changed, the
Company is unable to predict the effect or cost of compliance with such
requirements or their effects on oil and gas use or prices. In addition,
legislative proposals are frequently introduced in Congress and state
legislatures which, if enacted, might significantly affect the oil and gas
industry. In view of the many uncertainties which exist with respect to any
legislative proposals, the effect on the Company of any legislation which might
be enacted cannot be predicted.
18
<PAGE> 19
ABSENCE OF A PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to the liquidity of
any markets that may develop for the Exchange Notes or, the ability or price at
which the holders of Exchange Notes would be able to sell their Exchange Notes.
Future trading prices of the Exchange Notes will depend on many factors,
including, among others, prevailing interest rates, the Company's operating
results and the market for similar securities. The Company does not intend to
apply for listing of the Exchange Notes on any securities exchange. The
investment banking firms that are the Initial Purchasers have informed the
Company that they currently intend to make a market for the Exchange Notes.
However, they are not so obligated, and any such market making may be
discontinued at any time without notice. In addition, such market making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act and may be limited during the Exchange Offer or the pendency of the
Shelf Registration Statement. Accordingly, no assurance can be given that an
active public or other market will develop for the Exchange Notes or as to the
liquidity of or the trading market for the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Untendered Old Notes not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain subject to the existing restrictions upon transfer of
such Old Notes. See "Transfer Restrictions on Old Notes." Because the Company
anticipates that most holders of Old Notes will elect to exchange such Old Notes
for Exchange Notes due to the general lack of restrictions on the resale of
Exchange Notes under the Securities Act, the Company anticipates that the
liquidity of the market for any Old Notes remaining after the consummation of
the Exchange Offer may be substantially limited. Additionally, holders (other
than Restricted Holders) of any Old Notes not tendered in the Exchange Offer
prior to the Expiration Date will not be entitled to require the Company to file
the Shelf Registration Statement and the stated interest rate on such Old Notes
will remain at its initial level of 11%. See "Registration Rights Agreement."
19
<PAGE> 20
THE COMPANY
KCS Energy, Inc. is an independent energy company primarily engaged in the
acquisition, exploration, development and production of natural gas and crude
oil. The Company 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 late 1960s. As a result of the spin-off from NUI
Corporation in 1988, the Company was involved in several unrelated businesses
including propane distribution, data processing, natural gas marketing and oil
and gas exploration and production. In the course of the two years following the
spin-off, the Company sold both the propane distribution company and the data
processing company, as well as other non-strategic assets, and invested the net
proceeds in its core energy business. Since December 1990, the Company has
increased its proved oil and gas reserves 395%, a compound annual rate of 49%,
to 186.1 Bcfe at December 31, 1995. During this five-year period, the Company
also increased production 392%, a compound annual rate of 49%, and replaced 400%
of its production, primarily through a combination of development drilling and
acquisition activities. As of December 31, 1995, the Company's PV-10 was $291.1
million.
The Company's operations to date have been focused on properties in the
Gulf Coast region. The Company's recently completed Rocky Mountain Acquisition
has expanded the Company's operations into certain major producing basins in
Wyoming, Colorado and Montana. At December 31, 1995, the Company had working
interests in 901 producing wells (413 of which it operates). The Company
augments its working interest ownership of properties with a volumetric
production payment program that covers properties located primarily in the
offshore Gulf Coast region and, with the recent Michigan Acquisition, in the
Niagaran Reef trend in Michigan. At December 31, 1995, approximately 76% of the
Company's proved reserves were natural gas, approximately 78% of total proved
reserves were classified as proved developed, and the average reserve life
(based on fiscal 1995 pro forma production) was estimated to be 7.2 years.
The Company's largest single producing field is the Bob West Field in south
Texas, which accounted for approximately 34% of the Company's production during
1995 from its interests in 48 wells (18 of which it operates). Substantially all
of the Company's natural gas sold from the Bob West Field is covered by a take-
or-pay contract with Tennessee Gas that runs through January 1999 and is
currently the subject of litigation. (See "Risk Factors -- Tennessee Gas
Litigation," and Note 7 to Consolidated Financial Statements.)
The Company also operates a natural gas transportation business and an
energy marketing and services business, which together contributed less than 5%
of the Company's operating income during 1995. The natural gas transportation
business consists of approximately 500 miles of pipelines, including a 150-mile
intrastate pipeline system and related gathering lines located between Houston
and Dallas, Texas and 16 natural gas gathering systems in Texas, Montana and
Louisiana. Through its energy marketing and services business, the Company buys
and resells natural gas directly to industrial and commercial end users and also
offers energy supply, transportation and risk management services.
The Company's principal operating offices are located at 5555 San Felipe,
Suite 1200, Houston, Texas 77056 and its telephone number is (713) 877-8006. The
Company's executive offices are located at 379 Thornall Street, Edison, New
Jersey 08837 and its telephone number is (908) 632-1770.
20
<PAGE> 21
PRIVATE PLACEMENT
On January 25, 1996, the Company completed the private sale to the Initial
Purchasers of $150,000,000 principal amount of the Old Notes at a price of
97.25% of the principal amount thereof in a transaction not registered under the
Securities Act in reliance upon Section 4(2) of the Securities Act. The Initial
Purchasers thereupon offered and resold the Old Notes only to qualified
institutional buyers and a limited number of institutional accredited investors
at an initial price to such purchasers of 100% of the principal amount thereof.
The net proceeds to the Company were approximately $145 million after deducting
expenses of the offering. These net proceeds from the offering were utilized by
the Company to reduce by $120 million the outstanding indebtedness under the
Company's current bank credit facilities described in Management's Discussion
and Analysis (the "Bank Credit Facilities") and to repay a $25 million note sold
to a third party in November 1995.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange a like
principal amount of Old Notes, the terms of which are identical in all material
respects to the Exchange Notes. The Old Notes surrendered in exchange for the
Exchange Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any change in capitalization
of the Company.
21
<PAGE> 22
CAPITALIZATION
The following table sets forth as of December 31, 1995 (i) the
capitalization of the Company, and (ii) the as adjusted capitalization to give
effect to the sale of the Old Notes on January 25, 1996, the receipt of the net
proceeds therefrom (after deducting offering expenses totaling $5.0 million) and
the application of such net proceeds as set forth under "Private Placement." The
table should be read in conjunction with Management's Discussion and Analysis
and the Consolidated Financial Statements.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt................................... $ -- $ --
Long-term debt:
Master Note Facility.............................................. 76,255 4,655
Receivables Facility.............................................. 26,900 15,500
VPP Facility...................................................... 38,000 1,000
Note Financing(1)................................................. 24,374 --
11% Notes due 2003(1)............................................. -- 149,374
-------- --------
Total long-term debt...................................... 165,529 170,529
Stockholders' equity:
Preferred stock; authorized 5,000,000 shares, none issued......... -- --
Common stock, par value $0.01 per share; authorized 50,000,000
shares, 12,379,885 shares issued............................... 124 124
Additional paid-in capital(1)..................................... 24,910 24,910
Retained earnings................................................. 79,814 79,814
Less treasury stock, 892,748 shares at cost....................... (3,272) (3,272)
-------- --------
Total stockholders' equity................................ 101,576 101,576
-------- --------
Total capitalization...................................... $267,105 $ 272,105
======== ========
</TABLE>
- ---------------
(1) Includes $626,000 debt discount associated with the warrants issued in
conjunction with the Note Financing.
22
<PAGE> 23
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is derived from the
historical financial statements of the Company incorporated by reference herein.
See "Incorporation of Certain Documents by Reference."
The unaudited Pro Forma Condensed Statement of Consolidated Income for the
year ended December 31, 1995 reflects the Rocky Mountain and Michigan
Acquisitions as if such transactions had occurred on January 1, 1995. The
unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1995
reflects the sale of the Old Notes and the application of the net proceeds
therefrom, as if such transaction had occurred on December 31, 1995. The
unaudited pro forma financial data should be read in conjunction with the notes
thereto and the Consolidated Financial Statements.
The unaudited pro forma financial data do not purport to be indicative of
the financial position or results of operations that would actually have
occurred if the transactions described had occurred as presented in such
statements or that may be obtained in the future. In addition, future results
may vary significantly from the results reflected in such statements due to
normal crude oil and natural gas production declines, changes in prices received
for crude oil and natural gas, future acquisitions and dispositions of reserves,
changes in estimates of reserves and of the future net revenues therefrom and
other factors.
23
<PAGE> 24
KCS ENERGY, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
---------------------------
ROCKY PRO FORMA OFFERING AS
HISTORICAL MOUNTAIN MICHIGAN COMBINED ADJUSTMENTS ADJUSTED
---------- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue.................... $ 449,965 $ 5,619 $ 8,231(a) $ 463,815 $ $ 463,815
Operating costs and
expenses
Cost of gas sales........ 356,186 356,186 356,186
Other operating and
administrative
expenses.............. 18,669 2,848 605 22,772 22,772
650(b)
Depreciation, depletion
and amortization...... 39,209 1,606(c) 2,782(c) 43,597 43,597
---------- ----------- ---------- ---------- ----------- -----------
Operating costs and
expenses............ 414,064 5,104 3,387 422,555 422,555
---------- ----------- ---------- ---------- ----------- -----------
Operating income...... 35,901 515 4,844 41,260 41,260
Interest and other income,
net...................... 3,713 3,713 3,713
Interest expense........... (7,732) (2,541)(d) (2,387)(d) (12,660) (5,055)(e) (17,715)
---------- ----------- ---------- ---------- ----------- -----------
Income (loss) before income
taxes (benefit).......... 31,882 (2,026) 2,457 32,313 (5,055) 27,258
Federal and state income
taxes (benefit).......... 10,576 (709)(f) 860(f) 10,727 (1,770)(f) 8,957
---------- ----------- ---------- ---------- ----------- -----------
Net income
(loss)......... $ 21,306 $ (1,317) $ 1,597 $ 21,586 $ (3,285) $ 18,301
========== =========== ========== ========== =========== ===========
Earnings per share of
common stock and common
stock equivalents........ $ 1.81 $ (.11) $ .14 $ 1.84 $ (.28) $ 1.56
========== =========== ========== ========== =========== ===========
Average shares of common
stock and common stock
equivalents
outstanding.............. 11,760,701 11,760,701 11,760,701 11,760,701 11,760,701 11,760,701
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
24
<PAGE> 25
KCS ENERGY, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OFFERING AS
HISTORICAL ADJUSTMENTS ADJUSTED
-------- ----------- --------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 5,846 $ $ 5,846
Trade accounts receivable, net............................ 58,052 58,052
Fuel inventories.......................................... 782 782
Other current assets...................................... 3,374 3,374
-------- ------ --------
Current assets.................................... 68,054 68,054
-------- ------ --------
Property, plant and equipment
Oil and gas properties, full cost method, net............. 204,958 204,958
Natural gas transportation systems, net................... 22,345 22,345
Other property, plant and equipment, net.................. 2,013 2,013
-------- ------ --------
Property, plant and equipment, net................ 229,316 229,316
-------- ------ --------
Other assets
Receivable from Tennessee Gas............................. 56,437 56,437
Investments and other assets.............................. 6,802 5,000(g) 11,802
-------- ------ --------
Other assets...................................... 63,239 5,000 68,239
-------- ------ --------
$360,609 $5,000 $365,609
======== ====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 59,475 $ $ 59,475
Accrued liabilities....................................... 4,926 4,926
-------- ------ --------
Current liabilities............................... 64,401 64,401
-------- ------ --------
Deferred credits and other liabilities...................... 29,103 29,103
Long-term debt.............................................. 165,529 5,000(g) 170,529
Stockholders' equity
Preferred Stock; authorized 5,000,000 shares, none
issued................................................. -- --
Common Stock, par value $0.01 per share; authorized
50,000,000 shares, issued 12,379,885................... 124 124
Additional paid-in capital................................ 24,910 24,910
Retained earnings......................................... 79,814 79,814
Less treasury stock, 892,748 shares, at cost.............. (3,272) (3,272)
-------- ------ --------
Total stockholders' equity........................ 101,576 101,576
-------- ------ --------
$360,609 $5,000 $365,609
======== ====== ========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
25
<PAGE> 26
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying pro forma financial statements of the Company have been
prepared to reflect certain adjustments to the historical consolidated financial
statements of the Company. The unaudited Pro Forma Condensed Statement of
Consolidated Income for the year ended December 31, 1995 reflects the Rocky
Mountain and Michigan Acquisitions as if such transactions had occurred on
January 1, 1995. The unaudited Pro Forma Condensed Consolidated Balance Sheet as
of December 31, 1995 reflects the sale of the Old Notes and the application of
the net proceeds therefrom, as if such transaction had occurred on December 31,
1995.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED INCOME:
a. Pro forma revenue for the volumetric production payment acquired in the
Michigan Acquisition was calculated using the scheduled volumes to be
delivered in the first year of the volumetric production payment
agreement and the prices that would have been in effect during the pro
forma period presented.
b. Adjustment to reflect general and administrative expenses associated
with the Rocky Mountain properties.
c. Adjustment to reflect additional depreciation, depletion and
amortization expense calculated using the future gross revenue method
after giving effect to the Rocky Mountain and Michigan Acquisitions.
d. Adjustment to reflect incremental interest expense on additional
borrowings made to fund the Rocky Mountain and Michigan Acquisitions
calculated using the rates that would have been in effect under the
borrowing facility used to finance the acquisition.
e. Adjustment to (i) eliminate historical interest expense on additional
borrowings made to fund the Rocky Mountain and Michigan Acquisitions and
(ii) reflect incremental interest expense related to the sale of the
Notes.
f. Adjustment to the provision for income taxes related to the above
adjustments.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET:
g. Adjustment to reflect the sale of the Old Notes and application of the
net proceeds therefrom and related debt issuance costs to be amortized.
26
<PAGE> 27
SELECTED FINANCIAL INFORMATION
The historical financial data presented below for and as of the end of the
five years ended December 31, 1995 are derived from the Company's audited
financial statements. Such financial statements were audited by Arthur Andersen
LLP. The information in this table should be read in conjunction with
Management's Discussion and Analysis and the Consolidated Financial Statements,
including the notes thereto, incorporated by reference in this Prospectus. See
"Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Oil and gas exploration and production.......... $ 9,573 $ 13,505 $ 40,455 $ 66,076 $ 83,284
Energy marketing and services................... 100,700 131,071 249,017 260,704 359,620
Natural gas transportation...................... 7,391 12,955 16,480 19,910 26,722
Intercompany.................................... (437) (3,252) (1,663) (4,977) (19,661)
-------- -------- -------- -------- --------
Total.................................... 117,227 154,279 304,289 341,713 449,965
-------- -------- -------- -------- --------
Operating costs and expenses:
Cost of gas sales............................... 100,072 133,590 253,435 265,076 356,186
Other operating and administrative expenses..... 10,017 10,806 15,018 18,285 18,669
Depreciation, depletion and amortization........ 3,227 3,800 8,036 19,740 39,209
-------- -------- -------- -------- --------
Total.................................... 113,316 148,196 276,489 303,101 414,064
-------- -------- -------- -------- --------
Operating income.................................. 3,911 6,083 27,800 38,612 35,901
Interest and other income, net.................... 787 757 704 1,039 3,713
Interest expense.................................. (1,239) (1,297) (1,983) (2,938) (7,732)
-------- -------- -------- -------- --------
Income before income taxes........................ 3,459 5,543 26,521 36,713 31,882
-------- -------- -------- -------- --------
Federal and state income taxes.................... 885 1,533 7,910 12,556 10,576
-------- -------- -------- -------- --------
Net income........................................ $ 2,574 $ 4,010 $ 18,611 $ 24,157 $ 21,306
======== ======== ======== ======== ========
OTHER DATA:
EBITDA(1)(2)(3)................................... $ 7,138 $ 9,883 $ 35,836 $ 58,352 $ 75,110
Capital expenditures.............................. $ 8,559 $ 13,868 $ 48,455 $ 74,953 $128,699
Ratio of EBITDA to interest expense(2)(3)......... 5.8x 7.6x 18.1x 19.9x 9.7x
Ratio of earnings to fixed charges(4)............. 3.51x 4.86x 13.49x 12.93x 5.05x
Ratio of total debt to EBITDA(2)(3)............... 2.2x 2.2x 1.1x 1.1x 2.2x
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents......................... $ 1,914 $ 4,292 $ 5,369 $ 988 $ 5,846
Working capital................................... 4,002 5,967 10,367 2,646 3,653
Oil and gas properties, net....................... 19,028 30,827 70,477 125,621 204,958
Total assets(5)................................... 72,077 88,220 165,990 214,423 360,609
Long-term debt.................................... 15,707 21,637 36,289 61,970 165,529
Total stockholders' equity........................ 26,317 30,233 59,765 80,668 101,576
</TABLE>
- ---------------
(1) EBITDA represents operating income before depletion, depreciation,
amortization, interest expense, and interest and other income. EBITDA is not
intended to represent cash flow and does not represent the measure of cash
available to the Company. EBITDA is not a generally accepted accounting
principle measure, although it does provide additional information for
evaluating the Company's ability to make payment on the Notes. EBITDA is
also not intended to be an alternative to net income as a measure of
operating results.
(2) If the amounts representing the difference between the Tennessee Gas
Contract price and the $3.00 per MMBtu interim agreement price were excluded
from revenue for the year ended December 31, 1994, EBITDA for that period
would have been $45.9 million and the ratio of EBITDA to interest expense
would have been 15.6x and the ratio of total debt to EBITDA would have been
1.4x. See "Risk Factors -- Tennessee Gas Litigation" and Management's
Discussion and Analysis.
(3) If the amounts representing the difference between the Tennessee Gas
Contract price and the $3.00 per MMBtu interim agreement price were excluded
from revenue for the year ended December 31, 1995, EBITDA for that period
would have been $34.9 million and the ratio of EBITDA to interest expense
would have been 4.5 and the ratio of total debt to EBITDA would have been
4.8x. See "Risk Factors -- Tennessee Gas Litigation" and Management's
Discussion and Analysis.
(4) Income before income taxes plus fixed charges divided by fixed charges.
Fixed charges consist of interest expense and a portion of rent considered
to represent interest cost.
(5) Includes an approximately $56 million net receivable from Tennessee Gas at
December 31, 1995 that is the subject of litigation. See "Risk
Factors -- Tennessee Gas Litigation" and Management's Discussion and
Analysis.
27
<PAGE> 28
THE EXCHANGE OFFER
GENERAL
In connection with the sale of the Old Notes, the purchasers thereof became
entitled to the benefits of certain registration rights under the Registration
Rights Agreement. The Exchange Notes are being offered hereunder in order to
satisfy the obligations of the Company under the Registration Rights Agreement.
See "Registration Rights Agreement."
For each $1,000 principal amount of Old Notes surrendered to the Parent
pursuant to the Exchange Offer, the holder of such Old Notes will receive $1,000
principal amount of Exchange Notes. Upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, the
Parent will accept all Old Notes properly tendered prior to 5:00 p.m., New York
City time, on the Expiration Date. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer in integral multiples of $1,000 principal
amount.
Under existing interpretations of the staff of the SEC, including Exxon
Capital Holdings Corporation, SEC No-Action Letter (available April 13, 1989),
Morgan Stanley & Co. SEC No-Action Letter (available June 5, 1991) (the "Morgan
Stanley Letter") and Mary Kay Cosmetics, Inc., SEC No-Action Letter (available
June 5, 1991), the Company believes that the Exchange Notes would in general be
freely transferable after the Exchange Offer without further registration under
the Securities Act by the respective holders thereof (other than a "Restricted
Holder," being (i) a broker-dealer who purchased Old Notes exchanged for such
Exchange Notes directly from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business and such holders is not
participating in, and has no arrangement with any person to participate in, the
distribution (within the meaning of the Securities Act) of such Exchange Notes.
Eligible holders wishing to accept the Exchange Offer must represent to the
Parent that such conditions have been met. Any holder of Old Notes who tenders
in the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes could not rely on the interpretation by the staff of the SEC
enunciated in the Morgan Stanley Letter and similar no-action letters, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including that (i) it is neither an affiliate of the Parent nor a broker-dealer
tendering Old Notes acquired directly from the Parent for its own account, (ii)
any Exchange Notes to be received by it are being acquired in the ordinary
course of its business and (iii) it is not participating in, and it has no
arrangement with any person to participate in, the distribution (within the
meaning of the Securities Act) of the Exchange Notes. In addition, in connection
with any resales of Exchange Notes, any broker-dealer (a "Participating
Broker-Dealer") who acquired Old Notes for its own account as a result of
market-making activities or other trading activities must acknowledge that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. The staff of the SEC has
taken the position in no-action letters issued to third parties including
Shearman & Sterling, SEC No-Action Letter (available July 2, 1993), that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the Exchange Notes (other than a resale of an unsold allotment
from the original sale of Old Notes) with this Prospectus, as it may be amended
or supplemented from time to time. Under the Registration Rights Agreement, the
Company is required to allow Participating Broker-Dealers to use this
Prospectus, as it may be amended or supplemented from time to time, in
connection with the resale of such Exchange Notes. See "Plan of Distribution."
The Exchange Offer shall be deemed to have been consummated upon the
earlier to occur of (i) the Parent having exchanged Exchange Notes for all
outstanding Old Notes (other than Old Notes held by a Restricted Holder)
pursuant to the Exchange Offer and (ii) the Parent having exchanged, pursuant to
the Exchange Offer, Exchange Notes for all Old Notes that have been tendered and
not withdrawn on the date that is 30 days following the commencement of the
Exchange Offer. In such event, holders of Old Notes
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<PAGE> 29
seeking liquidity in their investment would have to rely on exemptions to
registration requirements under the securities laws, including the Securities
Act.
As of the date of this Prospectus, $150,000,000 principal amount of Old
Notes are issued and outstanding. In connection with the issuance of the Old
Notes, the Parent arranged for the Old Notes to be eligible for trading in the
Private Offering, Resale and Trading through Automated Linkages (PORTAL) Market,
the National Association of Securities Dealers' screen based, automated market
trading of securities eligible for resale under Rule 144A.
The Parent shall be deemed to have accepted for exchange validly tendered
Old Notes when, as and if the Parent has given oral or written notice thereof to
the Exchange Agent. See "-- Exchange Agent." The Exchange Agent will act as
agent for the tendering holders of Old Notes for the purpose of receiving
Exchange Notes from the Parent and delivering Exchange Notes to such holders. If
any tendered Old Notes are not accepted for exchange because of an invalid
tender or the occurrence of certain other events set forth herein, certificates
for any such unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of May 8, 1996.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean June 5, 1996 unless the Parent, in
its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. In order to extend the Expiration Date, the Parent will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Parent is extending the
Exchange Offer for a specified period of time. The Parent reserves the right (i)
to delay acceptance of any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer and to refuse to accept Old Notes not previously
accepted, if any of the conditions set forth herein under "--Termination" shall
have occurred and shall not have been waived by the Parent (if permitted to be
waived by the Parent), by giving oral or written notice of such delay, extension
or termination to the Exchange Agent, and (ii) to amend the terms of the
Exchange Offer in any manner deemed by it to be advantageous to the holders of
the Old Notes. Any such delay in acceptance, extension, termination or amendment
will be followed as promptly as practicable by oral or written notice thereof.
If the Exchange Offer is amended in a manner determined by the Parent to
constitute a material change, the Parent will promptly disclose such amendment
in a manner reasonably calculated to inform the holders of the Old Notes of such
amendment. Without limiting the manner in which the Parent may choose to make
public announcements of any delay in acceptance, extension, termination or
amendment of the Exchange Offer, the Parent shall have no obligation to publish,
advertise, or otherwise communicate any such public announcement, other than by
making a timely release to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest payable semi-annually on January 15
and July 15 of each year, commencing July 15, 1996. Holders of Exchange Notes of
record on July 1, 1996 will receive interest on July 15, 1996 from the date of
issuance of the Exchange Notes, plus an amount equal to the accrued interest on
the Old Notes from the date of issuance of the Old Notes, January 25, 1996, to
the date of exchange thereof. Consequently, assuming the Exchange Offer is
consummated prior to the record date in respect of the July 15, 1996 interest
payment for the Old Notes, holders who exchange their Old Notes for Exchange
Notes will receive the same interest payment on July 15, 1996 that they would
have received had they not accepted
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<PAGE> 30
the Exchange Offer. Interest on the Old Notes accepted for exchange will cease
to accrue upon issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes and any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. The tender by a holder of Old
Notes will constitute an agreement between such holder and the Parent in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal. Delivery of all documents must be made to the
Exchange Agent at its address set forth herein. Holders may also request that
their respective brokers, dealers, commercial banks, trust companies or nominees
effect such tender for such holders. The method of delivery of Old Notes and the
Letter of Transmittal and all other required documents to the Exchange Agent is
at the election and risk of the holders. Instead of delivery by mail, it is
recommended that holders use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. No Letter of
Transmittal or Old Notes should be sent to the Parent. Only a holder of Old
Notes may tender such Old Notes in the Exchange Offer. The term "holder" with
respect to the Exchange Offer means any person in whose name Old Notes are
registered on the books of the Parent or any other person who has obtained a
properly completed stock power from the registered holder.
Any beneficial holder whose Old Notes are registered in the name of such
holder's broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on behalf of the registered holder. If such
beneficial holder wishes to tender directly, such beneficial holder must, prior
to completing and executing the Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in such holder's name or obtain a properly completed bond power from the
registered holder. The transfer of record ownership may take considerable time.
If the Letter of Transmittal is signed by the record holder(s) of the Old Notes
tendered thereby, the signature must correspond with the name(s) written on the
face of the Old Notes without alteration, enlargement or any change whatsoever.
If the Letter of Transmittal is signed by a participant in DTC, the signature
must correspond with the name as it appears on the security position listing as
the holder of the Old Notes. Signatures on a Letter of Transmittal or a notice
of withdrawal, as the case may be, must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution")
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder (or by a participant in DTC whose name appears on a security position
listing as the owner) who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
and the Exchange Notes are being issued directly to such registered holder (or
deposited into the participant's account at DTC) or (ii) for the account of an
Eligible Institution. If the Letter of Transmittal is signed by a person other
than the registered holder of any Old Notes listed therein, such Old Notes must
be endorsed or accompanied by appropriate bond powers which authorize such
person to tender the Old Notes on behalf of the registered holder, in either
case signed as the name of the registered holder or holders appears on the Old
Notes. If the Letter of Transmittal or any Old Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Parent,
evidence satisfactory to the Parent of their authority to so act must be
submitted with the Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Old Notes
(or a timely confirmation received of a book-entry transfer of Old Notes into
the Exchange Agent's account at DTC) or a Notice of Guaranteed Delivery from an
Eligible Institution is received by the Exchange Agent. Issuances of Exchange
Notes in exchange for Old Notes tendered pursuant to a Notice of Guaranteed
Delivery by an Eligible Institution will be made only
30
<PAGE> 31
against delivery of the Letter of Transmittal (and any other required documents)
and the tendered Old Notes (or a timely confirmation received of a book-entry
transfer of Old Notes into the Exchange Agent's account at DTC) with the
Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Parent in its sole discretion, which determination will be final and
binding. The Parent reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Parent's acceptance of which would,
in the opinion of the Parent or its counsel, be unlawful. The Parent also
reserves the absolute right to waive any conditions of the Exchange Offer or
defects or irregularities in tender as to particular Old Notes. The Parent's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Parent shall determine.
Neither the Parent, the Exchange Agent nor any other person shall be under any
duty to give notification of defects or irregularities with respect to tenders
of Old Notes nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering holder of such Old Notes unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date. In addition, the Parent reserves the right in its sole
discretion to (i) purchase or make offers for any Old Notes that remain
outstanding subsequent to the Expiration Date, or, as set forth under
"-- Termination," to terminate the Exchange Offer and (ii) to the extent
permitted by applicable law, purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
may differ from the terms of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Old Notes
at DTC within two business days after the date of this Prospectus, and any
financial institution which is a participant in DTC may make book-entry delivery
of the Old Notes by causing DTC to transfer such Old Notes into the Exchange
Agent's account in accordance with DTC's procedure for such transfer. Although
delivery of Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, the Letter of Transmittal, with any required
signature guarantees and any other required documents, must in any case be
transmitted to and received by the Exchange Agent on or prior to the Expiration
Date at one of its addresses set forth below under "-- Exchange Agent", or the
guaranteed delivery procedure described below must be complied with. DELIVERY OF
DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All
references in this Prospectus to deposit or delivery of Old Notes shall be
deemed to include DTC's book-entry delivery method.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or who cannot complete the procedure for book-entry transfer on
a timely basis, may effect a tender if: (i) the tender is made by or through an
Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Old Notes, the
registration number or numbers of such Old Notes (if applicable), and the total
principal amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within five business days after the Expiration
Date, the Letter of Transmittal, together with the Old Notes in proper form for
transfer (or a confirmation of a book-entry transfer into the Exchange Agent's
account at DTC) and any other documents required by the Letter of Transmittal,
will be deposited by the Eligible Institution with the Exchange Agent; and (iii)
such properly completed and executed Letter of Transmittal, together with the
certificate(s) representing all tendered Old Notes in proper
31
<PAGE> 32
form for transfer (or a confirmation of such a book-entry transfer) and all
other documents required by the Letter of Transmittal are received by the
Exchange Agent within five business days after the Expiration Date.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain terms and
conditions which are summarized below and are part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that such holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of the Exchange Notes, and that such holder
is not a Restricted Holder.
Old Notes tendered in exchange for Exchange Notes (or a timely confirmation
of a book-entry transfer of such Old Notes into the Exchange Agent's account at
DTC) must be received by the Exchange Agent, with the Letter of Transmittal and
any other required documents, by the Expiration Date or within the time periods
set forth above pursuant to a Notice of Guaranteed Delivery from an Eligible
Institution. Each holder tendering the Old Notes for exchange sells, assigns and
transfers the Old Notes to the Exchange Agent, as agent of the Parent, and
irrevocably constitutes and appoints the Exchange Agent as the holder's agent
and attorney-in-fact to cause the Old Notes to be transferred and exchanged. The
holder warrants that it has full power and authority to tender, exchange, sell,
assign and transfer the Old Notes and to acquire the Exchange Notes issuable
upon the exchange of such tendered Old Notes, that the Exchange Agent, as agent
of the Company, will acquire good and unencumbered title to the tendered Old
Notes, free and clear of all liens, restrictions, charges and encumbrances, and
that the Old Notes tendered for exchange are not subject to any adverse claims
when accepted by the Exchange Agent, as agent of the Parent. The holder also
warrants and agrees that it will, upon request, execute and deliver any
additional documents deemed by the Company or the Exchange Agent to be necessary
or desirable to complete the exchange, sale, assignment and transfer of the Old
Notes. All authority conferred or agreed to be conferred in the Letter of
Transmittal by the holder will survive the death, incapacity or dissolution of
the holder and any obligation of the holder shall be binding upon the heirs,
personal representatives, successors and assigns of such holder.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day prior to
the Expiration Date, unless previously accepted for exchange. To withdraw a
tender of Old Notes in the Exchange Offer, a written or facsimile transmission
notice of withdrawal must be received by the Exchange Agent at its address set
forth herein prior to 5:00 p.m., New York City time, on the business day prior
to the Expiration Date and prior to acceptance for exchange thereof by the
Parent. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including, if applicable, the registration number
or numbers and total principal amount of such Old Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Old Notes to register the transfer of
such Old Notes into the name of the Depositor withdrawing the tender, (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor and (v) if applicable because the Old Notes have been
tendered pursuant to the book-entry procedures, specify the name and number of
the participant's account at DTC to be credited, if different than that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such withdrawal notices will be determined by the Parent,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer.
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<PAGE> 33
Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange any Old Notes not theretofore accepted for
exchange, and may terminate the Exchange Offer if it determines that the
Exchange Offer violates any applicable law or interpretation of the staff of the
SEC.
If the Parent determines that it may terminate the Exchange Offer, as set
forth above, the Parent may (i) refuse to accept any Old Notes and return any
Old Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the Expiration of the
Exchange Offer, subject to the rights of such holders of tendered Old Notes to
withdraw their tendered Old Notes or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered Old Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Parent will disclose such change by means of a supplement to
this Prospectus that will be distributed to each registered holder of Old Notes,
and the Parent will extend the Exchange Offer for a period of five to ten
business days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders of the Old Notes, if the Exchange Offer
would otherwise expire during such period. Holders of Old Notes will have
certain rights against the Company under the Registration Rights Agreement
should the Parent fail to consummate the Exchange Offer. See "Registration
Rights Agreement."
EXCHANGE AGENT
Fleet National Bank of Connecticut has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Mail:
Fleet National Bank
777 Main Street
MSN CT/MO/0224
Hartford, Connecticut 06115
Attention: Corporate Trust Operations
By Hand or Overnight Courier:
Fleet National Bank
777 Main Street
MSN CT/MO/0224
Hartford, Connecticut 06115
Attention: Corporate Trust Operations
Facsimile Transmission: (860) 986-7908
Confirm by Telephone: (860) 986-1271
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or telephone. The Company will not make any payments to brokers,
dealers or other persons soliciting acceptances of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse the Exchange Agent for its reasonable out-
of-pocket expenses in connection therewith. The Company may also pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding
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<PAGE> 34
copies of this Prospectus, Letters of Transmittal and related documents to the
beneficial owners of the Old Notes and in handling or forwarding tenders for
exchange.
The other expenses incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees, will be paid by the Company. The Company will pay all transfer
taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange
Offer. If, however, Exchange Notes or Old Notes not tendered or accepted for
exchange are to be delivered to, or are to be registered or issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
upon the consummation of the Exchange Offer. The expenses of the Exchange Offer
will be amortized by the Company over the term of the Exchange Notes under
generally accepted accounting principles.
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<PAGE> 35
DESCRIPTION OF THE NOTES
The Exchange Notes will be issued and the Old Notes were issued under an
indenture (the "Indenture") dated as of January 15, 1996 among the Company, as
issuer, Enercorp Gas Marketing, Inc., KCS Resources, Inc., KCS Michigan
Resources, Inc., KCS Pipeline Systems, Inc., KCS Energy Marketing, Inc., KCS
Power Marketing, Inc., KCS Energy Risk Management, Inc., National Enerdrill
Corporation and Proliq, Inc., as Subsidiary Guarantors, and Fleet National Bank,
as trustee (the "Trustee"). Old Notes were issued under the Indenture on January
25, 1996 in an aggregate principal amount of $150 million. References to the
Notes include the Old Notes and the Exchange Notes unless the context otherwise
requires. The Indenture is subject to and governed by the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The following summary of certain
provisions of the Indenture and of the Registration Rights Agreement does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all of the provisions of the Indenture, including the definitions
of certain terms contained therein and those terms that are made a part of the
Indenture by reference to the Trust Indenture Act and of the Registration Rights
Agreement, respectively. Copies of the Indenture and the Registration Rights
Agreement are filed as exhibits to the Form 8-K. See "Incorporation of Certain
Documents by Reference." Capitalized terms not otherwise defined below or
elsewhere in this Prospectus have the meanings given to them in the Indenture.
The definitions of certain capitalized terms used in the following summary are
set forth below under "-- Certain Definitions."
As used in this "Description of the Notes," the term "Company" refers only
to KCS Energy, Inc.
GENERAL
The Notes will be senior unsecured obligations of the Company limited to
$150 million aggregate principal amount. The Notes will be issued only in
registered form, without coupons, in denominations of $1,000 and integral
multiples thereof. Principal of, premium, if any, and interest on the Notes will
be payable, and the Notes will be transferable, at the office or agency of the
Company in the City of New York maintained for such purposes, which initially
will be the corporate trust office or agency of the Trustee maintained at
Shawmut Trust Company, c/o First Chicago Trust Company of New York, 14 Wall
Street, 8th Floor, Window #2, New York, New York 10005. In addition, in the
event the Notes do not remain in book-entry form, interest may be paid, at the
option of the Company, by check mailed to the registered holders of the Notes at
their respective addresses as shown on the Note Register, subject to the right
of any holder of Notes in the principal amount of $500,000 or more to request
payment by wire transfer. No service charge will be made for any transfer,
exchange or redemption of the Notes, but the Company or the Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be payable in connection therewith.
The obligations of the Company under the Notes will be guaranteed on a
senior unsecured basis by the Subsidiary Guarantors. See "-- Subsidiary
Guarantees of Notes."
Any Old Notes that remain outstanding after the completion of the Exchange
Offer, together with the Exchange Notes issued in connection with the Exchange
Offer, will be treated as a single class of securities under the Indenture.
MATURITY, INTEREST AND PRINCIPAL PAYMENTS
The Notes will mature on January 15, 2003. Interest on the Notes will
accrue from January 25, 1996 at the rate of 11% per annum and will be payable
semiannually in cash on January 15 and July 15 of each year, commencing July 15,
1996, to the Persons in whose name the Notes are registered in the Note Register
at the close of business on the January 1 or July 1 next preceding such interest
payment date. Holders of Exchange Notes of record on July 1, 1996 will receive
interest on July 15, 1996 from the date of issuance of the Exchange Notes, plus
an amount equal to the accrued interest on the Old Notes from the date of
issuance of the Old Notes, January 25, 1996, to the date of exchange thereof.
The interest rate on the Notes is subject to increase if the Company fails to
satisfy certain provisions of the Registration Rights Agreement. See
"Registration Rights Agreement." Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
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<PAGE> 36
REDEMPTION
Optional Redemption. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after January 15, 2000, upon not
less than 30 or more than 60 days' notice, at the redemption prices (expressed
as percentages of principal amount) set forth below, plus accrued and unpaid
interest, if any, to the date of redemption (subject to the right of Holders of
record on the relevant record date to receive interest due on an interest
payment date that is on or prior to the date of redemption), if redeemed during
the 12-month period beginning on January 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------------------------------------------- ----------
<S> <C>
2000...................................................... 105.50%
2001...................................................... 102.75%
2002 and thereafter....................................... 100.00%
</TABLE>
In the event that less than all of the Notes are to be redeemed, the particular
Notes (or any portion thereof that is an integral multiple of $1,000) to be
redeemed shall be selected not less than 30 nor more than 60 days prior to the
date of redemption by the Trustee, from the outstanding Notes not previously
called for redemption, pro rata, by lot or by any other method the Trustee shall
deem fair and appropriate.
Notwithstanding the foregoing, at any time on or prior to January 15, 1999,
up to $35 million in aggregate principal amount of Notes will be redeemable, at
the option of the Company, from the Net Cash Proceeds of a Public Equity
Offering, at a redemption price equal to 111% of the principal amount thereof,
together with accrued and unpaid interest to the date of redemption, provided
that at least $115 million in aggregate principal amount of Notes remains
outstanding immediately after such redemption and that such redemption occurs
within 60 days following the closing of such Public Equity Offering.
Offers to Purchase. As described below, (a) upon the occurrence of a Change
of Control, the Company will be obligated to make an offer to purchase all
outstanding Notes at a purchase price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase and (b) upon certain sales or other dispositions of assets, the Company
may be obligated to make offers to purchase Notes with a portion of the Net
Available Proceeds of such sales or other dispositions at a purchase price equal
to 100% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. See "-- Certain Covenants -- Change
of Control" and "-- Limitation on Asset Sales."
RANKING
The Notes will be senior unsecured obligations of the Company and will rank
pari passu in right of payment with all existing and future senior Indebtedness
of the Company, and senior in right of payment to all future Subordinated
Indebtedness of the Company. At March 31, 1996, excluding the Old Notes and the
Company's guaranties of the Bank Credit Facilities, the Company had no senior
Indebtedness outstanding. See "Capitalization." The Notes and the Subsidiary
Guarantees, however, will be effectively subordinated to secured Indebtedness of
the Company and the Subsidiary Guarantors, respectively, with respect to the
assets securing such Indebtedness, including Indebtedness of certain of the
Subsidiary Guarantors under the Bank Credit Facilities which is secured by liens
on substantially all of the assets of such Subsidiary Guarantors and guaranteed
by the Company. As of March 31, 1996, approximately $27.3 million of
Indebtedness was outstanding under the Bank Credit Facilities, not including
$11.1 million reserved pursuant to existing letters of credit. See
"Capitalization" and Management's Discussion and Analysis. Subject to certain
limitations, the Company and its Subsidiaries may incur additional Indebtedness
in the future. See "-- Certain Covenants -- Limitation on Indebtedness and
Disqualified Capital Stock."
SUBSIDIARY GUARANTEES OF NOTES
Each Subsidiary Guarantor has agreed to unconditionally guarantee, jointly
and severally, to each Holder and the Trustee, the full and prompt performance
of the Company's obligations under the Indenture and the Notes, including the
payment of principal of, premium, if any, and interest on the Notes pursuant to
its
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Subsidiary Guarantee. The initial Subsidiary Guarantors are currently all of the
Company's subsidiaries. In addition to the initial Subsidiary Guarantors, the
Company is obligated under the Indenture to cause each Restricted Subsidiary
that becomes, or comes into existence as, a Restricted Subsidiary after the date
of the Indenture and has assets, businesses, divisions, real property or
equipment with a fair market value (as determined in good faith by the Board of
Directors of the Company) in excess of $1 million to execute and deliver a
supplement to the Indenture pursuant to which such Restricted Subsidiary will
guarantee the payment of the Notes on the same terms and conditions as the
Subsidiary Guarantees by the initial Subsidiary Guarantors.
The Subsidiary Guarantees will be senior unsecured obligations of each
respective Subsidiary Guarantor and will rank pari passu in right of payment
with all existing and future senior Indebtedness of such Subsidiary Guarantor.
However, the Subsidiary Guarantees will be effectively subordinated to secured
Indebtedness of the Subsidiary Guarantors, with respect to the assets securing
such Indebtedness, including Indebtedness of certain Subsidiary Guarantors under
the Bank Credit Facilities which is secured by liens on substantially all of
their assets.
The obligations of each Subsidiary Guarantor will be limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. Each Subsidiary Guarantor that makes a
payment or distribution under a Subsidiary Guarantee shall be entitled to a
contribution from each other Subsidiary Guarantor in a pro rata amount based on
the Adjusted Net Assets of each Subsidiary Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell or
otherwise dispose of all or substantially all of its properties and assets to
the Company or another Subsidiary Guarantor without limitation, except to the
extent any such transaction is subject to the "Merger, Consolidation and Sale of
Assets" covenant of the Indenture. Each Subsidiary Guarantor may consolidate
with or merge into or sell all or substantially all of its properties and assets
to a Person other than the Company or another Subsidiary Guarantor (whether or
not affiliated with the Subsidiary Guarantor), provided that (a) if the
surviving Person is not the Subsidiary Guarantor, the surviving Person agrees to
assume such Subsidiary Guarantor's Subsidiary Guarantee and all its obligations
pursuant to the Indenture (except to the extent the following paragraph would
result in the release of such Subsidiary Guarantee) and (b) such transaction
does not (i) violate any of the covenants described below under "-- Certain
Covenants" or (ii) result in a Default or Event of Default immediately
thereafter that is continuing.
Upon the sale or other disposition (by merger or otherwise) of a Subsidiary
Guarantor (or all or substantially all of its properties and assets) to a Person
other than the Company or another Subsidiary Guarantor and pursuant to a
transaction that is otherwise in compliance with the Indenture (including as
described in the foregoing paragraph), such Subsidiary Guarantor shall be deemed
released from its Subsidiary Guarantee and the related obligations set forth in
the Indenture; provided, however, that any such termination shall occur only to
the extent that all obligations of such Subsidiary Guarantor under all of its
guarantees of, and under all of its pledges of assets or other security
interests which secure, other Indebtedness of the Company or any Restricted
Subsidiary shall also terminate or be released upon such sale or other
disposition. Each Subsidiary Guarantor that is designated as an Unrestricted
Subsidiary in accordance with the Indenture shall be released from its
Subsidiary Guarantee and related obligations set forth in the Indenture for so
long as it remains an Unrestricted Subsidiary.
Separate financial statements of the Subsidiary Guarantors have not been
provided because the Subsidiary Guarantors are jointly and severally liable for
the obligations of the Company under the Notes and the aggregate assets,
earnings and equity of the Subsidiary Guarantors are substantially equivalent to
the consolidated assets, earnings and equity of the Company.
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CERTAIN COVENANTS
The Indenture contains, among others, the covenants described below.
Limitation on Indebtedness and Disqualified Capital Stock. (a) The Company
will not, and will not permit any of its Restricted Subsidiaries to, create,
incur, issue, assume, guarantee or in any manner become directly or indirectly
liable for the payment of (collectively, "incur") any Indebtedness (including
any Acquired Indebtedness but excluding any Permitted Indebtedness) or any
Disqualified Capital Stock, unless, on a pro forma basis after giving effect to
such incurrence and the application of the proceeds therefrom, the Consolidated
EBITDA Coverage Ratio for the four full quarters immediately preceding such
event, taken as one period, would have been equal to or greater than 2.5 to 1.0.
(b) The Company will not incur any Indebtedness that is expressly
subordinated to any other Indebtedness of the Company unless such Indebtedness,
by its terms or the terms of any agreement or instrument pursuant to which such
Indebtedness is issued or outstanding, is also expressly made subordinate to the
Notes at least to the extent it is subordinated to such other Indebtedness.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any other distribution to
holders of, any shares of Capital Stock of the Company (other than
dividends or distributions payable solely in shares of Qualified Capital
Stock of the Company or in options, warrants or other rights to purchase
Qualified Capital Stock of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any Affiliate thereof (other than any
Restricted Subsidiary) or any options, warrants or other rights to acquire
such Capital Stock;
(iii) make any principal payment on or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, scheduled sinking fund payment or maturity, any Subordinated
Indebtedness, except in any case out of the net cash proceeds of Permitted
Refinancing Indebtedness; or
(iv) make any Restricted Investment;
(such payments or other actions described in clauses (i) through (iv) being
collectively referred to as "Restricted Payments"), unless at the time of and
after giving effect to the proposed Restricted Payment (the amount of any such
Restricted Payment, if other than cash, shall be the amount determined by the
Board of Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution),
(1) no Default or Event of Default shall have occurred and be
continuing,
(2) the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) in accordance with paragraph (a) of the
"-- Limitation on Indebtedness and Disqualified Capital Stock" covenant,
and
(3) the aggregate amount of all Restricted Payments declared or made
after the date of the Indenture shall not exceed the sum (without
duplication) of the following:
(A) 50% of the Consolidated Net Income of the Company accrued on a
cumulative basis during the period beginning on October 1, 1995 and
ending on the last day of the Company's last fiscal quarter ending prior
to the date of such proposed Restricted Payment (or, if such
Consolidated Net Income is a loss, minus 100% of such loss), without
giving effect to any reduction in such Consolidated Net Income resulting
from a write-off of any account receivable, or similar non-cash charge,
arising under the Tennessee Gas Contract,
(B) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Restricted Subsidiaries) of shares of Qualified
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Capital Stock of the Company or any options, warrants or rights to
purchase such shares of Qualified Capital Stock of the Company,
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Restricted
Subsidiaries) upon the exercise of any options, warrants or rights to
purchase shares of Qualified Capital Stock of the Company,
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Restricted Subsidiaries) of Indebtedness or shares of Disqualified
Capital Stock that have been converted into or exchanged for Qualified
Capital Stock of the Company, together with the aggregate cash received
by the Company at the time of such conversion or exchange,
(E) to the extent not otherwise included in Consolidated Net
Income, the net reduction in Investments in Unrestricted Subsidiaries
resulting from dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or a Restricted
Subsidiary after the date of the Indenture from any Unrestricted
Subsidiary or from the redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary (valued in each case as provided in the definition
of Investment), not to exceed in the case of any Unrestricted Subsidiary
the total amount of Investments (other than Permitted Investments) in
such Unrestricted Subsidiary made by the Company and its Restricted
Subsidiaries in such Unrestricted Subsidiary after the date of the
Indenture, and
(F) $10 million.
(b) Notwithstanding paragraph (a) above, the Company and its Restricted
Subsidiaries may take the following actions so long as (in the case of clauses
(ii) and (iii) below) no Default or Event of Default shall have occurred and be
continuing:
(i) the payment of any dividend on any Capital Stock of the Company
within 60 days after the date of declaration thereof, if at such
declaration date such declaration complied with the provisions of paragraph
(a) above (and such payment shall be deemed to have been paid on such date
of declaration for purposes of any calculation required by the provisions
of paragraph (a) above);
(ii) the repurchase, redemption or other acquisition or retirement of
any shares of any class of Capital Stock of the Company or any Restricted
Subsidiary, in exchange for, or out of the aggregate Net Cash Proceeds
from, a substantially concurrent issuance and sale (other than to a
Restricted Subsidiary) of shares of Qualified Capital Stock of the Company;
and
(iii) the purchase, redemption, repayment, defeasance or other
acquisition or retirement for value of any Subordinated Indebtedness in
exchange for, or out of the aggregate Net Cash Proceeds from, a
substantially concurrent issuance and sale (other than to a Restricted
Subsidiary) of shares of Qualified Capital Stock of the Company.
The actions described in clauses (i), (ii) and (iii) of this paragraph (b) shall
be Restricted Payments that shall be permitted to be made in accordance with
this paragraph (b) but shall reduce the amount that would otherwise be available
for Restricted Payments under clause (3) of paragraph (a), provided that any
dividend paid pursuant to clause (i) of this paragraph (b) shall reduce the
amount that would otherwise be available under clause (3) of paragraph (a) when
declared, but not also when subsequently paid pursuant to such clause (i).
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Company (i) will not permit any Restricted Subsidiary to issue
or sell any Capital Stock to any Person other than the Company or another
Restricted Subsidiary and (ii) will not permit any Person other than the Company
or a Restricted Subsidiary to own any Capital Stock of any Restricted
Subsidiary.
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Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into,
assume, guarantee or otherwise become liable with respect to any Sale/Leaseback
Transaction unless the Company or such Restricted Subsidiary, as the case may
be, would be able to incur Indebtedness (not including the incurrence of
Permitted Indebtedness) in an amount equal to the Attributable Indebtedness with
respect to such Sale/Leaseback Transaction pursuant to paragraph (a) of the
"Limitation on Indebtedness and Disqualified Capital Stock" covenant, the
Company or such Restricted Subsidiary receives proceeds from such Sale/Leaseback
Transaction at least equal to the fair market value of the property or assets
subject thereto (as determined in good faith by the Company's Board of
Directors, whose determination in good faith and evidenced by a board resolution
will be conclusive) and the Company applies an amount in cash equal to the Net
Available Proceeds of the Sale/Leaseback Transaction in accordance with the
provisions of the "Limitation on Asset Sales" covenant as if such Sale/Leaseback
Transaction were an Asset Sale.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets or property
or the rendering of any services) with, or for the benefit of, any Affiliate of
the Company (other than the Company or a Restricted Subsidiary), unless (i) such
transaction or series of transactions is on terms that are no less favorable to
the Company or such Restricted Subsidiary, as the case may be, than those that
would be available in a comparable arm's length transaction with unrelated third
parties, (ii) with respect to any one transaction or series of transactions
involving aggregate payments in excess of $1 million, the Company delivers an
Officers' Certificate to the Trustee certifying that such transaction or series
of transactions complies with clause (i) above and that such transaction or
series of transactions has been approved by a majority of the Disinterested
Directors of the Company, and (iii) with respect to any one transaction or
series of transactions involving aggregate payments in excess of $10 million,
the Officers' Certificate referred to in clause (ii) above also certifies that
the Company has obtained a written opinion from an independent nationally
recognized investment banking firm or appraisal firm specializing or having a
speciality in the type and subject matter of the transaction or series of
transactions at issue, which opinion shall be to the effect set forth in clause
(i) above or shall state that such transaction or series of transactions is fair
from a financial point of view to the Company or such Restricted Subsidiary;
provided, however, that the foregoing restriction shall not apply to (w) loans
or advances to officers, directors and employees of the Company or any
Restricted Subsidiary made in the ordinary course of business and consistent
with past practices of the Company and its Restricted Subsidiaries in an
aggregate amount not to exceed $1 million outstanding at any one time, (x)
indemnities of officers, directors and employees of the Company or any
Restricted Subsidiary permitted by bylaw or statutory provisions, (y) the
payment of reasonable and customary regular fees to directors of the Company or
any of its Restricted Subsidiaries who are not employees of the Company or any
Affiliate and (z) the Company's employee compensation and other benefit
arrangements.
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume, affirm
or suffer to exist or become effective any Lien of any kind, except for
Permitted Liens, upon any of their respective property or assets, whether now
owned or acquired after the date of the Indenture, or any income, profits or
proceeds therefrom, to secure (a) any Indebtedness of the Company or such
Restricted Subsidiary (if it is not also a Subsidiary Guarantor), unless prior
to, or contemporaneously therewith, the Notes are equally and ratably secured,
or (b) any Indebtedness of any Subsidiary Guarantor, unless prior to, or
contemporaneously therewith, the Subsidiary Guarantees are equally and ratably
secured; provided, however, that if such Indebtedness is expressly subordinated
to the Notes or the Subsidiary Guarantees, the Lien securing such Indebtedness
will be subordinated and junior to the Lien securing the Notes or the Subsidiary
Guarantees, as the case may be, with the same relative priority as such
Indebtedness has with respect to the Notes or the Subsidiary Guarantees. The
foregoing covenant will not apply to any Lien securing Acquired Indebtedness,
provided that any such Lien extends only to the property or assets that were
subject to such Lien prior to the related acquisition by the Company or such
Restricted Subsidiary and was not created, incurred or assumed in contemplation
of such transaction. The incurrence of additional secured Indebtedness by the
Company and its Restricted Subsidiaries is subject to further
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limitations on the incurrence of Indebtedness as described under "-- Limitation
on Indebtedness and Disqualified Capital Stock."
Change of Control. Upon the occurrence of a Change of Control, the Company
shall be obligated to make an offer to purchase all of the then outstanding
Notes (a "Change of Control Offer"), and shall purchase, on a Business Day (the
"Change of Control Purchase Date") not more than 60 nor less than 30 days
following such Change of Control, all of the then outstanding Notes validly
tendered pursuant to such Change of Control Offer, at a purchase price (the
"Change of Control Purchase Price") equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the Change of Control
Purchase Date. The Change of Control Offer is required to remain open for at
least 20 Business Days and until the close of business on the fifth Business Day
prior to the Change of Control Purchase Date.
In order to effect such Change of Control Offer, the Company shall, not
later than the 30th day after the Change of Control, give notice to the Trustee
and each Holder a notice of the Change of Control Offer, which notice shall
govern the terms of the Change of Control Offer and shall state, among other
things, the procedures that Holders must follow to accept the Change of Control
Offer.
The occurrence of a Change of Control may result in the lenders under the
Bank Credit Facilities having the right to require the Company to repay all
Indebtedness outstanding under the Bank Credit Facilities. There can be no
assurance that the Company will have adequate resources to repay or refinance
all Indebtedness owing under the Bank Credit Facilities or to fund the purchase
of the Notes upon a Change of Control.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if another Person makes the Change of Control Offer at the
same purchase price, at the same times and otherwise in substantial compliance
with the requirements applicable to a Change of Control Offer to be made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The Company intends to comply with Rule 14e-1 under the Exchange Act and
any other securities laws and regulations thereunder, if applicable, in the
event that a Change of Control occurs and the Company is required to purchase
Notes as described above. The existence of a Holder's right to require, subject
to certain conditions, the Company to repurchase its Notes upon a Change of
Control may deter a third party from acquiring the Company in a transaction that
constitutes, or results in, a Change of Control.
Limitation on Asset Sales. (a) The Company will not, and will not permit
any Restricted Subsidiary to, engage in any Asset Sale unless (i) the Company or
such Restricted Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets
and properties sold or otherwise disposed of pursuant to the Asset Sale (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and evidenced by a Board Resolution), (ii) at least 85% of the
consideration received by the Company or the Restricted Subsidiary, as the case
may be, in respect of such Asset Sale consists of cash, Cash Equivalents or
properties used in the Oil and Gas Business of the Company or its Restricted
Subsidiaries and (iii) the Company delivers to the Trustee an Officers'
Certificate certifying that such Asset Sale complies with clauses (i) and (ii).
The amount (without duplication) of any Indebtedness (other than Subordinated
Indebtedness) of the Company or such Restricted Subsidiary that is expressly
assumed by the transferee in such Asset Sale and with respect to which the
Company or such Restricted Subsidiary, as the case may be, is unconditionally
released by the holder of such Indebtedness, shall be deemed to be cash or Cash
Equivalents for purposes of clause (ii) and shall also be deemed to constitute a
repayment of, and a permanent reduction in, the amount of such Indebtedness for
purposes of the following paragraph.
(b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company or such Restricted Subsidiary may either, no later than 360 days
after such Asset Sale, (i) apply all or any of the Net Available Proceeds
therefrom to repay Indebtedness (other than Subordinated Indebtedness) of the
Company or any Restricted Subsidiary, provided, in each case, that the related
loan commitment (if any) is thereby permanently reduced by the amount of such
Indebtedness so repaid, or (ii) invest all or any part of the Net
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Available Proceeds thereof in properties and assets that will be used in the Oil
and Gas Business of the Company or its Restricted Subsidiaries, as the case may
be. The amount of such Net Available Proceeds not applied or invested as
provided in this paragraph will constitute "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals or exceeds $10
million, the Company will be required to make an offer to purchase, from all
Holders of the Notes, an aggregate principal amount of Notes equal to such
Excess Proceeds as follows:
(i) The Company will make an offer to purchase (a "Net Proceeds
Offer") from all Holders of the Notes in accordance with the procedures set
forth in the Indenture the maximum principal amount (expressed as a
multiple of $1,000) of Notes that may be purchased out of the amount (the
"Payment Amount") of such Excess Proceeds.
(ii) The offer price for the Notes will be payable in cash in an
amount equal to 100% of the principal amount of the Notes tendered pursuant
to a Net Proceeds Offer, plus accrued and unpaid interest, if any, to the
date such Net Proceeds Offer is consummated (the "Offered Price"), in
accordance with the procedures set forth in the Indenture. To the extent
that the aggregate Offered Price of the Notes tendered pursuant to a Net
Proceeds Offer is less than the Payment Amount relating thereto (such
shortfall constituting a "Net Proceeds Deficiency"), the Company may use
such Net Proceeds Deficiency, or a portion thereof, for general corporate
purposes, subject to the limitations of the "Limitation on Restricted
Payments" covenant.
(iii) If the aggregate Offered Price of Notes validly tendered and not
withdrawn by Holders thereof exceeds the Payment Amount, Notes to be
purchased will be selected on a pro rata basis.
(iv) Upon completion of such Net Proceeds Offer, the amount of Excess
Proceeds shall be reset to zero.
The Company will not permit any Restricted Subsidiary to enter into or suffer to
exist any agreement that would place any restriction of any kind (other than
pursuant to law or regulation) on the ability of the Company to make a Net
Proceeds Offer following any Asset Sale. The Company intends to comply with Rule
14e-1 under the Exchange Act, and any other securities laws and regulations
thereunder, if applicable, in the event that an Asset Sale occurs and the
Company is required to purchase Notes as described above.
Limitation on Guarantees by Subsidiary Guarantors. The Company will not
permit any Subsidiary Guarantor to guarantee the payment of any Subordinated
Indebtedness of the Company unless such guarantee shall be subordinated to such
Subsidiary Guarantor's Subsidiary Guarantee at least to the same extent as such
Subordinated Indebtedness is subordinated to the Notes; provided, however, that
this covenant will not be applicable to any guarantee of any Subsidiary
Guarantor that (i) existed at the time such Person became a Subsidiary of the
Company and (ii) was not incurred in connection with, or in contemplation of,
such Person becoming a Subsidiary of the Company.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or suffer to exist or allow to
become effective any consensual encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary (a) to pay dividends, in cash or otherwise,
or make any other distributions on its Capital Stock, or make payments on any
Indebtedness owed, to the Company or any other Restricted Subsidiary, (b) to
make loans or advances to the Company or any other Restricted Subsidiary or (c)
to transfer any of its property or assets to the Company or any other Restricted
Subsidiary (any such restrictions being collectively referred to herein as a
"Payment Restriction"), except for such encumbrances or restrictions existing
under or by reason of (i) customary provisions restricting subletting or
assignment of any lease governing a leasehold interest of the Company or any
Restricted Subsidiary, or customary restrictions in licenses relating to the
property covered thereby and entered into in the ordinary course of business,
(ii) any instrument governing Indebtedness of a Person acquired by the Company
or any Restricted Subsidiary at the time of such acquisition, which encumbrance
or restriction is not applicable to any other Person, other than the Person, or
the property or assets of the Person, so acquired, provided that such
Indebtedness was not incurred in
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anticipation of such acquisition or (iii) the Bank Credit Facilities as in
effect on the date of the Indenture or any agreement that amends, modifies,
supplements, restates, extends, renews, refinances or replaces the Bank Credit
Facilities, provided that the terms and conditions of any Payment Restrictions
thereunder are not materially less favorable to the Holders of the Notes than
those under the Bank Credit Facilities as in effect on the date of the
Indenture.
Limitation on Conduct of Business. The Company will not, and will not
permit any of its Restricted Subsidiaries to, engage in the conduct of any
business other than the Oil and Gas Business.
Reports. The Company will file on a timely basis with the Commission, to
the extent such filings are accepted by the Commission and whether or not the
Company has a class of securities registered under the Exchange Act, the annual
reports, quarterly reports and other documents that the Company would be
required to file if it were subject to Section 13 or 15 of the Exchange Act. The
Company will also be required (a) to file with the Trustee (with exhibits), and
provide to each Holder of Notes (without exhibits), without cost to such Holder,
copies of such reports and documents within 15 days after the date on which the
Company files such reports and documents with the Commission or the date on
which the Company would be required to file such reports and documents if the
Company were so required and (b) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the Exchange
Act, to supply at its cost copies of such reports and documents (including any
exhibits thereto) to any Holder of Notes promptly upon written request.
Future Designation of Restricted and Unrestricted Subsidiaries. The
foregoing covenants (including calculation of financial ratios and the
determination of limitations on the incurrence of Indebtedness and Liens) may be
affected by the designation by the Company of any existing or future Subsidiary
of the Company as an Unrestricted Subsidiary. The definition of "Unrestricted
Subsidiary" set forth under the caption "-- Certain Definitions" describes the
circumstances under which a Subsidiary of the Company may be designated as an
Unrestricted Subsidiary by the Board of Directors of the Company.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company will not, in any single transaction or series of related
transactions, merge or consolidate with or into any other Person, or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of the properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis to any Person or group of Affiliated Persons, and the Company
will not permit any of its Restricted Subsidiaries to enter into any such
transaction or series of transactions if such transaction or series of
transactions, in the aggregate, would result in the sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis to any other Person or group of Affiliated Persons, unless at
the time and after giving effect thereto (i) either (A) if the transaction is a
merger or consolidation, the Company shall be the surviving Person of such
merger or consolidation, or (B) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or to which the
properties and assets of the Company or its Restricted Subsidiaries, as the case
may be, are sold, assigned, conveyed, transferred, leased or otherwise disposed
of (any such surviving Person or transferee Person being the "Surviving Entity")
shall be a corporation organized and existing under the laws of the United
States of America, any state thereof or the District of Columbia and shall, in
either case, expressly assume by a supplemental indenture to the Indenture
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Notes and the Indenture, and, in each
case, the Indenture shall remain in full force and effect; (ii) immediately
before and immediately after giving effect to such transaction or series of
transactions on a pro forma basis (and treating any Indebtedness not previously
an obligation of Company or any of its Restricted Subsidiaries which becomes an
obligation of the Company or any of its Restricted Subsidiaries in connection
with or as a result of such transaction as having been incurred at the time of
such transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) except in the case of the consolidation or merger of any
Restricted Subsidiary with or into the Company, immediately after giving effect
to such transaction or transactions on a pro forma basis, the Consolidated Net
Worth of the Company (or the Surviving Entity if the Company is not the
continuing obligor under the Indenture) is at least equal to the
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Consolidated Net Worth of the Company immediately before such transaction or
transactions; (iv) except in the case of the consolidation or merger of the
Company with or into a Restricted Subsidiary or any Restricted Subsidiary with
or into the Company or another Restricted Subsidiary, immediately before and
immediately after giving effect to such transaction or transactions on a pro
forma basis (assuming that the transaction or transactions occurred on the first
day of the period of four fiscal quarters ending immediately prior to the
consummation of such transaction or transactions, with the appropriate
adjustments with respect to the transaction or transactions being included in
such pro forma calculation), the Company (or the Surviving Entity if the Company
is not the continuing obligor under the Indenture) could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
first paragraph of the "-- Limitation on Indebtedness and Disqualified Capital
Stock" covenant; (v) if the Company is not the continuing obligor under the
Indenture, then each Subsidiary Guarantor, unless it is the Surviving Entity,
shall have by supplemental indenture to the Indenture confirmed that its
Subsidiary Guarantee of the Notes shall apply to the Surviving Entity's
obligations under the Indenture and the Notes; (vi) if any of the properties or
assets of the Company or any of its Restricted Subsidiaries would upon such
transaction or series of related transactions become subject to any Lien (other
than a Permitted Lien), the creation and imposition of such Lien shall have been
in compliance with the "Limitation on Liens" covenant; and (vii) the Company (or
the Surviving Entity if the Company is not the continuing obligor under the
Indenture) shall have delivered to the Trustee, in form and substance reasonably
satisfactory to the Trustee, (a) an Officers' Certificate stating that such
consolidation, merger, transfer, lease or other disposition and any supplemental
indenture in respect thereto comply with the requirements under the Indenture
and (b) an Opinion of Counsel stating that the requirements of clause (i) of
this paragraph have been satisfied.
Upon any consolidation or merger or any sale, assignment, lease,
conveyance, transfer or other disposition of all or substantially all of the
properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis in accordance with the foregoing, in which the Company is not
the continuing corporation, the Surviving Entity shall succeed to, and be
substituted for, and may exercise every right and power of, the
Company under the Indenture with the same effect as if the Surviving Entity had
been named as the Company therein, and thereafter the Company, except in the
case of a lease, will be discharged from all obligations and covenants under the
Indenture and the Notes and may be liquidated and dissolved.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of the principal of or premium, if any, on
any of the Notes, whether such payment is due at Stated Maturity, upon
redemption, upon repurchase pursuant to a Change of Control Offer or a Net
Proceeds Offer, upon acceleration or otherwise; or
(ii) default in the payment of any installment of interest on any of
the Notes, when due, and the continuance of such default for a period of 30
days; or
(iii) default in the performance or breach of the provisions of the
"Merger, Consolidation and Sale of Assets" section of the Indenture, the
failure to make or consummate a Change of Control Offer in accordance with
the provisions of the "Change of Control" covenant or the failure to make
or consummate a Net Proceeds Offer in accordance with the provisions of the
"Limitation on Asset Sales" covenant; or
(iv) the Company or any Subsidiary Guarantor shall fail to perform or
observe any other term, covenant or agreement contained in the Notes, any
Subsidiary Guarantee or the Indenture (other than a default specified in
(i), (ii) or (iii) above) for a period of 45 days after written notice of
such failure stating that it is a "notice of default" under the Indenture
and requiring the Company or such Subsidiary Guarantor to remedy the same
shall have been given (x) to the Company by the Trustee or (y) to the
Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Notes then outstanding; or
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(v) the occurrence and continuation beyond any applicable grace period
of any default in the payment of the principal of, premium, if any, or
interest on any Indebtedness of the Company (other than the Notes) or any
Subsidiary Guarantor or any other Restricted Subsidiary for money borrowed
when due, or any other default resulting in acceleration of any
Indebtedness of the Company or any Subsidiary Guarantor or any other
Restricted Subsidiary for money borrowed, provided that the aggregate
principal amount of such Indebtedness shall exceed $2.5 million and
provided, further, that if any such default is cured or waived or any such
acceleration rescinded, or such Indebtedness is repaid, within a period of
10 days from the continuation of such default beyond the applicable grace
period or the occurrence of such acceleration, as the case may be, such
Event of Default under the Indenture and any consequential acceleration of
the Notes shall be automatically rescinded, so long as such rescission does
not conflict with any judgment or decree; or
(vi) any Subsidiary Guarantee shall for any reason cease to be, or be
asserted by the Company or any Subsidiary Guarantor, as applicable, not to
be, in full force and effect (except pursuant to the release of any such
Subsidiary Guarantee in accordance with the Indenture); or
(vii) final judgments or orders rendered against the Company or any
Subsidiary Guarantor or any other Restricted Subsidiary that are
unsatisfied and that require the payment in money, either individually or
in an aggregate amount, that is more than $2.5 million over the coverage
under applicable insurance policies and either (A) commencement by any
creditor of an enforcement proceeding upon such judgment (other than a
judgment that is stayed by reason of pending appeal or otherwise) or (B)
the occurrence of a 60-day period during which a stay of such judgment or
order, by reason of pending appeal or otherwise, was not in effect; or
(viii) the entry of a decree or order by a court having jurisdiction
in the premises (A) for relief in respect of the Company or any Subsidiary
Guarantor or any other Restricted Subsidiary in an involuntary case or
proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or (B) adjudging the Company or any
Subsidiary Guarantor or any other Restricted Subsidiary bankrupt or
insolvent, or approving a petition seeking reorganization, arrangement,
adjustment or composition of the Company or any Subsidiary Guarantor or any
other Restricted Subsidiary under any applicable federal or state law, or
appointing under any such law a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or any
Subsidiary Guarantor or any other Restricted Subsidiary or of a substantial
part of its consolidated assets, or ordering the winding up or liquidation
of its affairs, and the continuance of any such decree or order for relief
or any such other decree or order unstayed and in effect for a period of 60
consecutive days; or
(ix) the commencement by the Company or any Subsidiary Guarantor or
any other Restricted Subsidiary of a voluntary case or proceeding under any
applicable federal or state bankruptcy, insolvency, reorganization or other
similar law or any other case or proceeding to be adjudicated bankrupt or
insolvent, or the consent by the Company or any Subsidiary Guarantor or any
other Restricted Subsidiary to the entry of a decree or order for relief in
respect thereof in an involuntary case or proceeding under any applicable
federal or state bankruptcy, insolvency, reorganization or other similar
law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, or the filing by the Company or any Subsidiary
Guarantor or any other Restricted Subsidiary of a petition or consent
seeking reorganization or relief under any applicable federal or state law,
or the consent by it under any such law to the filing of any such petition
or to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or other similar official)
of the Company or any Subsidiary Guarantor or any other Restricted
Subsidiary or of any substantial part of its consolidated assets, or the
making by it of an assignment for the benefit of creditors under any such
law, or the admission by it in writing of its inability to pay its debts
generally as they become due or taking of corporate action by the Company
or any Subsidiary Guarantor or any other Restricted Subsidiary in
furtherance of any such action.
If an Event of Default (other than as specified in clause (viii) or (ix)
above) shall occur and be continuing, the Trustee, by written notice to the
Company, or the Holders of at least 25% in aggregate
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principal amount of the Notes then outstanding, by written notice to the Trustee
and the Company, may, and the Trustee upon the request of the Holders of not
less than 25% in aggregate principal amount of the Notes then outstanding shall,
declare the principal of, premium, if any, and accrued and unpaid interest on
all of the Notes due and payable immediately, upon which declaration all amounts
payable in respect of the Notes shall be immediately due and payable. If an
Event of Default specified in clause (viii) or (ix) above occurs and is
continuing, then the principal of, premium, if any, and accrued and unpaid
interest on all of the Notes shall become and be immediately due and payable
without any declaration, notice or other act on the part of the Trustee or any
Holder of Notes.
After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the Holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company, the Subsidiary Guarantors
and the Trustee, may rescind and annul such declaration if (a) the Company or
any Subsidiary Guarantor has paid or deposited with the Trustee a sum sufficient
to pay (i) all sums paid or advanced by the Trustee under the Indenture and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, (ii) all overdue interest on all Notes, (iii) the
principal of and premium, if any, on any Notes which have become due otherwise
than by such declaration of acceleration and interest thereon at the rate borne
by the Notes, and (iv) to the extent that payment of such interest is lawful,
interest upon overdue interest and overdue principal at the rate borne by the
Notes (without duplication of any amount paid or deposited pursuant to clause
(ii) or (iii)); (b) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction; and (c) all Events of Default,
other than the non-payment of principal of, premium, if any, or interest on the
Notes that has become due solely by such declaration of acceleration, have been
cured or waived.
No Holder will have any right to institute any proceeding with respect to
the Indenture or any remedy thereunder, unless such Holder has notified the
Trustee of a continuing Event of Default and the Holders of at least 25% in
aggregate principal amount of the outstanding Notes have made written request,
and offered reasonable indemnity, to the Trustee to institute such proceeding as
Trustee under the Notes and the Indenture, the Trustee has failed to institute
such proceeding within 60 days after receipt of such notice and the Trustee,
within such 60-day period, has not received directions inconsistent with such
written request by Holders of a majority in aggregate principal amount of the
outstanding Notes. Such limitations will not apply, however, to a suit
instituted by the Holder of a Note for the enforcement of the payment of the
principal of, premium, if any, or interest on such Note on or after the
respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee will be required
to exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default shall occur and be continuing, the Trustee will not
be under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the Holders of a
majority in aggregate principal amount of the outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee under the Indenture.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee shall mail to each Holder notice of the Default or
Event of Default within 60 days after the occurrence thereof. Except in the case
of a Default or an Event of Default in payment of principal of, premium, if any,
or interest on any Notes, the Trustee may withhold the notice to the Holders of
the Notes if the Trustee determines in good faith that withholding the notice is
in the interest of the Holders of the Notes.
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indenture and as to any default in such performance. The Company is also
required to notify the Trustee within 10 days of any Default or Event of
Default.
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LEGAL DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations
of the Company and the Subsidiary Guarantors with respect to the outstanding
Notes (such action being a "legal defeasance"). Such legal defeasance means that
the Company and the Subsidiary Guarantors shall be deemed to have paid and
discharged the entire Indebtedness represented by the outstanding Notes and to
have been discharged from all their other obligations with respect to the Notes
and the Subsidiary Guarantees, except for, among other things, (i) the rights of
Holders of outstanding Notes to receive payment in respect of the principal of,
premium, if any, and interest on such Notes when such payments are due, (ii) the
Company's obligations to replace any temporary Notes, register the transfer or
exchange of any Notes, replace mutilated, destroyed, lost or stolen Notes and
maintain an office or agency for payments in respect of the Notes, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and (iv) the
defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to terminate the obligations of the Company and
each Subsidiary Guarantor with respect to certain covenants that are set forth
in the Indenture, some of which are described under "-- Certain Covenants"
above, and any omission to comply with such obligations shall not constitute a
Default or an Event of Default with respect to the Notes (such action being a
"covenant defeasance").
In order to exercise either legal defeasance or covenant defeasance, (i)
the Company or any Subsidiary Guarantor must irrevocably deposit with the
Trustee, in trust, for the benefit of the Holders of the Notes, cash in United
States dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding Notes to
redemption or maturity; (ii) the Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that the Holders of the outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such legal defeasance or covenant defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such legal defeasance or covenant defeasance had not
occurred (in the case of legal defeasance, such opinion must refer to and be
based upon a published ruling of the Internal Revenue Service or a change in
applicable federal income tax laws); (iii) no Default or Event of Default shall
have occurred and be continuing on the date of such deposit or insofar as
clauses (viii) and (ix) under the first paragraph of "Events of Default" are
concerned, at any time during the period ending on the 91st day after the date
of deposit; (iv) such legal defeasance or covenant defeasance shall not cause
the Trustee to have a conflicting interest under the Indenture or the Trust
Indenture Act with respect to any securities of the Company or any Subsidiary
Guarantor; (v) such legal defeasance or covenant defeasance shall not result in
a breach or violation of, or constitute a default under, any material agreement
or instrument to which the Company or any Subsidiary Guarantor is a party or by
which it is bound; and (vi) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel satisfactory to the Trustee,
which, taken together, state that all conditions precedent under the Indenture
to either legal defeasance or covenant defeasance, as the case may be, have been
complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen, mutilated or destroyed Notes which have been replaced or
paid and Notes for whose payment money or certain United States government
obligations have theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust) have been delivered to the Trustee for cancellation or (b) all Notes
not theretofore delivered to the Trustee for cancellation have become due and
payable or will become due and payable at their Stated Maturity within one year,
or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the serving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to
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pay and discharge the entire Indebtedness on the Notes not theretofore delivered
to the Trustee for cancellation, for principal of, premium, if any, and interest
on the Notes to the date of deposit (in the case of Notes which have become due
and payable) or to the Stated Maturity or Redemption Date, as the case may be,
together with instructions from the Company irrevocably directing the Trustee to
apply such funds to the payment thereof at maturity or redemption, as the case
may be; (ii) the Company has paid all other sums payable under the Indenture by
the Company; and (iii) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel which, taken together, state that all
conditions precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with.
AMENDMENTS AND WAIVERS
From time to time, the Company, the Subsidiary Guarantors and the Trustee
may, without the consent of the Holders of the Notes, amend or supplement the
Indenture or the Notes for certain specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies, qualifying, or
maintaining the qualification of, the Indenture under the Trust Indenture Act,
adding or releasing any Subsidiary Guarantor pursuant to the terms of the
Indenture, or making any change that does not materially adversely affect the
rights of any Holder of Notes. Other amendments and modifications of the
Indenture or the Notes may be made by the Company, the Subsidiary Guarantors and
the Trustee with the consent of the Holders of not less than a majority of the
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (b) reduce the
principal amount of, premium, if any, or interest on any Note, (c) change the
coin or currency of payment of principal of, premium, if any, or interest on,
any Note, (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any Note, (e) reduce the above-stated percentage
of aggregate principal amount of outstanding Notes necessary to modify or amend
the Indenture, (f) reduce the percentage of aggregate principal amount of
outstanding Notes necessary for waiver of compliance with certain provisions of
the Indenture or for waiver of certain defaults, (g) modify any provisions of
the Indenture relating to the modification and amendment of the Indenture or the
waiver of past defaults or covenants, except as otherwise specified, (h) change
the ranking of the Notes or the Subsidiary Guarantees in a manner adverse to the
Holders or expressly subordinate in right of payment the Notes or the Subsidiary
Guarantees to any other Indebtedness or (i) amend, change or modify the
obligation of the Company to make and consummate a Change of Control Offer in
the event of a Change of Control or make and consummate a Net Proceeds Offer
with respect to any Asset Sale or modify any of the provisions or definitions
with respect thereto.
The Holders of not less than a majority in aggregate principal amount of
the outstanding Notes may, on behalf of the Holders of all Notes, waive any past
default under the Indenture, except a default in the payment of principal of,
premium, if any, or interest on the Notes, or in respect of a covenant or
provision which under the Indenture cannot be modified or amended without the
consent of the Holder of each Note outstanding.
THE TRUSTEE
Fleet National Bank serves as trustee under the Indenture.
The Indenture (including provisions of the Trust Indenture Act incorporated
by reference therein) contains limitations on the rights of the Trustee
thereunder, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Indenture permits the
Trustee to engage in other transactions; provided, however, if it acquires any
conflicting interest (as defined in the Trust Indenture Act) it must eliminate
such conflict or resign.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees are governed by the
laws of the State of New York, without regard to the principles of conflicts of
law.
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CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Restricted Subsidiary or (b) assumed in connection
with acquisitions of properties or assets from such Person (other than any
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition). Acquired Indebtedness
shall be deemed to be incurred on the date the acquired Person becomes a
Restricted Subsidiary or the date of the related acquisition of properties or
assets from such Person.
"Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of the date of determination, (a) the sum of (i) discounted future net revenue
from proved oil and gas reserves of the Company and its Restricted Subsidiaries
calculated in accordance with Commission guidelines (but utilizing the price
then being paid under the Tennessee Gas Contract, in lieu of the price specified
therein, when calculating revenue from such reserves attributable to the
Tennessee Gas Contract) before any state or federal income taxes, as estimated
by independent petroleum engineers in a reserve report prepared as of the end of
the Company's most recently completed fiscal year, as increased by, as of the
date of determination, the estimated discounted future net revenue from (A)
estimated proved oil and gas reserves of the Company and its Restricted
Subsidiaries attributable to any acquisition consummated since the date of such
year-end reserve report and (B) estimated oil and gas reserves of the Company
and its Restricted Subsidiaries attributable to extensions, discoveries and
other additions and upward revisions of estimates of proved oil and gas reserves
due to exploration, development or exploitation, production or other activities
conducted or otherwise occurring since the date of such year-end reserve report
which would, in accordance with standard industry practice, result in such
additions or revisions, in each case calculated in accordance with Commission
guidelines (utilizing the prices utilized in such year-end reserve report), and
decreased by, as of the date of determination, the discounted future net revenue
from (C) estimated proved oil and gas reserves of the Company and its Restricted
Subsidiaries produced or disposed of since the date of such year-end reserve
report and (D) reductions in the estimated oil and gas reserves of the Company
and its Restricted Subsidiaries since the date of such year-end reserve report
attributable to downward revisions of estimates of proved oil and gas reserves
due to exploration, development or exploitation, production or other activities
conducted or otherwise occurring since the date of such year-end reserve report
which would, in accordance with standard industry practice, result in such
revisions, in each case calculated in accordance with Commission guidelines
(utilizing the prices utilized in such year-end reserve report); provided that,
in the case of each of the determinations made pursuant to clauses (A) through
(D), such increases and decreases shall be as estimated by the Company's
engineers, except that such increases and decreases in the discounted future net
revenue shall be confirmed in writing by independent petroleum engineers in the
event of a Material Change; (ii) the capitalized costs that are attributable to
oil and gas properties of the Company and its Restricted Subsidiaries to which
no proved oil and gas reserves are attributable, based on the Company's books
and records as of a date no earlier than the date of the Company's latest annual
or quarterly financial statements; (iii) the Net Working Capital (exclusive of
any account receivable arising under the Tennessee Gas Contract in excess of
that portion that the purchaser is then paying) on a date no earlier than the
date of the Company's latest annual or quarterly financial statements; and (iv)
to the extent not included in clause (iii) above, the greater of (I) the net
book value on a date no earlier than the date of the Company's latest annual or
quarterly financial statements or (II) the appraised value, as estimated by
independent appraisers, of other tangible assets (exclusive of any account
receivable arising under the Tennessee Gas Contract in excess of that portion
that the purchaser is then paying) of the Company and its Restricted
Subsidiaries, as of a date no earlier than the date of the Company's latest
audited financial statements, minus (b) the sum of (i) minority interests, (ii)
any gas balancing liabilities of the Company and its Restricted Subsidiaries
reflected in the Company's latest audited financial statements, (iii) the
discounted future net revenue, calculated in accordance with Commission
guidelines (utilizing the prices utilized in the Company's year-end reserve
report), attributable to reserves which are required to be delivered to third
parties to fully satisfy the obligations of the Company and its Restricted
Subsidiaries with respect to Volumetric Production Payments on the schedules
specified with respect thereto, (iv) the discounted future net revenue,
calculated in accordance with Commission guidelines, attributable to reserves
subject to Dollar-Denominated Production Payments which, based on the estimates
of production included in determining the discounted future net revenue
specified in clause (a)(i) above
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(utilizing the same prices utilized in the Company's year-end reserve report),
would be necessary to fully satisfy the payment obligations of the Company and
its Restricted Subsidiaries with respect to Dollar-Denominated Production
Payments on the schedules specified with respect thereto, and (v) the discounted
future net revenue, calculated in accordance with Commission guidelines
(utilizing the same prices utilized in the Company's year-end reserve report),
attributable to reserves subject to participation interests, overriding royalty
interests or other interests of third parties, pursuant to participation,
partnership, vendor financing or other agreements then in effect, or which
otherwise are required to be delivered to third parties. If the Company changes
its method of accounting from the full cost method to the successful efforts
method or a similar method of accounting, Adjusted Consolidated Net Tangible
Assets will continue to be calculated as if the Company was still using the full
cost method of accounting.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
amount by which the fair value of the properties and assets of such Subsidiary
Guarantor exceeds the total amount of liabilities, including, without
limitation, contingent liabilities (after giving effect to all other fixed and
contingent liabilities incurred or assumed on such date), but excluding
liabilities under its Subsidiary Guarantee, of such Subsidiary Guarantor at such
date.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of this definition, beneficial ownership of 10% or more of the voting
common equity (on a fully diluted basis) or options or warrants to purchase such
equity (but only if exercisable at the date of determination or within 60 days
thereof) of a Person shall be deemed to constitute control of such Person.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition to any Person other than the Company or any of its Restricted
Subsidiaries (including, without limitation, by means of a merger or
consolidation) (collectively, for purposes of this definition, a "transfer"),
directly or indirectly, in one or a series of related transactions, of (a) any
Capital Stock of any Restricted Subsidiary held by the Company or any Restricted
Subsidiary, (b) all or substantially all of the properties and assets of any
division or line of business of the Company or any of its Restricted
Subsidiaries or (c) any other properties or assets of the Company or any of its
Restricted Subsidiaries other than (i) a transfer of cash, Cash Equivalents,
hydrocarbons or other mineral products in the ordinary course of business or
(ii) any lease, abandonment, disposition, relinquishment or farm-out of any oil
and gas properties in the ordinary course of business. For the purposes of this
definition, the term "Asset Sale" also shall not include (i) any transfer of
properties or assets (including Capital Stock) that is governed by, and made in
accordance with, the provisions described under "-- Merger, Consolidation and
Sale of Assets"; (ii) any transfer of properties or assets to an Unrestricted
Subsidiary, if permitted under the "Limitation on Restricted Payments" covenant;
or (iii) any transfer of properties or assets (including Capital Stock) having a
fair market value of less than $2 million.
"Attributable Indebtedness" means, with respect to any particular lease
under which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the present value of the total net amount of
rent required to be paid by such Person under the lease during the primary term
thereof, without giving effect to any renewals at the option of the lessee,
discounted from the respective due dates thereof to such date of determination
at a rate per annum equal to the discount rate which would be applicable to a
Capitalized Lease Obligation with a like term in accordance with GAAP. As used
in the preceding sentence, the "net amount of rent" under any lease for any such
period shall mean the sum of rental and other payments required to be paid with
respect to such period by the lessee thereunder, excluding any amounts required
to be paid by such lessee on account of maintenance and repairs, insurance,
taxes, assessments, water rates or similar charges. In the case of any lease
which is terminable by the lessee upon payment of a penalty, such net amount of
rent shall also include the amount of such penalty, but no rent shall be
considered as required to be paid under such lease subsequent to the first date
upon which it may be so terminated.
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"Average Life" means, with respect to any Indebtedness, as at any date of
determination, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years (and any portion thereof) from the date of determination
to the date or dates of each successive scheduled principal payment (including,
without limitation, any sinking fund or mandatory redemption payment
requirements) of such Indebtedness multiplied by (ii) the amount of each such
principal payment by (b) the sum of all such principal payments.
"Bank Credit Facilities" means (i) that certain Amended and Restated Credit
Agreement dated effective as of March 15, 1994, as amended, among KCS Resources,
Inc., KCS Pipeline Systems, Inc., Bank One, Texas, National Association, CIBC,
Inc., a Canadian Chartered Bank, and Den norske Bank, (ii) that certain Loan
Agreement dated as of January 11, 1995, as amended, among KCS Energy Marketing,
Inc., as borrower, KCS Energy Inc. and Proliq, Inc., as guarantors, and Canadian
Imperial Bank of Commerce, and (iii) that certain Amended and Restated Credit
Agreement, dated as of November 28, 1995 between KCS Energy Marketing, Inc., KCS
Michigan Resources, Inc., Comerica Bank-Texas and Den Norske Bank, in each case
as the same may be amended, modified, supplemented, extended, restated,
replaced, renewed or refinanced from time to time in one or more credit
agreements, loan agreements, instruments or similar agreements, as such may be
further amended, modified, supplemented, extended, restated, replaced, renewed
or refinanced.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights or other equivalents in the equity interests
(however designated) in such Person, and any rights (other than debt securities
convertible into an equity interest), warrants or options exercisable for,
exchangeable for or convertible into such an equity interest in such Person.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified and
accounted for as a capital lease obligation under GAAP, and, for the purpose of
the Indenture, the amount of such obligation at any date shall be the
capitalized amount thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity
of 180 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (ii) demand and time deposits and certificates of deposit or
acceptances with a maturity of 180 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500 million; (iii) commercial
paper with a maturity of 180 days or less issued by a corporation that is not an
Affiliate of the Company and is organized under the laws of any state of the
United States or the District of Columbia and rated at least A-l by S&P or at
least P-l by Moody's; (iv) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i) above
entered into with any commercial bank meeting the specifications of clause (ii)
above; (v) overnight bank deposits and bankers acceptances at any commercial
bank meeting the qualifications specified in clause (ii) above; (vi) deposits
available for withdrawal on demand with any commercial bank not meeting the
qualifications specified in clause (ii) above but which is a lending bank under
any of the Bank Credit Facilities, provided all such deposits do not exceed $5
million in the aggregate at any one time; (vii) demand and time deposits and
certificates of deposit with any commercial bank organized in the United States
not meeting the qualifications specified in clause (ii) above, provided that
such deposits and certificates support bond, letter of credit and other similar
types of obligations incurred in the ordinary course of business; and (viii)
investments in money market or other mutual funds substantially all of whose
assets comprise securities of the types described in clauses (i) through (v)
above.
"Change of Control" means the occurrence of any event or series of events
by which: (a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of 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 Voting Stock of the Company; (b) the Company consolidates with or
merges into another Person or any Person consolidates with, or merges into, the
Company, in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities or
other property, other than any such transaction where (i) the outstanding Voting
Stock of the Company is changed
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into or exchanged for Voting Stock of the surviving or resulting Person that is
Qualified Capital Stock and (ii) the holders of the Voting Stock of the Company
immediately prior to such transaction own, directly or indirectly, not less than
a majority of the Voting Stock of the surviving or resulting Person immediately
after such transaction; (c) the Company, either individually or in conjunction
with one or more Restricted Subsidiaries, sells, assigns, conveys, transfers,
leases or otherwise disposes of, or the Restricted Subsidiaries sell, assign,
convey, transfer, lease or otherwise dispose of, all or substantially all of the
properties and assets of the Company and such Restricted Subsidiaries, taken as
a whole (either in one transaction or a series of related transactions),
including Capital Stock of the Restricted Subsidiaries, to any Person (other
than the Company or a Restricted Subsidiary); (d) during any consecutive
two-year period, individuals who at the beginning of such period constituted the
Board of Directors of the Company (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
stockholders of the Company was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors of the Company
then in office; or (e) the liquidation or dissolution of the Company.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated EBITDA Coverage Ratio" means, for any period, the ratio on a
pro forma basis of (a) the sum of Consolidated Net Income, Consolidated Interest
Expense, Consolidated Income Tax Expense and Consolidated Non-cash Charges
deducted in computing Consolidated Net Income, in each case, for such period, of
the Company and its Restricted Subsidiaries on a consolidated basis, all
determined in accordance with GAAP, decreased (to the extent included in
determining Consolidated Net Income) by the sum of (x) the amount of deferred
revenues that are amortized during such period and are attributable to reserves
that are subject to Volumetric Production Payments and (y) amounts recorded in
accordance with GAAP as repayments of principal and interest pursuant to
Dollar-Denominated Production Payments, to (b) the sum of such Consolidated
Interest Expense for such period; provided, however, that (i) the Consolidated
EBITDA Coverage Ratio shall be calculated on a pro forma basis assuming that (A)
the Indebtedness to be incurred (and all other Indebtedness incurred after the
first day of such period of four full fiscal quarters referred to in the
covenant described in paragraph (a) under "-- Certain Covenants -- Limitation on
Indebtedness and Disqualified Capital Stock" through and including the date of
determination), and (if applicable) the application of the net proceeds
therefrom (and from any other such Indebtedness), including to refinance other
Indebtedness, had been incurred on the first day of such four-quarter period
and, in the case of Acquired Indebtedness, on the assumption that the related
transaction (whether by means of purchase, merger or otherwise) also had
occurred on such date with the appropriate adjustments with respect to such
acquisition being included in such pro forma calculation and (B) any acquisition
or disposition by the Company or any Restricted Subsidiary of any properties or
assets outside the ordinary course of business, or any repayment of any
principal amount of any Indebtedness of the Company or any Restricted Subsidiary
prior to the Stated Maturity thereof, in either case since the first day of such
period of four full fiscal quarters through and including the date of
determination, had been consummated on such first day of such four-quarter
period, (ii) in making such computation, the Consolidated Interest Expense
attributable to interest on any Indebtedness required to be computed on a pro
forma basis in accordance with the covenant described in paragraph (a) under
"-- Certain Covenants -- Limitation on Indebtedness and Disqualified Capital
Stock" and (A) bearing a floating interest rate shall be computed as if the rate
in effect on the date of computation had been the applicable rate for the entire
period and (B) which was not outstanding during the period for which the
computation is being made but which bears, at the option of the Company, a fixed
or floating rate of interest, shall be computed by applying, at the option of
the Company, either the fixed or floating rate, (iii) in making such
computation, the Consolidated Interest Expense attributable to interest on any
Indebtedness under a revolving credit facility required to be computed on a pro
forma basis in accordance with the covenant described in paragraph (a) under
"-- Certain Covenants -- Limitation on Indebtedness and Disqualified Capital
Stock" shall be computed based upon the average daily balance of such
Indebtedness during the applicable period, provided that such average daily
balance shall be reduced by the amount of any repayment
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of Indebtedness under a revolving credit facility during the applicable period,
which repayment permanently reduced the commitments or amounts available to be
reborrowed under such facility, (iv) notwithstanding clauses (ii) and (iii) of
this proviso, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Rate
Protection Obligations, shall be deemed to have accrued at the rate per annum
resulting after giving effect to the operation of such agreements, (v) in making
such calculation, Consolidated Interest Expense shall exclude interest
attributable to Dollar-Denominated Production Payments, and (vi) if after the
first day of the period referred to in clause (a) of this definition the Company
has permanently retired any Indebtedness out of the Net Cash Proceeds of the
issuance and sale of shares of Qualified Capital Stock of the Company within 30
days of such issuance and sale, Consolidated Interest Expense shall be
calculated on a pro forma basis as if such Indebtedness had been retired on the
first day of such period.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes (including state franchise taxes
accounted for as income taxes in accordance with GAAP) of the Company and its
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, but adjusted to give effect to the exclusion from revenues
during such period under the Tennessee Gas Contract in excess of that portion of
such revenues the purchaser has been paying during such period.
"Consolidated Interest Expense" means, for any period, without duplication,
the sum of (i) the interest expense of the Company and its Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP, including, without limitation, (a) any amortization of debt discount,
(b) the net cost under Interest Rate Protection Obligations (including any
amortization of discounts), (c) the interest portion of any deferred payment
obligation constituting Indebtedness, (d) all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing and (e) all accrued interest, in each case to the extent attributable
to such period, (ii) to the extent any Indebtedness of any Person (other than
the Company or a Restricted Subsidiary) is guaranteed by the Company or any
Restricted Subsidiary, the aggregate amount of interest paid (to the extent not
accrued in a prior period) or accrued by such other Person during such period
attributable to any such Indebtedness, in each case to the extent attributable
to that period, (iii) the aggregate amount of the interest component of
Capitalized Lease Obligations paid (to the extent not accrued in a prior
period), accrued or scheduled to be paid or accrued by the Company and its
Restricted Subsidiaries during such period as determined on a consolidated basis
in accordance with GAAP and (iv) the aggregate amount of dividends paid (to the
extent not accrued in a prior period) or accrued on Preferred Stock or
Disqualified Capital Stock of the Company and its Restricted Subsidiaries, to
the extent such Preferred Stock or Disqualified Capital Stock is owned by
Persons other than Restricted Subsidiaries, less, to the extent included in any
of clauses (i) through (iv), amortization of capitalized debt issuance costs of
the Company and its Restricted Subsidiaries during such period.
"Consolidated Net Income" means, for any period, the consolidated net
income (or loss) of the Company and its Restricted Subsidiaries for such period
as determined in accordance with GAAP, adjusted by excluding (a) net after-tax
extraordinary gains or losses (less all fees and expenses relating thereto), (b)
net after-tax gains or losses (less all fees and expenses relating thereto)
attributable to Asset Sales, (c) the net income (or net loss) of any Person
(other than the Company or any of its Restricted Subsidiaries), in which the
Company or any of its Restricted Subsidiaries has an ownership interest, except
to the extent of the amount of dividends or other distributions actually paid to
the Company or any of its Restricted Subsidiaries in cash by such other Person
during such period (regardless of whether such cash dividends or distributions
is attributable to net income (or net loss) of such Person during such period or
during any prior period), (d) net income (or net loss) of any Person combined
with the Company or any of its Restricted Subsidiaries on a "pooling of
interests" basis attributable to any period prior to the date of combination,
(e) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary is not at the date of determination permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders, (f) income
resulting from transfers of assets received by the Company or any Restricted
Subsidiary from an
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Unrestricted Subsidiary, (g) any write-downs of non-current assets, provided,
however, that any ceiling limitation writedowns under Commission guidelines
shall be treated as capitalized costs, as if such writedowns had not occurred
and (h) net income resulting from the recognition of revenues during such period
under the Tennessee Gas Contract in excess of that portion of such revenues the
purchaser has been paying during such period.
"Consolidated Net Worth" means, at any date, the consolidated stockholders'
equity of the Company less the amount of such stockholders' equity attributable
to Disqualified Capital Stock or treasury stock of the Company and its
Restricted Subsidiaries, as determined in accordance with GAAP.
"Consolidated Non-cash Charges" means, for any period, the aggregate
depreciation, depletion, amortization and other non-cash expenses of the Company
and its Restricted Subsidiaries reducing Consolidated Net Income for such
period, determined on a consolidated basis in accordance with GAAP (excluding
any such non-cash charge for which an accrual of or reserve for cash charges for
any future period is required and adjusted to give effect to the exclusion from
revenues during such period under the Tennessee Gas Contract in excess of that
portion of such revenues the purchaser has been paying during such period.
"Default" means any event, act or condition that is, or after notice or
passage of time or both would become, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors of the Company is
required to deliver a resolution of the Board of Directors under the Indenture,
a member of the Board of Directors of the Company who does not have any material
direct or indirect financial interest (other than an interest arising solely
from the beneficial ownership of Capital Stock of the Company) in or with
respect to such transaction or series of transactions.
"Disqualified Capital Stock" means any Capital Stock that, either by its
terms, by the terms of any security into which it is convertible or exchangeable
or by contract or otherwise, is, or upon the happening of an event or passage of
time would be, required to be redeemed or repurchased prior to the final Stated
Maturity of the Notes or is redeemable at the option of the holder thereof at
any time prior to such final Stated Maturity, or is convertible into or
exchangeable for debt securities at any time prior to such final Stated
Maturity. For purposes of the covenant described in paragraph (a) under
"-- Certain Covenants -- Limitation on Indebtedness and Disqualified Capital
Stock" covenant, Disqualified Capital Stock shall be valued at the greater of
its voluntary or involuntary maximum fixed redemption or repurchase price plus
accrued and unpaid dividends. For such purposes, the "maximum fixed redemption
or repurchase price" of any Disqualified Capital Stock which does not have a
fixed redemption or repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were redeemed or repurchased on the date of determination, and if such price is
based upon, or measured by, the fair market value of such Disqualified Capital
Stock, such fair market value shall be determined in good faith by the board of
directors of the issuer of such Disqualified Capital Stock; provided, however,
that if such Disqualified Capital Stock is not at the date of determination
permitted or required to be redeemed or repurchased, the "maximum fixed
redemption or repurchase price" shall be the book value of such Disqualified
Capital Stock.
"Dollar-Denominated Production Payments" means production payment
obligations of the Company or a Restricted Subsidiary recorded as liabilities in
accordance with GAAP, together with all undertakings and obligations in
connection therewith.
"Event of Default" has the meaning set forth above under the caption
"Events of Default."
"GAAP" means generally accepted accounting principles, consistently
applied, that are set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as may be approved by a significant
segment of the accounting profession of the United States of America, which are
applicable as of the date of the Indenture.
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The term "guarantee" means, as applied to any obligation, (i) a guarantee
(other than by endorsement of negotiable instruments for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down under letters of credit. When used as a verb,
"guarantee" has a corresponding meaning.
"Holder" means a Person in whose name a Note is registered in the Note
Register.
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities of such Person, contingent or otherwise, for borrowed money or
for the deferred purchase price of property or services (excluding any trade
accounts payable and other accrued current liabilities incurred in the ordinary
course of business) and all liabilities of such Person incurred in connection
with any agreement to purchase, redeem, exchange, convert or otherwise acquire
for value any Capital Stock of such Person, or any warrants, rights or options
to acquire such Capital Stock, outstanding on the date of the Indenture or
thereafter, if, and to the extent, any of the foregoing would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
(b) all obligations of such Person evidenced by bonds, notes, debentures or
other similar instruments, if, and to the extent, any of the foregoing would
appear as a liability upon a balance sheet of such Person prepared in accordance
with GAAP, (c) all Indebtedness of such Person created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade accounts payable arising in the ordinary
course of business, (d) all Capitalized Lease Obligations of such Person, (e)
all Indebtedness referred to in the preceding clauses of other Persons and all
dividends of other Persons, the payment of which is secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien upon property (including, without limitation, accounts
and contract rights) owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness (the amount of
such obligation being deemed to be the lesser of the value of such property or
the amount of the obligation so secured), (f) all guarantees by such Person of
Indebtedness referred to in this definition (including, with respect to any
Production Payment, any warranties or guaranties of production or payment by
such Person with respect to such Production Payment but excluding other
contractual obligations of such Person with respect to such Production Payment)
and (g) all obligations of such Person under or in respect of currency exchange
contracts, oil and natural gas price hedging arrangements and Interest Rate
Protection Obligations. Subject to clause (f) of the first sentence of this
definition, neither Dollar-Denominated Production Payments nor Volumetric
Production Payments shall be deemed to be Indebtedness. In addition,
Disqualified Capital Stock shall not be deemed to be Indebtedness.
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements or arrangements designed to protect
against or manage such Person's and any of its Subsidiaries exposure to
fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, guarantee of Indebtedness or other extension of credit or capital
contribution to (by means of any transfer of cash or other property or assets to
others or any payment for property, assets or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities (including derivatives) or
evidences of Indebtedness issued by, any other Person. In addition, the fair
market value of the net assets of any Restricted Subsidiary at the time that
such Restricted Subsidiary is designated an Unrestricted Subsidiary shall be
deemed to be an "Investment" made by the Company in such Unrestricted Subsidiary
at such time. "Investments" shall exclude (a) extensions of trade credit or
other advances to customers on commercially reasonable terms in accordance with
normal trade practices or
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otherwise in the ordinary course of business, (b) Interest Rate Protection
Obligations entered into in the ordinary course of business or as required by
any Permitted Indebtedness or any Indebtedness incurred in compliance with the
"Limitation on Indebtedness and Disqualified Capital Stock" covenant, but only
to the extent that the notional amounts of such Interest Rate Protection
Obligations do not exceed 105% of the aggregate principal amount of such
Indebtedness to which such Interest Rate Protection Obligations relate and (c)
endorsements of negotiable instruments and documents in the ordinary course of
business.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim or similar type
of encumbrance (including, without limitation, any agreement to give or grant
any lease, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing) upon or with
respect to any property of any kind. A Person shall be deemed to own subject to
a Lien any property which such Person has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement.
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 10% during a fiscal quarter
in the estimated discounted future net cash flows from proved oil and gas
reserves of the Company and its Restricted Subsidiaries, calculated in
accordance with clause (a) (i) of the definition of Adjusted Consolidated Net
Tangible Assets; provided, however, that the following will be excluded from the
calculation of Material Change: (i) any acquisitions during the quarter of oil
and gas reserves that have been estimated by a nationally recognized firm of
independent petroleum engineers and on which a report or reports exist and (ii)
any disposition of properties existing at the beginning of such quarter that
have been disposed of as provided in the "Limitation on Asset Sales" covenant.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as therein or in the Indenture provided,
whether at the Stated Maturity with respect to such principal or by declaration
of acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Proceeds" means, with respect to any Asset Sale, the
proceeds thereof in the form of cash or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary), net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel, accountants and investment banks) related to such Asset Sale,
(ii) provisions for all taxes payable as a result of such Asset Sale, (iii)
amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the assets subject to the
Asset Sale or having a Lien thereon and (iv) appropriate amounts to be provided
by the Company or any Restricted Subsidiary, as the case may be, as a reserve
required in accordance with GAAP consistently applied against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an Officers
Certificate delivered to the Trustee; provided, however, that any amounts
remaining after adjustments, revaluations or liquidations of such reserves shall
constitute Net Available Proceeds.
"Net Cash Proceeds," with respect to any issuance or sale of Qualified
Capital Stock or other securities, means the cash proceeds of such issuance or
sale net of attorneys' fees, accountants' fees, underwriters' or placement
agents' fees, discounts or commissions and brokerage, consultant and other fees
and expenses actually incurred in connection with such issuance or sale and net
of taxes paid or payable as a result thereof.
"Net Working Capital" means (i) all current assets of the Company and its
Restricted Subsidiaries, minus (ii) all current liabilities of the Company and
its Restricted Subsidiaries, except current liabilities included in
Indebtedness, in each case as set forth in financial statements of the Company
and its Restricted Subsidiaries prepared on a consolidated basis in accordance
with GAAP.
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness of the Company or any Restricted Subsidiary incurred in connection
with the acquisition by the Company or such Restricted
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Subsidiary of any property or assets and as to which (a) the holders of such
Indebtedness agree that they will look solely to the property or assets so
acquired and securing such Indebtedness for payment on or in respect of such
Indebtedness, and neither the Company nor any Subsidiary (other than an
Unrestricted Subsidiary) (i) provides credit support, including any undertaking,
agreement or instrument which would constitute Indebtedness or (ii) is directly
or indirectly liable for such Indebtedness, and (b) no default with respect to
such Indebtedness would permit (after notice or passage of time or both),
according to the terms thereof, any holder of any Indebtedness of the Company or
a Restricted Subsidiary to declare a default on such Indebtedness or cause the
payment thereof to be accelerated or payable prior to its Stated Maturity.
"Note Register" means the register maintained by or for the Company in
which the Company shall provide for the registration of the Notes and the
transfer of the Notes.
"Oil and Gas Business" means (i) the acquisition, exploration, development,
operation and disposition of interests in oil, gas and other hydrocarbon
properties, (ii) the gathering, marketing, treating, processing, storage,
refining, selling and transporting of any production from such interests or
properties, (iii) any business relating to or arising from exploration for or
development, production, treatment, processing, storage, refining,
transportation or marketing of oil, gas and other minerals and products produced
in association therewith, and (iv) any activity necessary, appropriate or
incidental to the activities described in the foregoing clauses (i) through
(iii) of this definition.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness under the Bank Credit Facilities in an aggregate
principal amount at any one time outstanding not to exceed the greater of
$75 million or 15% of Adjusted Consolidated Net Tangible Assets (the
"Maximum Credit Amount"), plus all interest and fees under such facilities
and any guarantee of any such Indebtedness;
(ii) Indebtedness under the Notes and any Exchange Notes issued in
exchange for Notes of an equal principal amount;
(iii) Indebtedness outstanding or in effect on the date of the
Indenture (and not repaid or defeased with the proceeds of the offering of
the Notes);
(iv) obligations pursuant to Interest Rate Protection Obligations, but
only to the extent such obligations do not exceed 105% of the aggregate
principal amount of the Indebtedness covered by such Interest Rate
Protection Obligations; obligations under currency exchange contracts
entered into in the ordinary course of business; hedging arrangements
entered into in the ordinary course of business for the purpose of
protecting production, purchases and resales against fluctuations in oil or
natural gas prices; and any guarantee of any of the foregoing;
(v) the Subsidiary Guarantees of the Notes (and any assumption of the
obligations guaranteed thereby);
(vi) Indebtedness of the Company to any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary to the Company or any other
Restricted Subsidiary;
(vii) Permitted Refinancing Indebtedness and any guarantee thereof;
(viii) Non-Recourse Indebtedness;
(ix) Indebtedness in respect of bid, performance or surety bonds
issued for the account of the Company or any Restricted Subsidiary in the
ordinary course of business, including guaranties and letters of credit
supporting such bid, performance or surety obligations (in each case other
than for an obligation for money borrowed); and
(x) any additional Indebtedness in an aggregate principal amount not
in excess of $15 million at any one time outstanding and any guarantee
thereof.
"Permitted Investments" means any of the following: (i) Investments in Cash
Equivalents; (ii) Investments in the Company or any of its Restricted
Subsidiaries; (iii) Investments in an amount not to
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exceed $3 million at any one time outstanding; (iv) Investments by the Company
or any of its Restricted Subsidiaries in another Person, if as a result of such
Investment (A) such other Person becomes a Restricted Subsidiary or (B) such
other Person is merged or consolidated with or into, or transfers or conveys all
or substantially all of its properties and assets to, the Company or a
Restricted Subsidiary; (v) entry into operating agreements, joint ventures,
partnership agreements, working interests, royalty interests, mineral leases,
processing agreements, farm-out agreements, contracts for the sale,
transportation or exchange of oil and natural gas, unitization agreements,
pooling arrangements, area of mutual interest agreements or other similar or
customary agreements, transactions, properties, interests or arrangements, and
Investments and expenditures in connection therewith or pursuant thereto, in
each case made or entered into in the ordinary course of the Oil and Gas
Business, excluding, however, Investments in corporations; (vi) entry into any
hedging arrangements in the ordinary course of business for the purpose of
protecting the Company's or any Restricted Subsidiary's production, purchases
and resales against fluctuations in oil or natural gas prices; (vii) Investments
permitted under the "Limitation on Asset Sales" covenant or the "Limitation on
Transactions with Affiliates" covenant; (viii) entry into any currency exchange
contract in the ordinary course of business; or (ix) Investments in stock,
obligations or securities received in settlement of debts owing to the Company
or any Restricted Subsidiary as a result of bankruptcy or insolvency proceedings
or upon the foreclosure, perfection or enforcement of any Lien in favor of the
Company or any Restricted Subsidiary, in each case as to debt owing to the
Company or any Restricted Subsidiary that arose in the ordinary course of
business of the Company or any such Restricted Subsidiary.
"Permitted Liens" means the following types of Liens:
(a) Liens existing as of the date of the Indenture (except to the
extent such Liens secure Indebtedness that is repaid or defeased with
proceeds of the offering of the Notes);
(b) Liens securing the Notes or the Subsidiary Guarantees;
(c) Liens in favor of the Company;
(d) Liens securing Indebtedness under the Bank Credit Facilities that
constitutes Permitted Indebtedness pursuant to clause (i) of the definition
of "Permitted Indebtedness";
(e) Liens for taxes, assessments and governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(f) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(g) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the payment or performance of
tenders, statutory or regulatory obligations, surety and appeal bonds,
bids, government contracts and leases, performance and return of money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money but including lessee or operator obligations
under statutes, governmental regulations or instruments related to the
ownership, exploration and production of oil, gas and minerals on state,
Federal or foreign lands or waters);
(h) judgment Liens not giving rise to an Event of Default so long as
any appropriate legal proceedings which may have been duly initiated for
the review of such judgment shall not have been finally terminated or the
period within which such proceeding may be initiated shall not have
expired;
(i) easements, rights-of-way, restrictions and other similar charges
or encumbrances not interfering in any material respect with the ordinary
conduct of the business of the Company or any of its Restricted
Subsidiaries;
(j) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease;
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(k) purchase money Liens; provided, however, that (i) the related
purchase money Indebtedness shall not be secured by any property or assets
of the Company or any Restricted Subsidiary other than the property or
assets so acquired and any proceeds therefrom and (ii) the Lien securing
such Indebtedness shall be created within 90 days of such acquisition;
(l) Liens securing obligations under hedging agreements that the
Company or any Restricted Subsidiary enters into in the ordinary course of
business for the purpose of protecting its production, purchases and
resales against fluctuations in oil or natural gas prices;
(m) Liens upon specific items of inventory or other goods of any
Person securing such Person's obligations in respect of bankers acceptances
issued or created for the account of such Person to facilitate the
purchase, shipment or storage of such inventory or other goods;
(n) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property or
assets relating to such letters of credit and products and proceeds
thereof;
(o) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets;
(p) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(q) Liens securing Interest Rate Protection Obligations which Interest
Rate Protection Obligations relate to Indebtedness that is secured by Liens
otherwise permitted under the Indenture;
(r) Liens on, or related to, properties or assets to secure all or
part of the costs incurred in the ordinary course of business for the
exploration, drilling, development or operation thereof;
(s) Liens on pipeline or pipeline facilities which arise by operation
of law;
(t) Liens arising under operating agreements, joint venture
agreements, partnership agreements, oil and gas leases, farm-out
agreements, division orders, contracts for the sale, transportation or
exchange of oil and natural gas, unitization and pooling declarations and
agreements, area of mutual interest agreements and other agreements which
are customary in the Oil and Gas Business;
(u) Liens reserved in oil and gas mineral leases for bonus or rental
payments or for compliance with the terms of such leases;
(v) Liens constituting survey exceptions, encumbrances, easements, or
reservations of, or rights to others for, rights-of-way, zoning or other
restrictions as to the use of real properties, and minor defects of title
which, in the case of any of the foregoing, were not incurred or created to
secure the payment of borrowed money or the deferred purchase price of
property, assets or services, and in the aggregate do not materially
adversely affect the value of properties and assets of the Company and the
Restricted Subsidiaries, taken as a whole, or materially impair the use of
such properties and assets for the purposes for which such properties and
assets are held by the Company or any Restricted Subsidiaries; and
(w) Liens securing Non-Recourse Indebtedness; provided, however, that
the related Non-Recourse Indebtedness shall not be secured by any property
or assets of the Company or any Restricted Subsidiary other than the
property and assets acquired by the Company with the proceeds of such
Non-Recourse Indebtedness.
Notwithstanding anything in clauses (a) through (w) of this definition, the term
"Permitted Liens" does not include any Liens resulting from the creation,
incurrence, issuance, assumption or guarantee of any Production Payments other
than Production Payments that are created, incurred, issued, assumed or
guaranteed in connection with the financing of, and within 30 days after, the
acquisition of the properties or assets that are subject thereto.
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"Permitted Refinancing Indebtedness" means Indebtedness of the Company or a
Restricted Subsidiary, the net proceeds of which are used to renew, extend,
refinance, refund or repurchase (including, without limitation, pursuant to a
Change of Control Offer or Net Proceeds Offer) outstanding Indebtedness of the
Company or any Restricted Subsidiary, provided that (a) if the Indebtedness
(including the Notes) being renewed, extended, refinanced, refunded or
repurchased is pari passu with or subordinated in right of payment to either the
Notes or the Subsidiary Guarantees, then such Indebtedness is pari passu with or
subordinated in right of payment to the Notes or the Subsidiary Guarantees, as
the case may be, at least to the same extent as the Indebtedness being renewed,
extended, refinanced, refunded or repurchased, (b) such Indebtedness has a
Stated Maturity for its final scheduled principal payment that is no earlier
than the Stated Maturity for the final scheduled principal payment of the
Indebtedness being renewed, extended, refinanced, refunded or repurchased and
(c) such Indebtedness has an Average Life at the time such Indebtedness is
incurred that is equal to or greater than the Average Life of the Indebtedness
being renewed, extended, refinanced, refunded or repurchased; provided, further,
that such Indebtedness is in an aggregate principal amount (or, if such
Indebtedness is issued at a price less than the principal amount thereof, the
aggregate amount of gross proceeds therefrom is) not in excess of the aggregate
principal amount then outstanding of the Indebtedness being renewed, extended,
refinanced, refunded or repurchased (or if the Indebtedness being renewed,
extended, refinanced, refunded or repurchased was issued at a price less than
the principal amount thereof, then not in excess of the amount of liability in
respect thereof determined in accordance with GAAP) plus the amount of
reasonable fees and expenses incurred by the Company or such Restricted
Subsidiary in connection therewith.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock, whether now outstanding or issued after
the date of the Indenture, including, without limitation, all classes and series
of preferred or preference stock of such Person.
"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Public Equity Offering" means an offer and sale of Common Stock of the
Company pursuant to a registration statement that has been declared effective by
the Commission pursuant to the Securities Act (other than a registration
statement on Form S-8 or otherwise relating to equity securities issuable under
any employee benefit plan of the Company).
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Capital Stock.
"Restricted Investment" means (without duplication) (i) the designation of
a Subsidiary as an Unrestricted Subsidiary in the manner described in the
definition of "Unrestricted Subsidiary" and (ii) any Investment other than a
Permitted Investment.
"Restricted Subsidiary" means any Subsidiary of the Company, whether
existing on or after the date of the Indenture, unless such Subsidiary of the
Company is an Unrestricted Subsidiary or is designated as an Unrestricted
Subsidiary pursuant to the terms of the Indenture.
"S&P" means Standard and Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
"Sale/Leaseback Transaction" means any direct or indirect arrangement
pursuant to which properties or assets are sold or transferred by the Company or
a Restricted Subsidiary and are thereafter leased back from the purchaser or
transferee thereof by the Company or one of its Restricted Subsidiaries.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the date specified in the instrument evidencing
or governing such Indebtedness as the fixed date on which the principal of such
Indebtedness or such installment of interest is due and payable.
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"Subordinated Indebtedness" means Indebtedness of the Company or a
Subsidiary Guarantor which is expressly subordinated in right of payment to the
Notes or the Subsidiary Guarantees, as the case may be.
"Subsidiary" means, with respect to any Person, (i) a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned by
such Person, by one or more Subsidiaries of such Person or by such Person and
one or more Subsidiaries thereof or (ii) any other Person (other than a
corporation), including, without limitation, a joint venture, in which such
Person, one or more Subsidiaries thereof or such Person and one or more
Subsidiaries thereof, directly or indirectly, at the date of determination
thereof, have at least majority ownership interest entitled to vote in the
election of directors, managers or trustees thereof (or other Person performing
similar functions).
"Subsidiary Guarantee" means any guarantee of the Notes by any Subsidiary
Guarantor in accordance with the provisions described under "-- Subsidiary
Guarantees of Notes.
"Subsidiary Guarantor" means (i) Enercorp Gas Marketing, Inc., (ii) KCS
Resources, Inc., (iii) KCS Michigan Resources, Inc., (iv) KCS Pipeline Systems,
Inc., (v) KCS Energy Marketing, Inc., (vi) KCS Power Marketing, Inc., (vii) KCS
Energy Risk Management, Inc., (viii) National Enerdrill Corporation, (ix)
Proliq, Inc., (x) each of the Company's other Restricted Subsidiaries, if any,
executing a supplemental indenture in which such Subsidiary agrees to be bound
by the terms of the Indenture and (xi) any Person that becomes a successor
guarantor of the Notes in compliance with the provisions described under
"-- Subsidiary Guarantees of Notes.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination will be designated an Unrestricted Subsidiary by the
Board of Directors of the Company as provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary of the Company as an Unrestricted Subsidiary so long as (a)
neither the Company nor any Restricted Subsidiary is directly or indirectly
liable pursuant to the terms of any Indebtedness of such Subsidiary; (b) no
default with respect to any Indebtedness of such Subsidiary would permit (upon
notice, lapse of time or otherwise) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity; (c) such designation as an Unrestricted Subsidiary would be
permitted under the "Limitation on Restricted Payments" covenant; and (d) such
designation shall not result in the creation or imposition of any Lien on any of
the properties or assets of the Company or any Restricted Subsidiary (other than
any Permitted Lien or any Lien the creation or imposition of which shall have
been in compliance with the "Limitation on Liens" covenant); provided, however,
that with respect to clause (a), the Company or a Restricted Subsidiary may be
liable for Indebtedness of an Unrestricted Subsidiary if (x) such liability
constituted a Permitted Investment or a Restricted Payment permitted by the
"Limitation on Restricted Payments" covenant, in each case at the time of
incurrence, or (y) the liability would be a Permitted Investment at the time of
designation of such Subsidiary as an Unrestricted Subsidiary. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by filing a Board Resolution with the Trustee giving effect to such
designation. The Board of Directors of the Company may designate any
Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving
effect to such designation on a pro forma basis, (i) no Default or Event of
Default shall have occurred and be continuing, (ii) the Company could incur
$1.00 of additional Indebtedness (not including the incurrence of Permitted
Indebtedness) under the first paragraph of the "Limitation on Indebtedness and
Disqualified Capital Stock" covenant and (iii) if any of the properties and
assets of the Company or any of its Restricted Subsidiaries would upon such
designation become subject to any Lien (other than a Permitted Lien), the
creation or imposition of such Lien shall have been in compliance with the
"Limitation on Liens" covenant.
"Volumetric Production Payments" means production payment obligations of
the Company or a Restricted Subsidiary recorded as deferred revenue in
accordance with GAAP, together with all undertakings and obligations in
connection therewith.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the 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 any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
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REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement, the Company agreed to file
with the SEC the Exchange Offer Registration Statement on the appropriate form
under the Securities Act with respect to an offer to exchange the Old Notes for
the Exchange Notes. The Registration Statement of which this Prospectus is a
part constitutes such Exchange Offer Registration Statement, and pursuant to the
Exchange Offer described herein the Parent is offering to the holders of Notes
who are able to make certain representations the opportunity to exchange their
Old Notes for Exchange Notes. If (i) the Company is not permitted to file the
Exchange Offer Registration Statement or to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or interpretation
of the staff of the SEC or (ii) any holder of Old Notes notifies the Company
within the specified time period that (A) due to a change in law or policy it is
not entitled to participate in the Exchange Offer, (B) due to a change in law or
policy it may not resell the Exchange Notes acquired by it in the Exchange Offer
to the public without delivering a prospectus and the prospectus contained in
the Exchange Offer Registration Statement is not appropriate or available for
such resales by such holder or (C) it is a broker-dealer and owns Old Notes
acquired directly from the Parent or an affiliate of the Parent, the Company
will file with the SEC the Shelf Registration Statement to cover resales of the
Transfer Restricted Notes (as defined) by the holders thereof. The Company will
use commercially reasonable best efforts to cause the applicable registration
statement to be declared effective within specified periods by the SEC. For
purposes of the foregoing, "Transfer Restricted Notes" means each Note until (i)
the date on which such Note has been exchanged by a person other than a
broker-dealer for an Exchange Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Old Note for an Exchange
Note, the date on which such Exchange Note is sold to a purchaser who receives
from such broker-dealer on or prior to the date of such sale a copy of the
prospectus contained in the Exchange Offer Registration Statement, (iii) the
date on which such Note has been effectively registered under the Securities Act
and disposed of in accordance with the Shelf Registration Statement or (iv) the
date on which such Note is distributed to the public pursuant to Rule 144 under
the Securities Act.
Under existing SEC staff interpretations, the Transfer Restricted Notes
would, in general, be freely transferable after the Exchange Offer without
further registration under the Securities Act, provided that in the case of
broker-dealers participating in the Exchange Offer, a prospectus meeting the
requirements of the Securities Act will be delivered upon resale by such
broker-dealers in connection with resales of Exchange Notes. The Company has
agreed, for a period of six months after consummation of the Exchange Offer, to
make available a prospectus meeting the requirements of the Securities Act to
any broker-dealer for use in connection with any resale of Exchange Notes
acquired in the Exchange Offer (other than a resale of any unsold allotment from
the original sale of the Old Notes). A broker-dealer which delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act and will be
bound by the provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
The Registration Rights Agreement provides that: (i) unless the Exchange
Offer would not be permitted by applicable law or SEC policy, the Company will
file an Exchange Offer Registration Statement with the SEC on or prior to 90
days after the date of original issuance of the Notes (the "Closing Date," which
was January 25, 1996), (ii) unless the Exchange Offer would not be permitted by
applicable law or SEC policy, the Company will use its commercially reasonable
best efforts to have the Exchange Offer Registration Statement declared
effective by the SEC on or prior to 120 days after the Closing Date, (iii)
unless the Exchange Offer would not be permitted by applicable law or SEC
policy, the Company will commence the Exchange Offer and use commercially
reasonable best efforts to issue, on or prior to 30 business days after the date
on which the Exchange Offer Registration Statement was declared effective by the
SEC, Exchange Notes in exchange for all Old Notes tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration Statement,
the Company will file prior to the later of (x) 90 days after the Closing Date
or (y) 30 days after such filing obligation arises and use its commercially
reasonable best efforts to cause the Shelf Registration Statement to be declared
effective by the SEC on or prior to 90 days after such obligation arises;
provided that if the Company has not consummated the Exchange Offer within 180
days of the Closing Date, then the Company will file the Shelf Registration
Statement with the SEC on or prior to the 181st day
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after the Closing Date and use its commercially reasonable best efforts to cause
the Shelf Registration Statement to be declared effective within 60 days after
such filing. The Company shall use its commercially reasonable best efforts to
keep such Shelf Registration Statement continuously effective, supplemented and
amended until the third anniversary of the Closing Date or such shorter period
that will terminate when all the Transfer Restricted Notes covered by the Shelf
Registration Statement have been sold pursuant thereto. If (i) the Company fails
to file any of the registration statements required by the Registration Rights
Agreement on or before the date specified for such filing, (ii) any of such
registration statements are not declared effective by the SEC on or prior to the
date specified for such effectiveness (the "Effectiveness Target Date"), (iii)
the Company fails to consummate the Exchange Offer within 30 business days of
the Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (iv) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter, subject to certain
exceptions, ceases to be effective or usable in connection with the Exchange
Offer or resales of Transfer Restricted Notes, as the case may be, during the
periods specified in the Registration Rights Agreement (each such event referred
to in clauses (i) through (iv) above, a "Registration Default"), then the
interest rate on Transfer Restricted Notes will increase ("Additional
Interest"), with respect to the first 90-day period immediately following the
occurrence of such Registration Default by 0.50% per annum and will increase by
an additional 0.50% per annum with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of 2%
per annum with respect to all Registration Defaults. Following the cure of all
Registration Defaults, the accrual of Additional Interest will cease and the
interest rate will revert to the original rate.
TRANSFER RESTRICTIONS ON OLD NOTES
The Old Notes have not been registered under the Securities Act and they
may not be offered or sold within the United States or to, or for the account or
benefit of, U.S. persons except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act.
Accordingly, the Old Notes were offered and sold only (A) to "Qualified
Institutional Buyers" (as defined in Rule 144A under the Securities Act) in
compliance with Rule 144A and (B) to a limited number of other institutional
"Accredited Investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) that, prior to their purchase of any Old Notes, delivered to the
Initial Purchasers a letter containing certain representations and agreements.
Each purchaser of Old Notes was deemed to have represented and agreed as
follows:
1. It is purchasing the Old Notes for its own account or an account
with respect to which it exercises sole investment discretion and that it
and any such account is (A) a Qualified Institutional Buyer, and is aware
that the sale to it is being made in reliance on Rule 144A or (B) an
Accredited Investor.
2. It acknowledges that the Old Notes have not been registered under
the Securities Act and that none of the Old Notes may be offered or sold
within the United States or to, or for the account or benefit of, U.S.
persons except as set forth below.
3. It shall not resell or otherwise transfer any of such Old Notes
within three years after the original issuance of the Old Notes except (A)
to the Parent or any of its subsidiaries, (B) inside the United States to a
Qualified Institutional Buyer in compliance with Rule 144A, (C) inside the
United States to an Accredited Investor that, prior to such transfer,
furnishes to the Trustee a signed letter containing certain representations
and agreements (the form of which letter can be obtained from such
Trustee), (D) outside the United States to foreign purchasers in offshore
transactions meeting the requirements of Rule 904 of Regulation S under the
Securities Act, (E) pursuant to the exemption from registration provided by
Rule 144 under the Securities Act (if available), or (F) pursuant to an
effective registration statement under the Securities Act. As used herein,
the terms "offshore transaction," "United States" and "U.S. person" have
the respective meanings given to them in Regulation S.
4. It agrees that it will give to each person to whom it transfers the
Old Notes notice of any restrictions on transfer of such Old Notes.
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5. It understands that all of the Old Notes will bear a legend
substantially to the following effect unless otherwise agreed by the
Parent, the Trustee and the holder thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF,
THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS
AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT) (AN "ACCREDITED INVESTOR") OR
(C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN
OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT WITHIN THREE YEARS
AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL OR OTHERWISE
TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER OR ANY SUBSIDIARY
THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER
IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE
UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER,
FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH LETTER CAN BE OBTAINED
FROM THE TRUSTEE), (D) OUTSIDE THE UNITED STATES TO FOREIGN PURCHASERS
IN OFFSHORE TRANSACTIONS MEETING THE REQUIREMENTS OF RULE 904 OF
REGULATION S UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION,
FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF
AVAILABLE), OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO
WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION,"
"UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO
THEM IN REGULATION S.
6. It acknowledges that the Trustee will not be required to accept for
registration of transfer any Old Notes acquired by it, except upon
presentation of evidence satisfactory to the Parent and the Trustee that
the restrictions set forth herein have been complied with.
7. It acknowledges that the Parent, the Trustee, the Initial
Purchasers and others will rely upon the truth and accuracy of the
foregoing acknowledgements, representations or agreements and agrees that
if any of the acknowledgements, representations or agreements deemed to
have been made by its purchase of the Old Notes are no longer accurate, it
shall promptly notify the Parent, the Trustee and the Initial Purchasers.
If it is acquiring the Old Notes as a fiduciary or agent for one or more
investor accounts, it represents that it has sole investment discretion
with respect to each such account and it has full power to make the
foregoing acknowledgements, representations and agreements on behalf of
each account.
Any Old Notes not exchanged in the Exchange Offer for Exchange Notes will
continue to be subject to the transfer restrictions described above.
BOOK ENTRY; DELIVERY AND FORM
The Exchange Notes initially will be represented by a single, permanent
global certificate in definitive, fully registered form (the "Global Note"). The
Global Note will be deposited with, or on behalf of, DTC and registered in the
name of a nominee of DTC.
64
<PAGE> 65
THE GLOBAL NOTE
The Company expects that pursuant to procedures established by DTC (i) upon
the issuance of the Global Note, DTC or its custodian will credit, on its
internal system, the principal amount of Exchange Notes of the individual
beneficial interests represented by such Global Note to the respective accounts
for persons who have accounts with DTC and (ii) ownership of beneficial
interests in the Global Note will be shown on, and the transfer of such
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
Ownership of beneficial interests in the Global Note will be limited to persons
who have accounts with DTC ("participants") or persons who interests through
participants. Owners of beneficial interests in the Global Note will hold their
interests directly through DTC, if they are participants in such system, or
indirectly through organizations which are participants in such system.
So long as DTC or its nominee is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by the Global Note for all
purposes under the Indenture. No beneficial owner of an interest in the Global
Note will be able to transfer that interest except in accordance with DTC's
procedures.
Payments of the principal of, premium, if any, and interest on, the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee, the Exchange Agent or any
paying agent of the Company will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in the Global Note
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in immediately available funds.
The laws of some states require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in the Global Note.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Old Notes for exchange
for Exchange Notes) only at the direction of one or more participants to whose
account the interests in the Global Note are credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants have given such direction. However, if there is an
Event of Default under the Indenture, DTC will exchange the Global Note for
certificated Notes in registered form ("Certificated Securities"), which it will
distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
65
<PAGE> 66
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Initial Purchasers, the
Trustee or the Exchange Agent will have any responsibility for the performance
by DTC or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED SECURITIES
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Note and a successor depositary is not appointed by the Parent within
90 days, or at the Parent's election at any time, Certificated Securities will
be issued in exchange for the Global Note.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain federal income tax consequences
associated with the Exchange Offer, and also with respect to the acquisition,
ownership, and disposition of the Exchange Notes. The following summary does not
discuss all of the aspects of federal income taxation that may be relevant to a
prospective holder of Exchange Notes in light of his or her particular
circumstances, or to certain types of holders which are subject to special
treatment under the federal income tax laws (including persons who hold Exchange
Notes as part of a conversion, straddle or hedge, dealers in securities,
insurance companies, tax exempt organizations, financial institutions,
broker-dealers and S corporations). Further, the summary pertains only to
holders that are citizens or residents of the United States, or any political
subdivision thereof, or estates or trusts the income of which is subject to
United States federal income taxation regardless of its source. In addition,
this summary does not describe any tax consequences under state, local, or
foreign tax laws.
The discussion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations, Internal Revenue Service ("IRS") rulings and
pronouncements and judicial decisions now in effect, all of which are subject to
change at any time by legislative, judicial or administrative action. Any such
changes may be applied retroactively in a manner that could adversely affect
holders of Exchange Notes. The Company has not sought and will not seek any
rulings or opinions from the IRS or counsel with respect to the matters
discussed below. There can be no assurance that the IRS will not take positions
concerning the tax consequences of the valuation, purchase, ownership or
disposition of the Exchange Notes which are different from those discussed
herein.
THIS SUMMARY DOES NOT PURPORT TO COVER ALL THE POSSIBLE TAX CONSEQUENCES OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE EXCHANGE NOTES, AND IS NOT
INTENDED AS TAX ADVICE. PROSPECTIVE PURCHASERS OF EXCHANGE NOTES SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES THAT MAY BE SPECIFIC TO THEM OF ACQUIRING, OWNING AND DISPOSING OF
EXCHANGE NOTES, AS WELL AS THE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS.
EXCHANGE OFFER
Under federal income tax law, a holder of Old Notes will not recognize gain
or loss upon an exchange of the Old Notes for Exchange Notes pursuant to the
Exchange Offer. A holder's basis and holding period for the Exchange Notes
received pursuant to the Exchange Offer will be the same as such holder's basis
and holding period for the Old Notes exchanged therefor.
Each exchanging holder should consult with his or her individual tax
advisor as to any foreign, state and local tax consequences of the Exchange
Offer as well as to the effect of his or her particular facts and circumstances
on the matters discussed herein.
66
<PAGE> 67
TAXATION OF QUALIFIED STATED INTEREST ON EXCHANGE NOTES
Absent some special circumstances that may be particular to a holder,
qualified stated interest paid on an Exchange Note will be taxable to a holder
as ordinary interest income at the time it accrues or is received, in accordance
the holder's regular method of accounting for federal income tax purposes.
The Company will annually furnish to certain record holders of the Exchange
Notes and to the IRS information with respect to qualified stated interest paid
during the calendar year as may be required under applicable regulations.
SALE OR OTHER TAXABLE DISPOSITION OF EXCHANGE NOTES
The sale, redemption, or other taxable disposition of an Exchange Note will
result in the recognition of gain or loss to the holder in an amount equal to
the difference between (a) the amount of cash and fair market value of property
received (except to the extent attributable to the payment of accrued qualified
stated interest) in exchange therefor and (b) the holder's adjusted tax basis in
such Exchange Note.
A holder's initial tax basis in an Exchange Note purchased by such holder
will be equal to the portion of the issue price allocable to the Exchange Notes,
as discussed above. The holder's initial tax basis in an Exchange Note will be
increased by the amount of any original issue discount included in gross income
with respect to such Exchange Note to the date of disposition.
Any gain or loss on the sale, redemption, or other taxable disposition of
an Exchange Note will be capital gain or loss, assuming the owner of the
Exchange Note holds such security as a "capital asset" (generally property held
for investment) within the meaning of Section 1221 of the Code. Any capital gain
or loss will be long-term capital gain or loss if the Exchange Note is held for
more than one year and otherwise will be short-term capital gain or loss.
Payments on such disposition for accrued qualified stated interest not
previously included in income will be treated as ordinary interest income.
If the Exchange Offer is not consummated within the required period of time
(and in certain other circumstances), then Additional Interest may become
payable with respect to the Notes. See "Registration Rights Agreement." This
rate increase should not result in a deemed taxable exchange of the Notes.
PURCHASERS OF NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE OR DATE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquired Old Notes either (a) other than at the time of
original issuance or (b) at the time of original issuance other than at the
issue price, including those provisions of the Code relating to the treatment of
"market discount," "acquisition premium" and "amortizable bond premium." Any
such purchaser should consult his or her tax advisor as to the consequences to
him or her of the acquisition, ownership, and disposition of Notes.
BACKUP WITHHOLDING
The backup withholding rules require a payor to deduct and withhold a tax
if (a) the payee fails to furnish a taxpayer identification number ("TIN") to
the payor, (b) the IRS notifies the payor that the TIN furnished by the payee is
incorrect, (c) the payee has failed to report properly the receipt of
"reportable payments" and the IRS has notified the payor that withholding is
required, or (d) there has been a failure of the payee to certify under the
penalty of perjury that a payee is not subject to withholding under Section 3406
of the Code. As a result, if any one of the events discussed above occurs with
respect to a holder of Notes, the Company, its paying agent or other withholding
agent will be required to withhold a tax equal to 31% of any "reportable
payment" made in connection with the Notes of such holder. A "reportable
payment" includes, among other things, amounts paid in respect of interest or
original issue discount and amounts paid through brokers in retirement of
securities. Any amounts withheld from a payment to a holder under the backup
withholding rules will be allowed as a refund or credit against such holder's
federal income tax, provided, that the required information is furnished to the
IRS. Certain holders (including, among others, corporations and certain
tax-exempt organizations) are not subject to the backup withholding rules.
67
<PAGE> 68
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale for a period of six
months after consummation of the Exchange Offer, or such shorter period as will
terminate when all Old Notes acquired by broker-dealers for their own accounts
as a result of market-making activities or other trading activities have been
exchanged for Exchange Notes and resold by such broker-dealers. A broker-dealer
that delivers such a prospectus to purchasers in connection with such resales
will be subject to certain of the civil liability provisions under the
Securities Act and will be bound by the provisions of the Registration Rights
Agreement (including certain indemnification rights and obligations).
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. For a period of six months after consummation of the Exchange Offer, or
such shorter period as will terminate when all Old Notes acquired by
broker-dealers for their own accounts as a result of market-making activities or
other trading activities have been exchanged for Exchange Notes and resold by
such broker-dealers, the Company will promptly send additional copies of this
Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in the Letter of Transmittal. The
Company has agreed in the Registration Rights Agreement to indemnify such
broker-dealers against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the issuance of the Notes offered hereby will be passed
upon for the Company by Mayor, Day, Caldwell & Keeton, L.L.P., Houston, Texas.
ACCOUNTANTS
The consolidated financial statements and schedules incorporated by
reference in this Prospectus and registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated by reference in reliance upon
the authority of said firm as experts in giving said reports.
The statements of revenues and direct operating expenses for the oil and
gas properties of Natural Gas Processing Co. sold to KCS Resources, Inc. for the
years ended June 30, 1994 and 1995 have been included herein in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
68
<PAGE> 69
RESERVE ENGINEERS
Information set forth in this Prospectus and the documents incorporated
herein by reference relating to the Company's estimated proved oil and gas
reserves not attributable to its volumetric production payment program at
December 31, 1995, the related calculations of future net production revenues
and the net present value thereof have been derived from independent petroleum
engineering reports (prepared principally by R.A. Lenser and Associates, Inc. &
H.J. Gruy and Associates, Inc.), and all such information has been included in
reliance on the authority of such firms as experts regarding the matters
contained in their reports.
The Company utilizes independent petroleum engineering reports with respect
to reserves underlying the Company's volumetric production payment program to
support its own analysis of the reserves underlying the volumetric production
payments, the proved reserves, related future net revenues and PV-10 that the
Company reports. This information is not derived from such independent reserve
engineers' reports, but rather is taken directly from the amounts contracted for
pursuant to the agreements relating to each volumetric production payment.
69
<PAGE> 70
GLOSSARY OF OIL AND GAS TERMS
The following are abbreviations and definitions of terms used throughout
this Prospectus and the documents incorporated herein by reference.
Bbl. Barrel of 42 U.S. gallons of crude oil or other liquid hydrocarbons.
Bcf. Billion cubic feet.
Bcfe. Billion feet of gas equivalent.
Btu. British thermal unit, which is the quantity of heat required to raise
the temperature of one-pound of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. Installation of permanent equipment for the production of crude
oil or natural gas.
Condensate. Hydrocarbon mixture that becomes liquid and separates from
natural gas when the natural gas is produced. Similar to crude oil.
Development location. A location on which a development well can be
drilled.
Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive in an
attempt to recover proved undeveloped reserves.
Dry hole. A well found to be incapable of producing either oil or gas in
sufficient quantities to justify completion as an oil or gas well.
Estimated future net revenues. Revenues from production of oil and gas, net
of all production-related taxes, lease operating expenses and capital costs.
Exploratory well. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field which contains other
productive oil or gas reservoirs, or to extend a known reservoir.
Gas equivalent. Cubic feet of natural gas equivalent, determined using the
ratio of one Bbl of crude oil, condensate or natural gas liquids to six Mcf of
natural gas.
Gross acres or gross wells. An acre or well in which a working interest is
owned.
Mbbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MMbbl. One million barrels of crude oil or other liquid hydrocarbons.
MBtu. One thousand Btus.
MMBtu. One million Btus.
Mcf. One thousand cubic feet.
Mcfe. One thousand cubic feet of gas equivalent.
MMcf. One million cubic feet.
MMcfe. One million cubic feet of gas equivalent.
Net acres or net wells. The sum of the fractional working interests net to
the Company owned in gross acres or gross wells.
Net production. Production after royalties and production due others.
NGLs. Natural gas liquids, such as ethane, propane, iso-butane, normal
butane and natural gasoline that can be extracted from natural gas.
Overriding royalty interest. An interest in an oil and gas property
entitling the owner to a share of oil or gas production, free of costs of
production.
PDP. Proved developed producing.
70
<PAGE> 71
Pre-tax present value of estimated future net revenues ("PV-10"). Estimated
future net revenues before income taxes except where permitted by SEC
guidelines, with no price or cost escalation or de-escalation, in accordance
with guidelines promulgated by the SEC and discounted using an annual discount
rate of 10%.
Productive well. A well that is producing oil or gas or that is capable of
production.
Proved developed reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped reserves. Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.
Recompletion. The completion for production of an existing wellbore in
another formation from that in which the well has previously been completed.
Reserve life is calculated by dividing year-end reserves by total
production in that year.
Reserve replacement costs. Total costs incurred for exploration and
development, divided by reserves added from all sources, including reserve
discoveries, extensions and improved recovery additions, net revisions to
reserve estimates and purchases of reserves-in-place. This calculation is often
used as a measure of the efficiency of an oil and gas company's exploration and
development expenditures.
Reserve replacement ratio is calculated by dividing the net total reserves
added in a specific year through drilling, acquisitions, and revisions by total
production in that year.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
Working interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
the production.
Workover. Operations on a producing well to restore or increase production.
71
<PAGE> 72
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Rocky Mountain Properties
Report of Independent Public Accountants............................................. F-2
Statements of Revenues and Direct Operating Expenses for the Oil and Gas Properties
of Natural Gas Processing Co. sold to KCS Resources, Inc. for the years ended June
30, 1994 and 1995................................................................. F-3
Notes to Statements of Revenues and Direct Operating Expenses for the Oil and Gas
Properties of Natural Gas Processing Co. sold to KCS Resources, Inc. ............. F-4
Statements of Revenues and Direct Operating Expenses for the Oil and Gas Properties
of Natural Gas Processing Co. sold to KCS Resources, Inc. for the three months
ended September 30, 1994 and 1995 (unaudited)..................................... F-6
</TABLE>
F-1
<PAGE> 73
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To KCS Resources, Inc.:
We have audited the accompanying Statements of Revenues and Direct
Operating Expenses for the Oil and Gas Properties of Natural Gas Processing Co.
Sold to KCS Resources, Inc. for the years ended June 30, 1994 and 1995. These
financial statements are the responsibility of the management of KCS Resources,
Inc. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statements of Revenues and Direct
Operating Expenses for the Oil and Gas Properties of Natural Gas Processing Co.
Sold to KCS Resources, Inc. are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission for
inclusion in Form S-4 of KCS Energy, Inc. and are not intended to be a complete
financial presentation of the properties described above.
In our opinion, the statements referred to above present fairly, in all
material respects, the Revenues and Direct Operating Expenses for the Oil and
Gas Properties of Natural Gas Processing Co. Sold to KCS Resources, Inc. for the
years ended June 30, 1994 and 1995, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Billings, Montana
October 6, 1995
F-2
<PAGE> 74
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE OIL AND GAS PROPERTIES OF NATURAL
GAS PROCESSING CO. SOLD TO KCS RESOURCES, INC.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1994 1995
------- --------
<S> <C> <C>
Revenues:
Oil and gas sales to unaffiliated enterprises............................ $4,355 $4,177
Oil and gas sales to Natural Gas Processing Co's other operations........ 1,316 1,492
Gathering system and contract operating.................................. 1,951 1,865
------ ------
Total revenues................................................... 7,622 7,534
------ ------
Direct operating expenses:
Production............................................................... 2,761 2,748
Gathering system and contract operating.................................. 1,618 1,209
------ ------
Total direct operating expenses.................................. 4,379 3,957
------ ------
Excess of Revenues Over Direct Operating Expenses.......................... $3,243 $3,577
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 75
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE OIL AND GAS PROPERTIES OF NATURAL GAS PROCESSING CO.
SOLD TO KCS RESOURCES, INC.
(1) THE PROPERTIES
Effective July 1, 1995 Natural Gas Processing Co. (NGP) sold certain oil
and gas properties and gas gathering systems (the properties) located in
Montana, Wyoming, New Mexico and Colorado to KCS Resources, Inc. (KCS) for $33
million.
(2) BASIS FOR PRESENTATION
During the periods presented, the above properties were not accounted for
or operated as a separate entity by NGP. Certain costs, such as depreciation,
depletion and amortization; general and administrative expenses; and corporate
income taxes were not allocated to the individual properties. Accordingly, full
separate financial statements prepared in accordance with generally accepted
accounting principles do not exist.
Revenues and direct operating expenses included in the accompanying
statements represent NGP's net working interest in the properties and NGP's
revenue and direct operating expenses from the gas gathering systems operations.
The amounts are presented on the accrual basis of accounting. Depreciation,
depletion and amortization, allocated general and administrative expenses and
corporate income taxes have been excluded.
(3) COMMITMENTS AND CONTINGENCIES
Pursuant to the terms of the Purchase and Sale Agreement dated September 8,
1995, any claims, litigation or disputes pending as of the effective date or any
matters arising in connection with ownership of the properties prior to the
effective date are retained by NGP.
(4) CAPITAL EXPENDITURES (UNAUDITED)
Direct operating expenses do not include oil and gas property acquisition,
exploration and development expenditures capitalizable under the full cost
method of accounting related to the properties which amounted to $2,298,900 and
$2,172,463 for the years ended June 30, 1994 and 1995, respectively.
F-4
<PAGE> 76
NOTES TO STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE OIL AND GAS PROPERTIES OF NATURAL GAS PROCESSING CO.
SOLD TO KCS RESOURCES, INC.
(5) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The following data which is presented pursuant to FASB Statement No. 69 is
based on estimates of year-end oil and gas reserve quantities and forecasts of
future development costs and production schedules. These estimates and forecasts
are inherently imprecise and subject to substantial revision as a result of
changes in estimates or remaining volumes, prices, costs, and production rates:
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1994 1995
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Future Cash inflows................................................... $138,444 $132,775
Future costs:
Production.......................................................... 43,365 40,617
Development......................................................... 11,900 11,431
-------- --------
Net cash flows........................................................ 83,179 80,727
Discount for estimated timing of future cash flows.................... 36,888 35,457
-------- --------
Total....................................................... $ 46,291 $ 45,270
======== ========
</TABLE>
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1994 1995
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Beginning of year..................................................... $ 42,993 $ 46,291
Sales, net of production costs........................................ (2,910) (2,921)
Net change in prices, net of production costs......................... (821) (3,432)
Extensions, discoveries and improved recovery, less related costs..... 2,242 234
Development costs incurred during the period.......................... 488 469
Accretion of discount................................................. 4,299 4,629
-------- --------
End of year........................................................... $ 46,291 $ 45,270
======== ========
</TABLE>
RESERVE INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1994 1995
---------------- ----------------
GAS OIL GAS OIL
MMCF MBBL MMCF MBBL
------ ----- ------ -----
<S> <C> <C> <C> <C>
Proved developed and undeveloped reserves
Balance, beginning of year.............................. 41,741 4,426 42,358 4,494
Production.............................................. (1,696) (172) (1,936) (174)
Discoveries, extensions, and improved recovery.......... 2,313 240 512 --
------ ----- ------ -----
Balance, end of year.................................... 42,358 4,494 40,934 4,320
====== ===== ====== =====
Proved developed reserves
Balance, end of year.................................... 31,789 1,756 29,853 1,582
====== ===== ====== =====
</TABLE>
F-5
<PAGE> 77
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE OIL AND GAS PROPERTIES OF NATURAL GAS PROCESSING CO.
SOLD TO KCS RESOURCES, INC.
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
------------------
1994 1995
------ ------
<S> <C> <C>
Revenues.................................................................. $1,681 $1,389
Direct Operating Expenses................................................. 676 652
------ ------
Excess of Revenues Over Direct Operating Expenses......................... $1,005 $ 737
====== ======
</TABLE>
F-6
