<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 1997
REGISTRATION NO. 333-40479
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
KCS ENERGY, INC.
(AND CERTAIN SUBSIDIARIES IDENTIFIED IN FOOTNOTE (*) BELOW)
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
DELAWARE
(State or other jurisdiction of 22-2889587
incorporation or organization) (I.R.S. Employer Identification No.)
KATHRYN M. KINNAMON
379 THORNALL STREET 379 THORNALL STREET
EDISON, NEW JERSEY 08837 EDISON, NEW JERSEY 08837
(732) 632-1770 (732) 632-1770
(Address, including zip code, and telephone (Name, address, including zip code,
number, including area code, of and telephone number, including area
registrant's principal executive offices) code, of agent for service)
</TABLE>
Copies to:
<TABLE>
<C> <C>
DIANA M. HUDSON T. MARK KELLY
JOHN B. CLUTTERBUCK VINSON & ELKINS L.L.P.
MAYOR, DAY, CALDWELL & KEETON, L.L.P. 2300 FIRST CITY TOWER
700 LOUISIANA, SUITE 1900 1001 FANNIN
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002-6760
(713) 225-7000 (713) 758-2222
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on the Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
- ---------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=====================================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM
OF SECURITIES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
$143,750,000 $43,561(3)
% Senior Subordinated Notes due 2008.....................
- ---------------------------------------------------------------------------------------------------------------------
Guarantees(4).............................................. -- --
=====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Pursuant to Rule 457(i) and (o) of the Rules and Regulations of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, the registration fee has been calculated solely on the basis of the
proposed maximum offering price of the Senior Subordinated Notes being
offered hereby.
(3) This fee, which was calculated pursuant to the formula in effect at the time
of the initial filing, was previously paid in full with initial filing.
(4) Guarantees by subsidiaries of the Registrant of the payment of the principal
and interest on the Senior Subordinated Notes. Pursuant to Rule 457(n), no
additional registration fee is required.
(*) The following subsidiaries of KCS Energy, Inc. are co-registrants
incorporated in the states and having the I.R.S. Employer Identification
Numbers indicated: (i) KCS Resources, Inc., a Delaware corporation
(76-0413320), (ii) KCS Michigan Resources, Inc., a Delaware corporation
(76-0482274), (iii) KCS Medallion Resources, Inc., a Delaware corporation
(76-0482274), (iv) KCS Energy Marketing, Inc., a New Jersey corporation
(22-2267499), (v) Enercorp Gas Marketing, Inc., a Delaware corporation
(76-0420837), (vi) KCS Pipeline Systems, Inc., a Delaware corporation
(76-0413321), (vii) KCS Energy Services, Inc., a Delaware corporation
(76-0516389), (viii) National Enerdrill Corporation, a New Jersey
corporation (22-9196560), (ix) Proliq, Inc., a New Jersey corporation
(22-1516527), (x) Medallion California Properties Co., a Texas corporation
(76-0267470) and (xi) Medallion Gas Services, Inc., an Oklahoma corporation
(73-1385098).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO CHANGE, COMPLETION OR AMENDMENT
WITHOUT NOTICE. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 29, 1997
PROSPECTUS
$125,000,000
KCS ENERGY, INC. [KCS ENERGY, INC. LOGO]
% SENIOR SUBORDINATED NOTES DUE 2008
------------------
The % Senior Subordinated Notes due 2008 (the "Notes") are being
offered (the "Offering") by KCS Energy, Inc. (the "Company"). The Notes will
mature on , 2008 and will bear interest at a rate of % per
annum, payable semi-annually on and of each year,
commencing , 1998.
The Notes will not be redeemable by the Company prior to , 2003.
Thereafter, the Notes will be redeemable at the option of the Company, in whole
or in part, at the redemption prices set forth in this Prospectus, together with
accrued interest. In the event the Company consummates a Public Equity Offering
(as defined) on or prior to 2001, the Company may at its option
use all or a portion of the proceeds from such offering to redeem up to $
million principal amount of the Notes at a redemption price equal to % of
the aggregate principal amount thereof, together with accrued interest, provided
that at least $90 million in aggregate principal amount of Notes remains
outstanding immediately after such redemption. In addition, upon a Change of
Control (as defined herein), each holder of Notes shall have the right, at the
holder's option, to require the Company to repurchase such holder's Notes at a
purchase price equal to 101% of the principal amount thereof, together with
accrued interest. See "Description of the Notes -- Redemption."
The Notes will be unsecured obligations of the Company and will be
subordinate to all present and future Senior Indebtedness (as defined herein) of
the Company and senior to all future Subordinated Indebtedness (as defined
herein) of the Company. See "Description of the Notes -- Subordination." Each of
the Company's current and certain of its future subsidiaries will
unconditionally guarantee, jointly and severally, the Company's obligations
under the Notes on a senior subordinated basis. See "Description of the
Notes -- Subsidiary Guarantees of Notes."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 HEREIN FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------
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.
<TABLE>
<CAPTION>
===================================================================================================================
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note...................................... % % %
- -------------------------------------------------------------------------------------------------------------------
Total......................................... $ $ $
===================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from the date of initial issuance.
(2) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $725,000.
------------------
The Notes are being offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that delivery of the Notes in book-entry form will be
made through the facilities of The Depository Trust Company on or about
, 1998.
---------------------
SALOMON SMITH BARNEY
PRUDENTIAL SECURITIES INCORPORATED
CIBC OPPENHEIMER
JEFFERIES AND COMPANY, INC.
MORGAN KEEGAN & COMPANY, INC.
, 1998
<PAGE> 3
[INSERT LOCATIONS MAP]
[INSIDE COVER PAGE CONTAINS MAP OF MIDDLE PORTION OF UNITED STATES WITH THE
COMPANY'S PRIMARY AREAS OF NATURAL GAS AND OIL ACTIVITY SHOWN GEOGRAPHICALLY IN
MONTANA, MICHIGAN, WYOMING, COLORADO, NEW MEXICO, OKLAHOMA, ARKANSAS, TEXAS,
LOUISIANA AND OFFSHORE OF TEXAS AND LOUISIANA]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR, AND PURCHASE, THE NOTES IN THE OPEN MARKET AND MAY IMPOSE PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) included
elsewhere in this Prospectus and in the documents incorporated herein by
reference. Investors should carefully consider the statements set forth under
"Risk Factors." Unless the context otherwise requires, "Company" and "KCS" refer
to KCS Energy, Inc. and its consolidated subsidiaries. Except as otherwise
specified, all data set forth in this Prospectus has been adjusted to reflect a
two-for-one stock split that the Company completed on June 30, 1997. See
"Glossary" for definitions of certain terms used herein.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. See "Special Note on
Forward-Looking Statements." Factors that might cause such differences include,
but are not limited to, those discussed in "Risk Factors."
THE COMPANY
GENERAL
KCS is an independent oil and gas company engaged in the acquisition,
exploration, development and production of oil and gas. Through its experienced
management and technical staff, the Company has grown significantly and created
a geographically diversified reserve base by implementing a balanced program of
development drilling, reserve acquisitions and exploration drilling. The Company
concentrates its activities in areas where it has accumulated geological
knowledge and technical expertise and where it can retain significant operating
control. As a result of these efforts, KCS has compiled a multi-year inventory
of over 600 potential drilling and recompletion locations, including a
significant number of sites in the Manderson Field in the Big Horn Basin in
Wyoming where the Company believes it has the potential to significantly
increase its reserves. Additionally, the Company augments its working interest
ownership of properties with a volumetric production payment ("VPP") program to
acquire priority rights to a portion of the oil and gas from other parties'
producing properties. The Company plans to spend $183 million on capital
expenditures in 1998, of which $95 million is for development drilling, $30
million is for exploration, $45 million is for the VPP program, $10 million is
for working interest acquisitions and $3 million is for other expenditures. The
Company currently plans to drill approximately 175 development wells and to
participate in approximately 60 exploratory prospects during 1998.
The Company's operations are primarily focused in the Rocky Mountain, Gulf
Coast, and Mid-Continent/West Texas regions, and through its VPP program
primarily in the Gulf of Mexico and Michigan. As of December 31, 1996, the
Company had estimated proved reserves of 355.8 Bcfe with an estimated pre-tax
present value of future net revenues ("PV-10") of $557.6 million. These
estimated reserves were 75% natural gas and 87% proved developed, and
approximately 10% were attributable to the Company's VPP program. The Company
operates properties comprising approximately 72% of its reserves (excluding VPP
reserves) at December 31, 1996.
A significant focus of the Company's future development is in the Manderson
Field in the Big Horn Basin in Wyoming. Since it acquired the field in November
1995, the Company has increased its acreage position from 7,500 to over 61,000
gross acres, and has undertaken an extensive exploration and development
drilling program. Through September 30, 1997, the Company had drilled 54 wells,
investing $35 million, and had spent $15.3 million to install infrastructure in
the field. Most of these wells are currently shut-in or awaiting completion,
remediation or stimulation because of delays in construction of a sour gas
treatment plant and associated gas injection system. Operations at the plant and
injection system commenced on December 3, 1997. Based on drilling and production
results and accumulation of additional seismic data, the Company believes that
there are seven productive formations located in the greater Manderson Field and
that they have significant reserve potential. The Company plans to spend $12
million in the fourth quarter of 1997 to complete a sour gas treatment plant in
the Manderson Field, bring the shut-in wells on production and drill
3
<PAGE> 5
17 additional wells. In 1998, the Company plans to spend approximately $40 to
$50 million to drill and complete as many as 70 to 100 wells in this field.
The Company has successfully increased its reserves through opportunistic
acquisitions. In May 1997, KCS completed an acquisition of properties in the
Langham Creek Field near Houston, Texas for $17 million (the "Langham Creek
Acquisition"), which enabled it to assume operatorship and increase its average
working interest in the area to approximately 61%. In December 1996, the Company
completed a major acquisition of oil and gas properties, principally in the
Mid-Continent region, for an aggregate purchase price of $199 million (the
"Medallion Acquisition"). As a result of the Medallion Acquisition, the Company
more than doubled its reserve base and production rate and significantly
expanded its presence in the Mid-Continent region. In November 1995, the Company
completed an acquisition in the Rocky Mountain region for $33 million (the
"Rocky Mountain Acquisition"), which resulted in numerous exploration and
development opportunities, including the Manderson Field.
Through its VPP program, the Company is able to add reserves at very
attractive rates of return and increase its exposure to acquisition, development
and exploration opportunities. In the three years ended September 30, 1997, the
Company invested $124 million in 25 separate VPP transactions, acquiring 71.8
Bcf of natural gas and 1.5 MMbbls of oil.
BUSINESS STRATEGY
KCS intends to continue to broaden its reserve base and increase production
and cash flow through a balanced program of development drilling, reserve
acquisitions and exploration drilling. The Company extensively utilizes advanced
technology, most notably 3-D seismic, computer-enhanced basin analysis, and
reservoir simulation and stimulation techniques, to better delineate and produce
reserves. The key components of the Company's business strategy include: (i)
exploiting and developing its multi-year inventory of development drilling
locations, (ii) capitalizing on the development potential of the Manderson
Field, (iii) acquiring properties with growth potential, (iv) controlling its
major properties, (v) continuing to expand its VPP program and (vi) pursuing a
balanced exploration program that includes high-potential opportunities.
KEY STRENGTHS
To implement its business strategy, the Company intends to take advantage
of several key strengths, including the following:
Proven Growth Record. The Company has achieved substantial growth in reserves,
production and EBITDA since 1992. KCS's estimated proved reserves have increased
at a compound annual growth rate of 57%, from 60.0 Bcfe as of December 31, 1992
to 355.8 Bcfe as of December 31, 1996. Over this period, production has
increased at a compound annual growth rate of 61%, from 4.4 Bcfe in 1992 to 30.1
Bcfe in 1996. Similarly, the Company's EBITDA has increased at a compound annual
growth rate of 81%, from $8.3 million for the year ended December 31, 1992 to
$88.9 million for the year ended December 31, 1996. For the nine months ended
September 30, 1997, the Company had oil and gas production of 41.2 Bcfe and
EBITDA of $72.0 million, compared to 22.2 Bcfe and $65.8 million for the same
period in 1996.
Innovative and Creative Approach to Expansion. The Company has demonstrated the
ability to identify and acquire oil and gas reserves in a disciplined, creative
manner and believes it has become one of the leaders in the acquisition of oil
and gas reserves through VPP transactions.
Large Multi-year Inventory of Drilling Opportunities. The Company has identified
more than 600 potential drilling and recompletion locations, representing a
three to four-year inventory. In addition, the Company believes that there are
significant exploratory opportunities in the acreage it has assembled, including
more than 265,000 gross undeveloped acres, in the onshore Gulf Coast regions of
Texas and Louisiana and in the Rocky Mountain and Mid-Continent regions.
Geographically Diversified Property Base. The Company operates in three distinct
regions: the Rocky Mountains, the Gulf Coast and the Mid-Continent/West Texas
regions. As a result, it benefits from diversification with respect to risks
associated with focusing on any one geographical region.
4
<PAGE> 6
Successful Drilling Program. During the three-year period ended December 31,
1996, the Company participated in the drilling of 118 development wells and 70
exploratory wells with a 93% and 46% completion rate. During the first nine
months of 1997, the Company participated in the drilling of 71 development
wells, 86% of which were completed and 23 exploratory wells, 43% of which were
completed. Over the five-year period ended December 31, 1996, the Company
replaced approximately 114% of its production through drilling.
High Operating Margins. The Company's drilling success and emphasis on an
efficient administrative and operating structure have enabled the Company to
generate high cash margins that the Company believes compare favorably with its
peer companies.
Control of Major Properties. The Company seeks to operate and own a majority
working interest in its major properties, which gives it greater control over
the timing and nature of future development as well as over operating costs and
the marketing of production. The Company operates properties comprising
approximately 72% of its reserves (excluding VPP reserves) at December 31, 1996.
Experienced, Motivated Management Team with a Significant Equity Stake. The
Company's senior management has extensive experience in the oil and gas industry
and is motivated to increase stockholder value. The Company's compensation
system is strongly geared to "pay for performance" with incentives directly tied
to operating and financial goals and objectives. Members of the Company's
management and directors currently own approximately 14% of the Company's common
stock, and the Company has established minimum direct ownership requirements for
all officers and directors.
5
<PAGE> 7
THE OFFERING
SECURITIES OFFERED............ $125,000,000 principal amount of % Senior
Subordinated Notes due 2008.
MATURITY...................... , 2008.
PAYMENT OF INTEREST........... and , commencing
, 1998.
OPTIONAL REDEMPTION........... The Notes will be redeemable in whole or in
part, at the option of the Company, at the
redemption prices set forth herein, together
with accrued interest, except that no
redemption may be made prior to ,
2003. In the event the Company consummates a
Public Equity Offering (as defined) on or prior
to 2001, the Company 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 % of the aggregate
principal amount thereof, together with accrued
interest, provided that at least $90 million in
aggregate principal amount of Notes remains
outstanding immediately after such redemption.
GUARANTEES.................... The Notes will be unconditionally guaranteed on
a senior subordinated basis by each of the
Company's current and certain of the Company's
future subsidiaries, and such Subsidiary
Guarantees (as defined) will be subordinate in
right of payment to all existing and future
Senior Indebtedness of the Subsidiary
Guarantors (as defined) and senior to all
future Subordinated Indebtedness of the
Subsidiary Guarantors.
RANKING....................... The Notes will be unsecured senior subordinated
obligations of the Company and will be
subordinate in right of payment to all existing
and future Senior Indebtedness of the Company
and senior to all future Subordinated
Indebtedness of the Company.
CHANGE OF CONTROL............. In the event that there shall occur a Change of
Control (as defined), each holder of the Notes
shall have the right, at the holder's option,
to require the Company to repurchase such
holder's Notes at 101% of their principal
amount, plus accrued interest. The term Change
in Control does not include other events that
might adversely affect the financial condition
of the Company or result in a downgrade in the
credit rating (if any) of the Notes. The
Company's ability to repurchase the Notes
following a Change of Control is dependent upon
the Company having sufficient funds and may be
limited by the terms of the Company's Senior
Indebtedness or the subordination provisions of
the Indenture. There is no assurance that the
Company will be able to repurchase the Notes
upon the occurrence of a Change of Control.
CERTAIN COVENANTS............. The Indenture relating to the Notes will
contain certain covenants, including covenants
which limit: (i) indebtedness; (ii) restricted
payments; (iii) issuances and sales of capital
stock of restricted subsidiaries; (iv)
transactions with affiliates; (v) other senior
subordinated indebtedness; (vi) liens; (vii)
asset sales; (viii) dividends and other payment
restrictions affecting restricted subsidiaries;
(ix) conduct of business; and (x) mergers,
consolida-
6
<PAGE> 8
tions and sales of assets. See "Description of
the Notes -- Certain Covenants" and "-- Merger,
Consolidation and Sale of Assets."
USE OF PROCEEDS............... The net proceeds to the Company from the sale
of the Notes will be used to fund the Company's
capital expenditure program and for working
capital and other general corporate purposes.
The proceeds will initially be used to repay
existing indebtedness under the Company's Bank
Credit Facilities (as defined).
7
<PAGE> 9
SUMMARY HISTORICAL FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected historical financial information of
the Company and should be read in conjunction with the Consolidated Financial
Statements (including the notes thereto) of KCS Energy, Inc. and the information
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus. The historical
data for the years ended December 31, 1994, 1995 and 1996 and for the nine
months ended September 30, 1996 (i) includes revenues attributable to an
above-market, take-or-pay contract with Tennessee Gas Pipeline Company (the
"Tennessee Gas Contract") which was terminated effective January 1, 1997 and
(ii) has been restated to reflect the discontinuation of the Company's natural
gas transportation and marketing operations in 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Oil and gas revenue(1)..................................... $66,215 $ 86,629 $108,015 $ 79,051 $100,396
Other revenue, net......................................... 1,185 486 359 377 3,702
------- -------- -------- -------- --------
Total................................................ 67,400 87,115 108,374 79,428 104,098
Operating costs and expenses:
Lease operating expenses................................... 6,218 6,156 9,167 6,582 20,470
Production taxes........................................... 845 467 2,526 1,671 4,354
General and administrative expenses........................ 4,853 4,704 7,825 5,411 7,302
Depreciation, depletion and amortization................... 18,783 38,231 45,460 33,128 42,486
------- -------- -------- -------- --------
Total................................................ 30,699 49,558 64,978 46,792 74,612
------- -------- -------- -------- --------
Operating income............................................ 36,701 37,557 43,396 32,636 29,486
Interest and other income, net.............................. 1,175 4,472 5,086 4,820 388
Interest expense............................................ (2,004) (6,807) (14,085) (11,193) (15,146)
------- -------- -------- -------- --------
Income from continuing operations before income taxes....... 35,872 35,222 34,397 26,263 14,728
Federal and state income taxes.............................. 12,269 11,817 12,680 9,483 5,452
------- -------- -------- -------- --------
Income from continuing operations........................... 23,603 23,405 21,717 16,780 9,276
Discontinued operations:
Net income (loss) from operations........................ 554 (2,099) (1,845) (1,974) (72)
Net gain on disposition.................................. -- -- -- -- 5,461
------- -------- -------- -------- --------
Net income.................................................. $24,157 $ 21,306 $ 19,872 $ 14,806 $ 14,665
======= ======== ======== ======== ========
Earnings per share:
Continuing operations.................................... $ 1.00 $ 1.00 $ 0.91 $ 0.70 $ 0.32
Discontinued operations.................................. 0.02 (0.09) (0.08) (0.08) 0.18
------- -------- -------- -------- --------
Total................................................ $ 1.02 $ 0.91 $ 0.83 $ 0.62 $ 0.50
======= ======== ======== ======== ========
Average common shares outstanding........................... 23,610 23,521 23,811 23,773 29,449
Dividends per common share.................................. $ 0.045 $ 0.060 $ 0.060 $ 0.045 $ 0.050
OTHER DATA (UNAUDITED):
Tennessee Gas Contract premium(2)........................... $42,828 $ 52,007 $ 32,829 $ 25,689 $ --
EBITDA(3)................................................... 55,484 75,788 88,856 65,764 71,972
Capital expenditures........................................ 74,953 128,699 277,218 52,735 171,884
Ratio of earnings to fixed charges(4)....................... 17.7x 6.1x 3.4x 3.3x 2.0x
Ratio of EBITDA to interest expense......................... 27.7x 11.1x 6.3x 5.9x 4.8x
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED(5)
-------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,858 $ 3,858
Working capital............................................. 7,707 7,707
Oil and gas properties, net................................. 540,896 540,896
Total assets................................................ 614,043 617,893
Long-term debt.............................................. 275,723 279,573
Total stockholders' equity.................................. 251,990 251,990
</TABLE>
- ---------------
(1) Includes revenues attributable to the Tennessee Gas Contract, for the years
ended December 31, 1994, 1995 and 1996 and for the nine months ended
September 30, 1996, that was terminated effective January 1, 1997.
(2) Reflects revenues associated with the natural gas production covered by the
above-market prices provided for in the Tennessee Gas Contract in excess of
the revenues that would otherwise have been received for such production at
spot market prices.
(3) EBITDA represents income before depletion, depreciation, amortization,
interest expense, interest and other income and income taxes. EBITDA is a
financial measure commonly used in the Company's industry and should not be
considered in isolation or as a substitute for net income, cash flow
provided by operating activities or other income or cash flow data prepared
in accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity.
(4) For purposes of calculating the ratio of earnings to fixed charges, fixed
charges include interest expense and that portion of non-capitalized rental
expense deemed to be the equivalent of interest. Earnings represents income
before income taxes from continuing operations before fixed charges.
(5) As adjusted to give effect to the sale by the Company of the Notes offered
hereby and the application of the estimated net proceeds as described under
"Use of Proceeds."
8
<PAGE> 10
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 at the end of the periods
indicated. Summary reserve information as of December 31, 1996 includes reserves
attributable to the Medallion Acquisition. For additional information relating
to the Company's oil and gas reserves and operating data, see "Business and
Properties," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the notes to the Consolidated Financial Statements
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1994 1995 1996
-------- ------------ --------
<S> <C> <C> <C>
RESERVE DATA:
Proved developed reserves:
Oil (Mbbls)............................................... 1,336 3,808 12,133
Natural gas (MMcf)........................................ 74,215 121,987 236,454
Total (MMcfe)........................................... 82,231 144,835 309,252
Proved undeveloped reserves:
Oil (Mbbls)............................................... 983 3,709 2,498
Natural gas (MMcf)........................................ 14,969 18,976 31,571
Total (MMcfe)........................................... 20,867 41,230 46,561
Total proved reserves:
Oil (Mbbls)............................................... 2,319 7,517 14,631
Natural gas (MMcf)........................................ 89,184 140,963 268,025
Total (MMcfe)........................................... 103,098 186,065 355,813
Estimated future net revenue before income taxes
($000)(1)(2).............................................. $307,533 $405,049 $849,265
Present value of estimated future net revenues before income
taxes ($000)(2)(3)(4)..................................... $241,705 $291,085 $557,612
Standardized measure of discounted future net cash flows
($000)(2)(3)(5)........................................... $179,660 $231,763 $437,599
Reserve replacement percentage.............................. 242.3% 527.2% 703.8%
Reserve life (in years)..................................... 8.2 9.2 11.8
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET PRODUCTION DATA:
Oil (Mbbls)................................................. 211 196 758 547 1,295
Liquids..................................................... -- -- -- -- 101
Natural gas (MMcf):
Tennessee Gas Contract.................................... 6,851 6,924 4,645 3,576 --
Other..................................................... 4,453 12,205 20,936 15,346 32,806
------- ------- ------- ------- -------
Total................................................... 11,304 19,129 25,581 18,922 32,806
Total (MMcfe)............................................... 12,570 20,305 30,129 22,204 41,180
OTHER DATA:
Average prices:
Oil (per bbl)............................................. $ 15.16 $ 17.28 $ 20.69 $ 19.72 $ 18.92
Liquids (per bbl)......................................... -- -- -- -- 11.05
Natural gas (per Mcf):
Tennessee Gas Contract.................................. 7.49 7.90 8.40 8.38 --
Other................................................... 1.81 1.62 2.35 2.29 2.28
Average................................................. 5.54 4.29 3.61 3.61 2.28
Average equivalent price (per Mcfe)......................... $ 5.27 $ 4.27 $ 3.59 $ 3.56 $ 2.44
Lifting cost (per Mcfe)(6).................................. 0.56 0.33 0.39 0.37 0.60
General and administrative expense (per Mcfe)............... 0.39 0.23 0.26 0.25 0.18
------- ------- ------- ------- -------
Cash margin (per Mcfe)...................................... $ 4.32 $ 3.71 $ 2.94 $ 2.94 $ 1.66
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Reflects estimated future cash inflows less future production and
development costs.
(2) Estimates at December 31, 1994 and 1995 reflect the contract price for
natural gas to be delivered from the Bob West Field under the Tennessee Gas
Contract until January 1999. In December 1996, the contract was terminated
by agreement of the parties effective January 1, 1997.
(3) Other than gas and oil sold under contractual arrangements including swaps,
futures contracts and options, reflects average realized gas prices of
$1.50, $2.03 and $3.54 per Mcf and average realized oil prices of $16.99,
$18.23 and $22.45 per bbl in effect at December 31, 1994, 1995 and 1996,
respectively.
(4) Reflects estimated future net revenue before income taxes discounted at 10%
per annum.
(5) Reflects estimated future net revenue less future income taxes discounted at
10% per annum.
(6) Includes lease operating expenses and production taxes.
9
<PAGE> 11
RISK FACTORS
In addition to the other information set forth in this Prospectus,
prospective purchasers of the Notes should carefully consider the following risk
factors in evaluating an investment in the Notes. This Prospectus contains
forward-looking statements which involve certain assumptions, risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. See "Special Note on Forward-Looking Statements."
VOLATILE NATURE OF OIL AND GAS MARKETS; FLUCTUATIONS IN 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, domestic and foreign supply of oil
and gas, the level of consumer demand, weather conditions, domestic and foreign
government regulations and taxes, the price and availability of alternative
fuels and overall economic conditions. From time to time, oil and gas prices
have been depressed by excess domestic and imported supplies. There can be no
assurance that current price levels will be sustained, and it is impossible to
predict future oil and gas price movements with any certainty. A decline in oil
or gas prices may adversely affect the Company's cash flow, liquidity and
profitability. Lower oil or gas prices also may reduce the amount of the
Company's oil and gas that can be produced economically. Additionally,
substantially all of the Company's sales of oil and gas are made in the spot
market and not pursuant to long-term fixed price contracts. With the objective
of reducing price risk, the Company may from time to time enter into hedging
transactions with respect to a portion of its expected future production. See
"-- Risks of Hedging Transactions." There can be no assurance that such hedging
transactions will reduce risk or mitigate the effect of any substantial or
extended decline in oil or gas prices. Any substantial or extended decline in
the prices of oil or gas would have a material adverse effect on the Company's
financial condition and results of operations.
DEPENDENCE ON ACQUIRING AND FINDING ADDITIONAL RESERVES
The Company's prospects for future growth and profitability will depend
predominately on its ability to replace present reserves through acquisitions
and development and exploratory drilling. The decision to acquire a business or
to purchase, explore or develop an interest in a property will depend in part on
the evaluation of data obtained through geophysical and geological analyses and
engineering studies, the results of which are often inconclusive or subject to
varying interpretations. Acquisitions may not be available at attractive prices,
and there can be no assurance that the 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
economically productive wells. Without successfully acquiring or developing
additional reserves, the Company's proved reserves and revenues will decline.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company has made, and likely will continue to make, substantial capital
expenditures in connection with the acquisition, development and exploration of
oil and gas properties. Historically, the Company has funded its capital
expenditures with cash flow from operations and funds from long-term debt
financing, including bank financing secured by its oil and gas assets (including
the Credit Facility and the Revolving Credit Agreement, as defined herein, the
"Bank Credit Facilities"). The Company anticipates that the net proceeds from
the sale of the Notes, together with its cash flow from operations, net proceeds
from the sale of non-strategic assets and the availability of credit under the
Bank Credit Facilities, will be sufficient to fund the approximately $183
million of capital expenditures currently budgeted for drilling and acquisition
activities in 1998. Future cash flows and the availability of financing are
subject to a number of variables, such as the level of production from existing
wells, prices of oil and gas and the Company's success in locating and producing
10
<PAGE> 12
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 the 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 the 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.
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES AND FUTURE NET CASH FLOWS
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves, including many factors beyond the Company's
control. This Prospectus includes independent engineering estimates of the
Company's oil and gas reserves and future net cash flows. Reserve engineering is
a subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact manner. Estimates of economically recoverable oil
and gas reserves and of future net cash flow necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulation by governmental agencies and assumptions concerning future oil and
gas prices, operating costs, severance and excise taxes, development costs and
workover and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of oil and gas attributable to any particular group of properties,
classifications of such reserves based on risk of recovery and estimates of the
future net cash flows expected therefrom prepared by different engineers or by
the same engineers at different times may vary significantly. Actual production,
revenues and expenditures with respect to the Company's reserves likely will
vary from estimates, and such variances may be material. The Company's
properties may also be susceptible to hydrocarbon drainage from production by
other operators of adjacent properties. 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. See "Business and Properties -- Oil and Gas Reserves."
Approximately 13% of the Company's total proved reserves as of December 31,
1996 were undeveloped, which are by their nature less certain. Recovery of such
reserves will require substantial capital expenditures by the Company and the
successful completion of drilling operations. The Company's reserve data assume
that substantial capital expenditures by the Company will be required to develop
such reserves. Although cost and reserve estimates attributable to the Company's
reserves have been prepared in accordance with industry standards, no assurance
can be given that the estimated costs are accurate, that development will occur
as scheduled or that the results will be as estimated. See "Business and
Properties -- Oil and Gas Reserves."
PV-10 values referred to in this Prospectus 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
Securities and Exchange Commission (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.
The Company provides for depreciation, depletion and amortization ("DD&A")
using the future gross revenue method based on recoverable reserves valued at
current prices. See Note 1 to Consolidated Financial Statements -- "Property,
Plant and Equipment" for a description of how the Company provides for DD&A and
the related limitation on capitalized oil and gas property costs. Significant
declines in oil and gas prices,
11
<PAGE> 13
like those experienced in early 1997, if not offset by increases in proved oil
and gas reserves, could result in a substantial increase in non-cash DD&A
accruals and could negatively impact earnings.
SUBSTANTIAL INDEBTEDNESS AND RESTRICTIONS
At September 30, 1997, the Company had outstanding $150 million in 11%
Senior Notes due 2003 (the "Senior Notes") issued pursuant to an indenture
governing the Senior Notes (the "Senior Notes Indenture") and approximately
$126.2 million of outstanding indebtedness under the Bank Credit Facilities
(which amount has increased since such date). See "Use of Proceeds" and
"Capitalization." Giving effect to the Offering and the application of the net
proceeds to repay amounts owed under the Bank Credit Facilities, the Company
expects to have approximately $145 million available for borrowing under the
Bank Credit Facilities immediately after the sale of the Notes.
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 Senior Notes Indenture require the Company to meet
certain financial tests. Other restrictions will also limit the Company's
ability to borrow additional funds and may affect its 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 or the Senior Notes Indenture.
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, the Senior Notes
Indenture 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 restrict the Company's future growth.
SUBORDINATION OF NOTES
The Notes will be subordinate in right of payment to all current and future
Senior Indebtedness of the Company, including the Bank Credit Facilities and the
Senior Notes. Senior Indebtedness will include all indebtedness of the Company,
whether existing on or created or incurred after the issuance of the Notes, that
is not made subordinate to or pari passu with the Notes by the instrument
creating the indebtedness. At September 30, 1997, the aggregate amount of the
Company's Senior Indebtedness was approximately $276.2 million. By reason of the
subordination of the Notes, in the event of insolvency, bankruptcy, liquidation,
reorganization, or similar proceeding in relation to the Company or upon default
in payment with respect to certain Senior Indebtedness of the Company or an
event of default with respect to such indebtedness permitting the acceleration
thereof, the assets of the Company will be available to pay the amounts due on
the Notes only after all or certain of the Senior Indebtedness of the Company
has been paid in full. There can be no assurance that the assets of the Company
will be sufficient for that purpose at the time such payment is due. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of the
Notes -- Subordination."
RISKS RELATING TO ENFORCEABILITY OF SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally guaranteed by all of its current and certain future subsidiaries. To
the extent that a court were to find that (i) a guarantee was incurred by a
subsidiary guarantor with the intent to hinder, delay or defraud any present or
future creditor, (ii) the subsidiary guarantor contemplated insolvency with a
design to prefer one or more creditors to the exclusion in whole or in part of
others or (iii) such subsidiary guarantor did not receive fair consideration or
reasonably equivalent value for issuing its guarantee and such subsidiary
guarantor (w) was insolvent, (x) was rendered insolvent by reason of the
issuance of such guarantee, (y) was engaged or about to engage in a business or
transaction for which the remaining assets of such subsidiary guarantor
constituted unreasonably small capital to carry on its business or (z) intended
to incur, or believed that it would incur, debts beyond its
12
<PAGE> 14
ability to pay such debts as they matured, the court, subject to applicable
statutes of limitations, could avoid or subordinate such guarantee in favor of a
subsidiary guarantor's creditors or take other action detrimental to the holders
of the Notes. Among other things, a legal challenge of a guarantee on fraudulent
conveyance grounds may focus on the benefits, if any, realized by a subsidiary
guarantor as a result of the issuance by the Company of the Notes.
To the extent any guarantees were avoided as a fraudulent conveyance or
held unenforceable for any other reason, holders of the Notes would cease to
have any claim in respect of such subsidiary guarantor and would be creditors
solely of the Company and any subsidiary guarantor whose guarantee was not
avoided or held unenforceable. In such event, the claims of holders of the Notes
against the issuer of an invalid guarantee would be subject to the prior payment
of all liabilities of such subsidiary guarantor. There can be no assurance that,
after providing for all prior claims, there would be sufficient assets remaining
to satisfy the claims of the holders of the Notes relating to any avoided
portions of any of the guarantees. In addition, if a court were to avoid the
guarantees under fraudulent conveyance laws or other legal principles or, by the
terms of such guarantees, the obligations thereunder were reduced as necessary
to prevent such avoidance, or the guarantees were released, the claims of other
creditors of the subsidiary guarantors, including trade creditors, would to such
extent have priority as to the assets of such subsidiary guarantors over the
claims of holders of the Notes.
The guarantees of the Notes by any subsidiary guarantor will be released in
certain circumstances. See "Description of the Notes -- Subsidiary Guarantees of
Notes."
LIMITATIONS ON REPURCHASE UPON A CHANGE OF CONTROL
In the event of a Change of Control (as defined in the Indenture) each
holder of Notes will have the right, at the holder's option, to require the
Company to repurchase all or a portion of such holder's Notes at a purchase
price equal to 101% of the principal amount thereof plus accrued interest
thereon to the repurchase date. The Company's ability to repurchase the Notes
upon a Change of Control may be limited by the terms of the Company's Senior
Indebtedness and the subordination provisions of the Indenture. Further, the
ability of the Company to repurchase Notes upon a Change of Control will be
dependent on the availability of sufficient funds and compliance with applicable
securities laws. Accordingly, there can be no assurance that the Company will be
able to repurchase the Notes upon a Change of Control. The term "Change of
Control" is limited to certain specified transactions and may not include other
events that might adversely affect the financial condition of the Company or
result in a downgrade of the credit rating (if any) of the Notes nor would the
requirement that the Company offer to repurchase the Notes upon a Change of
Control necessarily afford holders of the Notes protection in the event of a
highly leveraged reorganization, merger or similar transaction involving the
Company. See "Description of the Notes."
RISKS OF HEDGING TRANSACTIONS
In order to manage its exposure to price risks in the marketing of its oil
and gas, the Company has in the past entered into, and expects to continue to
enter into, oil and gas price hedging arrangements with respect to a portion of
its expected production. These arrangements may include futures contracts and
options sold on the New York Mercantile Exchange ("NYMEX") and
privately-negotiated forwards, swaps and options. While intended to reduce the
effects of volatility of oil and gas prices, such transactions may limit
potential gains by the Company if oil and gas prices were to rise substantially
over the prices established by hedging. In addition, such transactions may
expose the Company to the risk of financial loss in certain circumstances,
including instances in which (i) production is less than expected, (ii) there is
a widening of price differentials between delivery points for the Company's
production and the delivery point assumed in hedging arrangements, (iii) the
counterparties to the Company's future contracts fail to perform the contracts,
(iv) the Company fails to make timely deliveries or (v) a sudden, unexpected
event materially impacts oil or gas prices. See "Business and
Properties -- Marketing of Oil and Gas Production" and Note 8 to Consolidated
Financial Statements.
13
<PAGE> 15
EXPLORATION AND DEVELOPMENT RISKS
Exploratory drilling and development drilling are subject to many risks,
including the risk that no commercially productive reservoirs will be
encountered, and there can be no assurance that new wells drilled by the 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. 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.
SHORTAGES OF RIGS, EQUIPMENT, SUPPLIES AND PERSONNEL
There is a general shortage of drilling rigs, equipment, supplies and
personnel which the Company believes may intensify. The costs and delivery times
of rigs, equipment, supplies and personnel are substantially greater than in
prior periods and currently are escalating. The demand for, and wage rates of,
qualified drilling rig crews have begun to rise in the drilling industry in
response to the increasing number of active rigs in service. Such shortages have
in the past occurred in the industry in times of increasing demand for drilling
services. If the number of active drilling rigs continues to increase, the oil
and gas industry may experience shortages of qualified personnel to operate
drilling rigs. Shortages of drilling rigs, equipment or supplies could delay and
adversely affect the Company's exploration and development operations, which
could have a material adverse effect on its financial condition and results of
operations.
MARKETING RISKS
The Company's ability to market oil and gas at commercially acceptable
prices is dependent upon the availability, and capacity, of gas gathering
systems, pipeline and processing facilities. The unavailability or lack of
capacity thereof could result in the shut-in of producing wells or the delay or
discontinuance of development plans for properties. Federal and state regulation
of oil and gas production and transportation, general economic conditions and
changes in supply and demand all could adversely affect the Company's ability to
produce and market its oil and gas. If market factors were to change
dramatically, the financial impact on the Company could be substantial. The
availability of markets and the volatility of product prices are beyond the
control of the Company and represent a significant risk.
ACQUISITION RISKS
Acquisitions of oil and gas businesses, working interests in 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 of the major properties it seeks to acquire
that it believes is consistent with industry practices (including a limited
review of title and other records), such reviews are inherently incomplete and
it is generally not feasible for the 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 may assume
environmental and other liabilities in connection with acquired businesses and
properties.
OPERATING 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
14
<PAGE> 16
may be materially curtailed, delayed or canceled as a result of numerous
factors, including the presence of unanticipated pressure or irregularities in
formations, a high percentage of hydrogen sulfide gas ("sour gas"), title
problems, weather conditions, accidents, compliance with governmental
requirements and shortages or delays in the delivery of equipment. A number of
the Company's wells are currently shut-in due to the presence of quantities of
sour gas. Despite the Company's commitment of both financial and operational
resources in the Manderson Field, oil and gas production did not increase
significantly from this area during 1997. To the extent that mechanical,
equipment, weather and other delays continue to prevent the Company from
increasing production from the field, revenues and other aspects of the
Company's financial performance could be adversely affected. See "Business and
Properties -- Rocky Mountain Region -- Manderson Field." 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. In addition, in the
future, the Company may shut in wells due to the production of excess quantities
of sour gas, a risk against which it does not maintain insurance.
COMPETITIVE INDUSTRY
The oil and gas industry is highly competitive. The Company competes for
oil and gas business and property acquisitions and for the exploration,
development, production, transportation and marketing of oil and gas, as well as
for equipment and personnel, with major oil and gas companies, other independent
oil and gas concerns and individual producers and operators. Many of these
competitors have financial and other resources which substantially exceed those
available to the Company.
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. See "Business and Properties -- Regulation."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
Prior to this Offering, there has been no trading market for the Notes.
Although the Underwriters have advised the Company that they currently intend to
make a market in the Notes, they are not obligated to do so and may discontinue
such market making 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. Accordingly, there can be no assurance that any market for the
Notes will develop or, if one does develop, that it will be maintained. If an
active market for the Notes fails to develop or be sustained, the trading price
of the Notes could be materially adversely affected.
15
<PAGE> 17
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Exchange Act. All statements other than statements of
historical facts included in this Prospectus, including, without limitation,
statements under "Prospectus Summary," "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business and
Properties" are forward-looking statements. Such statements include, without
limitation, discussions regarding planned capital expenditures, the Company's
financial position, business strategy and other plans and objectives for future
operations. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause actual results, performance or achievements to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. There are numerous uncertainties inherent in
estimating quantities of proved oil and gas reserves and in projecting future
rates of production and timing of development expenditures, including many
factors beyond the control of the Company. Reserve engineering is a subjective
process of estimating underground accumulations of oil and gas that cannot be
measured in an exact way, and the accuracy of any reserve estimate is a function
of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates made by different engineers
often vary from one another. In addition, results of drilling, testing and
production subsequent to the date of an estimate may justify revisions of such
estimate and such revisions, if significant, would change the schedule of any
further production and development drilling. Accordingly, reserve estimates are
generally different from the quantities of oil and gas that are ultimately
recovered. Additional important factors that could cause actual results to
differ materially from the Company's expectations are disclosed under "Risk
Factors" and elsewhere in this Prospectus, including without limitation in
conjunction with the forward-looking statements included in this Prospectus. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by such factors.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the Notes are estimated to be
approximately $121.2 million, after deducting estimated offering expenses
payable by the Company. These estimated net proceeds will be used by the Company
to reduce the outstanding indebtedness under the Bank Credit Facilities. The
Bank Credit Facilities have been used historically to fund the Company's capital
expenditure program, including the Rocky Mountain and Medallion Acquisitions,
the Manderson Field development drilling program and the continued growth of the
VPP program. Consistent with past practice, the Company intends to use the
resulting borrowing capacity under these facilities to fund its future capital
expenditure program.
On December 26, 1997, the outstanding balance under the Bank Credit
Facilities was $140.6 million. The Bank Credit Facilities permit the Company to
borrow at interest rates based upon the banks' prime rate or LIBOR. The
applicable spread over the prime rate or LIBOR is determined each quarter based
on the Company's consolidated debt-to-EBITDA ratio. The weighted average
interest rate on bank borrowings on September 30, 1997 was 7.2%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Debt Financing" and
"Description of Existing Indebtedness."
CAPITALIZATION
The following table sets forth the Company's capitalization at September
30, 1997, and as adjusted to give effect to the issuance of the Notes offered
hereby and the application of the estimated net proceeds as set forth under "Use
of Proceeds." The table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements (including the notes thereto)
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Bank Credit Facilities.................................... $126,200 $ 5,050
11% Senior Notes due 2003................................. 149,523 149,523
% Senior Subordinated Notes due 2008.................... -- 125,000
-------- --------
Total long-term debt.............................. 275,723 279,573
-------- --------
Stockholders' equity:
Preferred stock: 5,000,000 shares authorized; none
issued................................................. -- --
Common stock, par value $0.01 per share: 50,000,000 shares
authorized; 31,198,390 issued.......................... 312 312
Additional paid-in capital................................ 143,718 143,718
Retained earnings......................................... 111,348 111,348
Less treasury stock, 1,801,496 shares at cost............. (3,388) (3,388)
-------- --------
Total stockholders' equity........................ 251,990 251,990
-------- --------
Total capitalization.............................. $527,713 $531,563
======== ========
</TABLE>
17
<PAGE> 19
KCS ENERGY, INC.
SELECTED HISTORICAL FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The historical financial data presented below is derived from the Company's
financial statements. The information in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements (including
the notes thereto) included elsewhere in this Prospectus. The historical data
for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and for the
nine months ended September 30, 1996 (i) includes revenues attributable to the
Tennessee Gas Contract which was terminated effective January 1, 1997 and (ii)
has been restated to reflect the discontinuation of the Company's natural gas
transportation and marketing operations in 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Oil and gas revenue(1)........ $ 13,496 $ 40,455 $ 66,215 $ 86,629 $ 108,015 $ 79,051 $ 100,396
Other revenue, net............ 568 973 1,185 486 359 377 3,702
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................... 14,064 41,428 67,400 87,115 108,374 79,428 104,098
Operating costs and expenses:
Lease operating expenses...... 2,223 4,598 6,218 6,156 9,167 6,582 20,470
Production taxes.............. 391 411 845 467 2,526 1,671 4,354
General and administrative
expenses.................... 3,190 4,158 4,853 4,704 7,825 5,411 7,302
Depreciation, depletion and
amortization................ 2,985 7,179 18,783 38,231 45,460 33,128 42,486
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................... 8,789 16,346 30,699 49,558 64,978 46,792 74,612
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income................ 5,275 25,082 36,701 37,557 43,396 32,636 29,486
Interest and other income,
net........................... 659 1,022 1,175 4,472 5,086 4,820 388
Interest expense................ (217) (1,125) (2,004) (6,807) (14,085) (11,193) (15,146)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations before income
taxes......................... 5,717 24,979 35,872 35,222 34,397 26,263 14,728
Federal and state income
taxes......................... 1,581 7,450 12,269 11,817 12,680 9,483 5,452
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations.................... 4,136 17,529 23,603 23,405 21,717 16,780 9,276
Discontinued operations:
Net income (loss) from
operations.................. (126) 1,082 554 (2,099) (1,845) (1,974) (72)
Net gain on disposition....... -- -- -- -- -- -- 5,461
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income...................... $ 4,010 $ 18,611 $ 24,157 $ 21,306 $ 19,872 $ 14,806 $ 14,665
=========== =========== =========== =========== =========== =========== ===========
Earnings per share:
Continuing operations......... $ 0.19 $ 0.75 $ 1.00 $ 1.00 $ 0.91 $ 0.70 $ 0.32
Discontinued operations....... (0.01) 0.05 0.02 (0.09) (0.08) (0.08) 0.18
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................... $ 0.18 $ 0.80 $ 1.02 $ 0.91 $ 0.83 $ 0.62 $ 0.50
Average common shares
outstanding................... 22,276 23,317 23,610 23,521 23,811 23,773 29,449
Dividends per common share...... $ 0.015 $ 0.030 $ 0.045 $ 0.060 $ 0.060 $ 0.045 $ 0.050
OTHER DATA (UNAUDITED):
Tennessee Gas Contract
premium(2).................... $ 4,059 $ 22,544 $ 42,828 $ 52,007 $ 32,829 $ 25,689 $ --
EBITDA(3)....................... 8,260 32,261 55,484 75,788 88,856 65,764 71,972
Capital expenditures............ 13,867 48,455 74,953 128,699 277,218 52,735 171,884
Ratio of earnings to fixed
charges(4).................... 17.0x 20.7x 17.7x 6.1x 3.4x 3.3x 2.0x
Ratio of EBITDA to interest
expense....................... 38.1x 28.7x 27.7x 11.1x 6.3x 5.9x 4.8x
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents....... $ 4,292 $ 5,369 $ 988 $ 5,846 $ 5,100 $ 53,597 $ 3,858
Working capital................. 23,924 29,396 33,969 81,953 30,755 78,497 7,707
Oil and gas properties, net..... 30,828 70,477 125,621 204,958 415,870 206,308 540,896
Total assets.................... 60,579 117,640 176,179 306,564 511,820 321,157 614,043
Long-term debt.................. 21,637 36,289 61,970 165,529 310,347 149,830 275,723
Total stockholders' equity...... 30,233 59,765 80,668 101,576 125,622 116,312 251,990
</TABLE>
- ---------------
(1) Includes revenues attributable to the Tennessee Gas Contract, for the years
ended December 31, 1992, 1993, 1994, 1995 and 1996 and for the nine months
ended September 30, 1996, that was terminated effective January 1, 1997.
(2) Reflects revenues associated with the natural gas production covered by the
above-market prices provided for in the Tennessee Gas Contract in excess of
the revenues that would otherwise have been received for such production at
spot market prices.
(3) EBITDA represents income before depletion, depreciation, amortization,
interest expense, interest and other income and income taxes. EBITDA is a
financial measure commonly used in the Company's industry and should not be
considered in isolation or as a substitute for net income, cash flow
provided by operating activities or other income or cash flow data prepared
in accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity.
(4) For purposes of calculating the ratio of earnings to fixed charges, fixed
charges include interest expense and that portion of non-capitalized rental
expense deemed to be the equivalent of interest. Earnings represents income
before income taxes from continuing operations before fixed charges.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's financial
condition and results of operations and should be read in conjunction with the
Company's Consolidated Financial Statements (including the notes thereto)
included elsewhere in this Prospectus.
GENERAL
In the past year, several important developments have had and will continue
to have a significant impact on the Company's financial condition and results of
operations. On December 23, 1996, the Company and Tennessee Gas Pipeline Company
("Tennessee Gas") entered into a settlement covering all claims and litigation
between them related to the above-market, take-or-pay contract (the "Tennessee
Gas Contract"). As part of the settlement, the Tennessee Gas Contract was
terminated effective January 1, 1997, approximately two years prior to its
expiration date, and the parties also agreed to the dismissal of the contract
dispute that resulted in a November 1996 jury award to Tennessee Gas unfavorable
to the Company. See Note 9 to Consolidated Financial Statements. Prior to its
termination, the Tennessee Gas Contract had a material and positive effect on
the Company's gas revenue, income and cash flow. The December 1996 settlement
did not affect the Company's successful conclusion of litigation earlier in the
year relating to the validity and pricing provisions of the Tennessee Gas
Contract and its recovery in September 1996 of approximately $70 million in past
underpayments that had accrued under the contract.
As of December 31, 1996, the Company completed the arrangements for the
Medallion Acquisition (see Note 2 to Consolidated Financial Statements) for a
total purchase price of approximately $199.1 million, consisting of $194.1
million in cash and warrants to purchase 870,000 shares of Common Stock at an
exercise price of $22.50 per share with a four-year term.
During the first quarter of 1997, the Company sold its principal natural
gas transportation asset, the Texas intrastate pipeline, for a net sale price of
$27.9 million and realized an after-tax gain of $5.9 million. In addition, the
Company sold its gas marketing operations. Accordingly, the financial statements
included in this Prospectus have been restated to reflect the natural gas
transportation and marketing operations as discontinued operations.
These developments have transformed the Company from an enterprise heavily
dependent on the Bob West Field and the Tennessee Gas Contract, with significant
marketing and transportation operations, to a Company focused on exploration and
production, with a portfolio of operations in three core operating areas (the
Gulf Coast region, the Rocky Mountain region and the Mid-Continent/West Texas
region), and its VPP program. Production from the Bob West Field, which in 1993
accounted for 55% of total production and 78% of the Company's oil and gas
revenues, is expected to account for less than 5% of production and revenues in
1997.
The Company completed a two-for-one-stock split effective June 30, 1997.
All per share data and data relating to the number of outstanding shares of
Common Stock in this Prospectus have been adjusted to reflect the stock split.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30,
1996
Results of Operations -- Consolidated
Net income for the nine months ended September 30, 1997 was $14.7 million,
or $0.50 per share, compared to $14.8 million, or $0.62 per share for the nine
months ended September 30, 1996. Income from continuing operations for the nine
months ended September 30, 1997 was $9.3 million, or $0.32 per share, compared
to $16.8 million, or $0.70 per share for the nine months ended September 30,
1996. Significantly higher oil and gas production during 1997 was more than
offset by the impact of the termination of the Tennessee Gas Contract and higher
net interest costs. In addition, current year earnings per share reflects the
19
<PAGE> 21
effect of six million additional shares of Common Stock outstanding following
the Company's public equity offering in January 1997. Net income for the current
nine-month period included net income of $5.4 million, or $0.18 per share, from
discontinued operations, principally from the gain on the sale of the Texas
intrastate pipeline system.
Revenue
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1997
------- --------
<S> <C> <C>
Production:
Oil (Mbbl)................................................ 547 1,295
Liquids (Mbbl)............................................ -- 101
Gas (MMcf)................................................ 18,922 32,806
Total (MMcfe)..................................... 22,204 41,180
Average Prices:
Oil (per bbl)............................................. $ 19.72 $ 18.92
Liquids (per bbl)......................................... -- 11.05
Gas (per Mcf)............................................. 3.61 2.28
Total (per Mcfe).................................. 3.56 2.44
Revenue:
Oil....................................................... $10,779 $ 24,501
Liquids................................................... -- 1,113
Gas....................................................... 68,272 74,782
------- --------
Total............................................. $79,051 $100,396
</TABLE>
Oil and Gas Production. The Company's oil and gas production during the
nine months ended September 30, 1997 increased 85% to 41.2 Bcfe, compared to
22.2 Bcfe produced during the same period in 1996. For the nine months ended
September 30, 1997, oil and liquids production increased 155% to 1,396 Mbbls and
gas production increased 73% to 32.8 Bcf, compared to the same period in 1996.
The production increases were primarily as a result of the Medallion
Acquisition.
Gas Revenue. For the nine months ended September 30, 1997, gas revenues
increased $6.5 million to $74.8 million. Production gains added $31.9 million of
gas revenue during the 1997 period. This increase was largely offset by the
termination of the Tennessee Gas Contract, which provided $25.7 million in
premium over corresponding spot market prices in the nine-month period ended
September 30, 1996. Average realized prices for gas not covered by the Tennessee
Gas Contract were $2.28 and $2.29 per Mcf in the 1997 and 1996 nine-month
periods, respectively.
Oil and Liquids Revenue. For the nine months ended September 30, 1997, oil
and liquids revenue increased $14.8 million to $25.6 million. Production gains
added $15.3 million of oil and liquids revenue, partially offset by lower
average realized prices.
Other Revenue, Net
Other revenue includes certain marketing and gathering revenues incidental
to the Company's oil and gas exploration and production operations. The
increases for the nine months ended September 30, 1997 over the same period in
1996 were primarily the result of the Medallion Acquisition. The 1997 nine-month
total includes $1.3 million from the settlement of a gas sales contract dispute
during the second quarter of 1997.
Lease Operating Expenses
As a result of the substantial increase in oil and gas production, lease
operating expenses increased $13.9 million to $20.5 million for the nine months
ended September 30, 1997, compared to the same period in 1996. Approximately
$12.3 million of the increase was related to the Medallion properties, with the
remainder
20
<PAGE> 22
of the increase primarily due to the expanded operations in the Rocky Mountain
region, especially in the Manderson Field.
Production Taxes
Production taxes, which are generally based on a fixed percentage of
revenue, increased 161% to $4.4 million during the nine months of 1997, compared
to the same period in 1996. In addition to the effect of higher oil and gas
revenue during the 1997 period, a larger percentage of that revenue was subject
to severance taxes as a result of the termination of the Tennessee Gas Contract
which provided for reimbursement to the Company of severance taxes on production
covered under that contract.
General and Administrative Expenses
For the nine months ended September 30, 1997, general and administrative
expenses increased $1.9 million to $7.3 million, compared to the same period in
1996. This increase was primarily the result of the overall growth of the
Company, including expansion in the Mid-Continent region as a result of the
Medallion Acquisition and expanded VPP operations.
Depreciation, Depletion and Amortization
The Company provides for depreciation, depletion and amortization ("DD&A")
on its oil and gas properties using the future gross revenue method based on
recoverable reserves valued at current prices. For the nine months ended
September 30, 1997, DD&A on the Company's oil and gas properties increased $8.1
million over the same period in 1996. Production gains increased DD&A by $8.7
million, partially offset by a $0.6 million reduction attributable to a decline
in the DD&A rate. In addition, depreciation on assets other than oil and gas
properties increased $1.3 million primarily due to the expansion of the
Company's operations in the Mid-Continent and Rocky Mountain regions.
Interest and Other Income, Net
Interest and other income was lower during the nine-month period ended
September 30, 1997 compared to the same period in 1996 primarily due to the
absence of interest income on outstanding receivables related to the Tennessee
Gas litigation. The outstanding receivables plus interest were paid by Tennessee
Gas on September 30, 1996.
Interest Expense
Interest expense increased $4.0 million to $15.1 million for the nine
months ended September 30, 1997, as compared to the same period in 1996. Higher
average borrowings in 1997 due to the expansion of the Company's oil and gas
operations (including the Medallion Acquisition, the VPP program and the
development of the Manderson Field) were offset in part by lower average
interest rates during the period.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Results of Operations
Net income for the year ended December 31, 1996 was $19.9 million, or $0.83
per share, compared to $21.3 million, or $0.91 per share, for the year ended
December 31, 1995. Income from continuing operations was $21.7 million, or $0.91
per share, for the year ended December 31, 1996, compared to $23.4 million, or
$1.00 per share, for the year ended December 31, 1995. Significantly higher oil
and gas production, along with higher oil and gas prices in 1996 for
non-Tennessee Gas Contract sales were offset by lower production from properties
covered by the Tennessee Gas Contract, higher interest costs and a higher
effective income tax rate. Loss from discontinued operations in 1996 was $1.8
million, or $0.08 per share, compared to a loss of $2.1 million, or $0.09 per
share, in 1995.
Net income for the year ended December 31, 1995 was $21.3 million, or $0.91
per share, compared to $24.2 million, or $1.02 per share, for the year ended
December 31, 1994. Income from continuing operations
21
<PAGE> 23
was $23.4 million, or $1.00 per share, for 1995, compared to $23.6 million, or
$1.00 per share, for 1994. A significant increase in gas production in 1995,
compared to 1994, was offset by the impact of lower natural gas prices and
higher net interest costs. Loss from discontinued operations in 1995 was $2.1
million, or $0.09 per share, compared to income from discontinued operations of
$0.6 million, or $0.02 per share, in 1994. Lower natural gas prices and the
absence of severe weather conditions during the peak 1994/1995 winter heating
season were the primary reasons for the 1995 loss from discontinued operations.
Revenue
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Production:
Oil (Mbbl)......................................... 211 196 758
Gas (MMcf)......................................... 11,304 19,129 25,581
Total (MMcfe).............................. 12,570 20,305 30,129
Average Prices:
Oil (per bbl)...................................... $ 15.16 $ 17.28 $ 20.69
Gas (per Mcf)...................................... 5.54 4.29 3.61
Total (per Mcfe)........................... 5.27 4.27 3.59
Revenue:
Oil................................................ $ 3,198 $ 3,387 $ 15,684
Gas................................................ 63,016 83,241 92,330
------- ------- --------
Total...................................... $66,215 $86,629 $108,015
</TABLE>
Oil and Gas Production. The Company's oil and gas production during 1996
increased 48% to 30.1 Bcfe, compared to 20.3 Bcfe produced during 1995. Oil
production increased 286% to 758 Mbbls and gas production increased 34% to 25.6
Bcf. Approximately 6.7 Bcfe of the increase in oil and gas production was
attributable to the Company's VPP program, with the remainder resulting from a
combination of lease acquisitions, exploration and development drilling.
Oil and gas production during 1995 increased 62% to 20.3 Bcfe, compared to
12.6 Bcfe in 1994, primarily due to higher gas and oil volumes delivered under
the Company's VPP program.
Gas Revenue. In 1996, gas revenues increased $9.1 million to $92.3 million.
Higher production from properties not covered by the Tennessee Gas Contract
along with higher average non-Tennessee Gas Contract prices more than offset the
impact of lower production from the properties covered by the Tennessee Gas
Contract. Sales under the Tennessee Gas Contract decreased to 4.6 Bcf in 1996
compared to 6.9 Bcf during 1995, largely due to the normal production decline
from existing wells. Average natural gas prices were $3.61 per Mcf in 1996,
compared to $4.29 per Mcf in 1995. This decrease reflected the lower percent of
production covered by the Tennessee Gas Contract. Average non-Tennessee Gas
Contract gas prices were $2.35 per Mcf in 1996, compared to $1.62 per Mcf in
1995. Natural gas sale prices under the Tennessee Gas Contract, excluding
severance tax reimbursements, were $8.40 in 1996, compared to $7.90 in 1995.
The early termination of the Tennessee Gas Contract, with its above-market
pricing provisions, resulted in downward revisions in the amounts of $37.1
million for estimated future net revenues before income taxes (based upon a
natural gas price of $3.69 per Mcf, the assumed realized price on December 31,
1996) and $34.7 million for PV-10.
With the termination of the Tennessee Gas Contract, the Company's earnings
have been and will continue to be more heavily impacted by changing energy
prices. Not only is the Company's oil and gas revenue more sensitive to spot
market price changes, but significant declines in oil and gas prices, like those
experienced in early 1997, if not offset by increases in proved oil and gas
reserves, could result in a substantial increase in non-cash depreciation,
depletion and amortization ("DD&A") accruals and could negatively impact
earnings. The Company provides for DD&A using the future gross revenue method
based on recoverable reserves valued at current prices. See Note 1 to
Consolidated Financial Statements -- "Property,
22
<PAGE> 24
Plant and Equipment" for a description of how the Company provides for DD&A and
the related limitation on capitalized oil and gas property costs. The Company
utilizes commodity price swaps, futures and options contracts and basis swaps
(See Note 8 to Consolidated Financial Statements) to help mitigate the impact of
fluctuations in the price of its natural gas and oil production.
Gas revenues in 1995 increased $20.2 million to $83.2 million. Higher
production from properties not covered by the Tennessee Gas Contract was
partially offset by lower average non-Tennessee Gas Contract prices. Sales to
Tennessee Gas were 6.9 Bcf in both 1995 and 1994. Average natural gas prices
were $4.29 per Mcf in 1995, compared to $5.54 per Mcf in 1994. This decrease
resulted from lower non-Tennessee Gas Contract gas prices of $1.62 in 1995,
compared to $1.81 in 1994. Natural gas sale prices under the Tennessee Gas
Contract, excluding severance tax reimbursements, were $7.90 in 1995, compared
to $7.49 in 1994.
Oil Revenue. In 1996, oil revenue increased $12.3 million to $15.7 million,
compared to 1995. Production gains, primarily from properties in the Rocky
Mountain region added $11.6 million. The remainder of the increase was due to
higher average oil prices.
Oil revenue in 1995 increased $0.2 million to $3.4 million mainly due to
higher average oil prices.
Lease Operating Expenses
For the year ended December 31, 1996, lease operating expenses increased
$3.0 million to $9.2 million, or $0.30 per Mcfe, primarily due to production
increases in the Rocky Mountain region over 1995 lease operating expenses of
$6.2 million, or $0.30 per Mcfe, and $6.2 million, or $0.49 per Mcfe, in 1994.
The reduction in rate per Mcfe in 1995 compared to 1994 was primarily due to
higher VPP volumes which do not bear any development or lease operating
expenses.
Production Taxes
Production taxes increased $2.1 million to $2.5 million in 1996 over 1995
primarily due to the increased revenue and, to a lesser extent, an increase in
average production tax rates, which are higher in the Rocky Mountain region as
compared to the Gulf Coast region. In addition, a larger percentage of the
Company's revenue was subject to production taxes in 1996, as compared to 1995,
due to the decline in production covered under the Tennessee Gas Contract, which
provided for reimbursement of severance taxes.
In 1995, production taxes were $0.5 million, compared to $0.8 million in
1994. While total revenue increased significantly, revenue subject to production
taxes was down slightly. The overall increase in revenue was mainly due to the
VPP program, which generally are free of production taxes.
General and Administrative Expenses
In 1996, general and administrative expenses were $7.8 million, compared to
$4.7 million in 1995. The increase reflected the overall growth of the Company,
most notably the expansion into the Rocky Mountain region. In 1995, general and
administrative expenses decreased slightly to $4.7 million, compared to $4.9
million in 1994.
Depreciation, Depletion and Amortization
For the year ended December 31, 1996, depreciation, depletion and
amortization ("DD&A") increased $7.2 million over DD&A for 1995 to $45.5 million
due to the increase in oil and gas revenue, which was partially offset by a
reduction in the DD&A rate to 41.7% in 1996 from 43.9% in 1995.
In 1995, DD&A increased $19.4 million over 1994 DD&A to $38.2 million due
to the increase in oil and gas revenue and an increase in the DD&A rate to 43.9%
in 1995 from 28% in 1994. The increase in the DD&A rate in 1995 reflects the
relative increase in the percentage of total proved reserves not covered by the
Tennessee Gas Contract.
23
<PAGE> 25
Interest and Other Income, Net
Interest and other income was $5.1 million in 1996, compared to $4.5
million in 1995 and $1.2 million in 1994. Of these amounts, $4.4 million, $3.1
million and $0.2 million for the years 1996, 1995 and 1994, respectively,
represented interest income accrued on the Tennessee Gas receivable. These
amounts were included in the September 1996 cash payment received from Tennessee
Gas. The Tennessee Gas Contract was terminated effective January 1, 1997. See
Note 9 to Consolidated Financial Statements.
Interest Expense
Interest expense was $14.1 million in 1996, compared to $6.8 million in
1995 and $2.0 million in 1994. The increase in 1996 was due to higher average
borrowings, along with higher average interest rates, principally resulting from
the sale of $150 million of 11% Senior Notes in January 1996. Higher average
borrowings in 1996, compared to 1995, as well as in 1995 compared to 1994, were
used to expand the Company's operations. The increases in interest expense
during the periods were partially offset by the increase in interest income as
discussed above.
Income Taxes
The income tax provision was $12.7 million in 1996, representing an
effective tax rate of 36.9%, compared to effective rates of 33.6% and 34.2% in
1995 and 1994, respectively. See Note 7 to Consolidated Financial Statements for
the reconciliation of the statutory federal income tax rate to the Company's
effective tax rates. A substantial portion of the income taxes reflected on the
Company's income statements during these periods is deferred to future years.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow From Operating Activities
Net income adjusted for non-cash charges increased to $57.6 million for the
nine months ended September 30, 1997, compared to $54.2 million during the same
period in 1996. The increase reflects cash flow from the properties acquired as
part of the Medallion Acquisition, which more than offset the impact of the
termination of the Tennessee Gas Contract ($25.7 million). Net cash provided by
operating activities was $61.9 million during the 1997 nine-month period,
compared to $105.1 million for the nine months ended September 30, 1996. The
1996 period included the receipt of approximately $70 million from Tennessee Gas
on September 30, 1996 for past underpayments and interest pursuant to the
Tennessee Gas Contract. The reduction in trade accounts receivable ($58.1
million) and in accounts payable and accrued liabilities ($54.6 million) were
largely related to the discontinuance of the natural gas transportation and
marketing operations. Net income adjusted for non-cash charges was $75.8 million
for the year ended December 31, 1996, compared to $71.1 million in 1995. Net
cash provided by operating activities was $121.3 million in 1996 compared to
$30.1 million in 1995. This increase resulted primarily from the receipt of $70
million from Tennessee Gas on September 30, 1996 and, to a lesser extent, the
timing of cash receipts and payments.
Investing Activities
Capital expenditures for the nine months ended September 30, 1997 were
$171.9 million of which $91.2 million was for development drilling, including
$10.8 million for Manderson Field infrastructure, $45.6 million for the
acquisition of proved reserves under the Company's VPP program and $33.0 million
for lease acquisitions, seismic surveys and exploratory drilling.
As of March 31, 1997, the Company completed the sale of its principal
natural gas transportation asset for a net sale price of $27.9 million, the
proceeds of which were used to reduce indebtedness under its Bank Credit
Facilities, and recognized an after-tax gain of $5.9 million.
The 1997 capital budget was initially set at $160 million and was
subsequently increased to $210 million for 1997 in order to further the
Company's expansion in the Rocky Mountain region and to provide additional
24
<PAGE> 26
funding for the VPP program. The Company believes that internally generated cash
and additional borrowings under the Bank Credit Facilities are sufficient to
fund its capital program.
The Company has established a preliminary capital expenditure budget for
1998 of $183 million, consisting of $95 million for development drilling, $30
million for exploration, $45 million for VPP transactions, $10 million for
working interest acquisitions and $3 million for other expenditures. The program
is expected to be largely funded by cash flow from operations, borrowings under
the Bank Credit Facilities and, to a lesser extent, the sale of non-strategic
assets.
Capital expenditures in 1996 were $282.2 million, of which $183.1 million
was related to the Medallion Acquisition (see Note 2 to Consolidated Financial
Statements), $54.9 million was for development drilling, including $13.8 million
in the Bob West Field, $15.9 million was for the purchase of proved reserves
under the Company's VPP program and $18.2 million was for lease acquisitions,
seismic surveys and exploratory drilling. The Company utilized approximately
$160.5 million from its Bank Credit Facilities to fund the Medallion
Acquisition, while the remainder of the 1996 capital program was funded
primarily with internally generated cash, including $70.0 million received from
Tennessee Gas and $16.6 million of proceeds from the sale of certain
non-strategic oil and gas properties.
Capital expenditures in 1995 were $128.7 million, of which $43.8 million
was for the purchase of oil and gas reserves under the Company's VPP program
(including the Michigan Acquisition), $33 million was for the Rocky Mountain
Acquisition and $19.4 million was for the development of the Bob West Field. The
remainder was largely for lease acquisitions, seismic evaluations and
exploratory drilling ($16.9 million) and development drilling ($7.5 million) on
non-Tennessee Gas Contract properties. The Company funded its capital
expenditures through a combination of additional borrowings under its credit
facilities and internally generated cash.
Debt Financing
The Company has outstanding $150 million principal amount of 11% Senior
Notes due 2003 issued pursuant to an indenture governing the Senior Notes dated
January 25, 1996. The Senior Notes mature on January 15, 2003 and bear interest
at the rate of 11% per annum, payable semi-annually. The Senior Notes are
redeemable at the option of the Company, in whole or in part, commencing January
15, 2000, at pre-determined redemption prices set forth within the Senior Notes
Indenture. The Senior Notes contain certain restrictive covenants which, among
other things, limit the Company's ability to incur additional indebtedness,
require the repurchase of the Senior Notes upon a change of control and restrict
the aggregate cash dividends paid by the Company to 50% of the Company's
cumulative net income during the period beginning October 1, 1995.
Credit Facility
In September 1996, the Company consolidated two separate credit agreements
creating one revolving credit facility (the "Credit Facility") which will mature
on September 30, 2000. The Credit Facility is secured by the Company's oil and
gas assets excluding those securing the Revolving Credit Agreement (see below).
The borrowing base under the Credit Facility is a function of the lenders'
determination of the value of the collateral, and is limited to approximately
$75 million under the terms of the Senior Notes Indenture. The Credit Facility
bears interest at a spread over the prime rate or LIBOR, determined each quarter
based upon the Company's consolidated debt-to-EBITDA ratio. As of September 30,
1997, the weighted average interest rate under the Credit Facility was 6.8% and
$74.5 million was outstanding.
Revolving Credit Agreement
Simultaneous with the consummation of the Medallion Acquisition in January
1997, the Company entered into a revolving credit agreement (the "Revolving
Credit Agreement") with a group of banks which will mature on September 30,
2000. The Company's obligations under the Revolving Credit Agreement are secured
by substantially all of the oil and gas assets acquired in the Medallion
Acquisition and a pledge of Medallion's common stock. The Revolving Credit
Agreement permits the Company to borrow at interest rates
25
<PAGE> 27
based upon the banks' prime rate or LIBOR. The applicable spread over the prime
rate or LIBOR is determined each quarter based on the Company's consolidated
debt-to-EBITDA ratio. As of September 30, 1997, the weighted average interest
rate under the Revolving Credit Agreement was 7.8% and $51.7 million was
outstanding.
Equity Financing
In January 1997, the Company completed a public offering of 6,000,000
shares of Common Stock. The net proceeds to the Company of approximately $110.6
million were used to reduce outstanding indebtedness under the Bank Credit
Facilities.
26
<PAGE> 28
BUSINESS AND PROPERTIES
GENERAL
KCS is an independent oil and gas company engaged in the acquisition,
exploration, development and production of oil and gas. Through its experienced
management and technical staff, the Company has grown significantly and created
a geographically diversified reserve base by implementing a balanced program of
development drilling, reserve acquisitions and exploration drilling. The Company
concentrates its activities in areas where it has accumulated geological
knowledge and technical expertise and where it can retain significant operating
control. As a result of these efforts, KCS has compiled a multi-year inventory
of over 600 potential drilling and recompletion locations, including a
significant number of sites in the Manderson Field in the Big Horn Basin in
Wyoming where the Company believes it has the potential to significantly
increase its reserves. Additionally, the Company augments its working interest
ownership of properties with a volumetric production payment ("VPP") program to
acquire priority rights to a portion of the oil and gas from other parties'
producing properties. The Company plans to spend $183 million on capital
expenditures in 1998, of which $95 million is for development drilling, $30
million is for exploration, $45 million is for the VPP program, $10 million is
for working interest acquisitions and $3 million is for other expenditures. The
Company currently plans to drill approximately 175 development wells and to
participate in approximately 60 exploratory prospects during 1998.
The Company's operations are primarily focused in the Rocky Mountain, Gulf
Coast, and Mid-Continent/West Texas regions, and through its VPP program
primarily in the Gulf of Mexico and Michigan. As of December 31, 1996, the
Company had estimated proved reserves of 355.8 Bcfe with an estimated pre-tax
present value of future net revenues of $557.6 million. These estimated reserves
were 75% natural gas and 87% proved developed, and approximately 10% were
attributable to the Company's VPP program. The Company operates properties
comprising approximately 72% of its reserves (excluding VPP reserves) at
December 31, 1996.
A significant focus of the Company's future development is in the Manderson
Field in the Big Horn Basin in Wyoming. Since it acquired the field in November
1995, the Company has increased its acreage position from 7,500 to over 61,000
gross acres, and has undertaken an extensive exploration and development
drilling program. Through September 30, 1997, the Company had drilled 54 wells,
investing $35 million, and had spent $15.3 million to install infrastructure in
the field. Most of these wells are currently shut-in or awaiting completion,
remediation or stimulation because of delays in construction of a sour gas
treatment plant and associated gas injection system. Operations at the plant and
injection system commenced on December 3, 1997. Based on drilling and production
results and accumulation of additional seismic data, the Company believes that
there are seven productive formations located in the greater Manderson Field and
that they have significant reserve potential. The Company plans to spend $12
million in the fourth quarter of 1997 to complete a sour gas treatment plant in
the Manderson Field, bring the shut-in wells on production and drill 17
additional wells. In 1998, the Company plans to spend approximately $40 to $50
million to drill and complete as many as 70 to 100 wells in this field.
The Company has successfully increased its reserves through opportunistic
acquisitions. In May 1997, KCS completed an acquisition of properties in the
Langham Creek Field near Houston, Texas for $17 million, which enabled it to
assume operatorship and increase its average working interest in the area to
approximately 61%. In December 1996, the Company completed a major acquisition
of oil and gas properties, principally in the Mid-Continent region, for an
aggregate purchase price of $199 million. As a result of the Medallion
Acquisition, the Company more than doubled its reserve base and production rate
and significantly expanded its presence in the Mid-Continent region. In November
1995, the Company completed an acquisition in the Rocky Mountain region for $33
million, which resulted in numerous exploration and development opportunities,
including the Manderson Field.
Through its VPP program, the Company is able to add reserves at very
attractive rates of return and increase its exposure to acquisition, development
and exploration opportunities. In the three years ended
27
<PAGE> 29
September 30, 1997, the Company invested $124 million in 25 separate VPP
transactions, acquiring 71.8 Bcf of natural gas and 1.5 MMbbls of oil.
BUSINESS STRATEGY
KCS intends to continue to broaden its reserve base and increase production
and cash flow through a balanced program of development drilling, reserve
acquisitions and exploration drilling. The Company extensively utilizes advanced
technology, most notably 3-D seismic, computer-enhanced basin analysis, and
reservoir simulation and stimulation techniques, to better delineate and produce
reserves. The key components of the Company's business strategy include: (i)
exploiting and developing its multi-year inventory of development drilling
locations, (ii) capitalizing on the development potential of the Manderson
Field, (iii) acquiring properties with growth potential, (iv) controlling its
major properties, (v) continuing to expand its VPP program and (vi) pursuing a
balanced exploration program that includes high-potential opportunities.
KEY STRENGTHS
To implement its business strategy, the Company intends to take advantage
of several key strengths, including the following:
Proven Growth Record. The Company has achieved substantial growth in reserves,
production and EBITDA since 1992. KCS's estimated proved reserves have increased
at a compound annual growth rate of 57%, from 60.0 Bcfe as of December 31, 1992
to 355.8 Bcfe as of December 31, 1996. Over this period, production has
increased at a compound annual growth rate of 61%, from 4.4 Bcfe in 1992 to 30.1
Bcfe in 1996. Similarly, the Company's EBITDA has increased at a compound annual
growth rate of 81%, from $8.3 million for the year ended December 31, 1992 to
$88.9 million for the year ended December 31, 1996. For the nine months ended
September 30, 1997, the Company had oil and gas production of 41.2 Bcfe and
EBITDA of $72.0 million, compared to 22.2 Bcfe and $65.8 million for the same
period in 1996.
Innovative and Creative Approach to Expansion. The Company has demonstrated the
ability to identify and acquire oil and gas reserves in a disciplined, creative
manner and believes it has become one of the leaders in the acquisition of oil
and gas reserves through VPP transactions.
Large Multi-year Inventory of Drilling Opportunities. The Company has identified
more than 600 potential drilling and recompletion locations, representing a
three to four-year inventory. In addition, the Company believes that there are
significant exploratory opportunities in the acreage it has assembled, including
more than 265,000 gross undeveloped acres, in the onshore Gulf Coast regions of
Texas and Louisiana and in the Rocky Mountain and Mid-Continent regions.
Geographically Diversified Property Base. The Company operates in three distinct
regions: the Rocky Mountains, the Gulf Coast and the Mid-Continent/West Texas
regions. As a result, it benefits from diversification with respect to risks
associated with focusing on any one geographical region.
Successful Drilling Program. During the three-year period ended December 31,
1996, the Company participated in the drilling of 118 development wells and 70
exploratory wells with a 93% and 46% completion rate. During the first nine
months of 1997, the Company participated in the drilling of 71 development
wells, 86% of which were completed and 23 exploratory wells, 43% of which were
completed. Over the five-year period ended December 31, 1996, the Company
replaced approximately 114% of its production through drilling.
High Operating Margins. The Company's drilling success and emphasis on an
efficient administrative and operating structure have enabled the Company to
generate high cash margins that the Company believes compare favorably with its
peer companies.
Control of Major Properties. The Company seeks to operate and own a majority
working interest in its major properties, which gives it greater control over
the timing and nature of future development as well as over operating costs and
the marketing of production. The Company operates properties comprising
approximately 72% of its reserves (excluding VPP reserves) at December 31, 1996.
28
<PAGE> 30
Experienced, Motivated Management Team with a Significant Equity Stake. The
Company's senior management has extensive experience in the oil and gas industry
and is motivated to increase stockholder value. The Company's compensation
system is strongly geared to "pay for performance" with incentives directly tied
to operating and financial goals and objectives. Members of the Company's
management and directors currently own 14% of the Company's common stock, and
the Company has established minimum direct ownership requirements for all
officers and directors.
The Company's executive offices are located at 379 Thornall Street, Edison,
New Jersey 08837, and its telephone number is (732) 632-1770. The Company has
regional operating offices in Worland, Wyoming; Houston, Texas; and Tulsa,
Oklahoma.
OIL AND GAS OPERATIONS AND PRINCIPAL PROPERTIES
From 1991 through 1996, the Company's most significant property was the Bob
West Field in south Texas, which accounted for approximately 34% of the
Company's gas production and 61% of oil and gas revenues during that six-year
period. Most of the Company's natural gas sold from the Bob West Field was
covered by the Tennessee Gas Contract, which had been the subject of several
lawsuits. On December 23, 1996, the Company and Tennessee Gas entered into a
settlement covering all claims and litigation between them and terminated the
contract effective January 1, 1997.
Prior to their sale earlier in 1997, the Company also operated an
intrastate natural gas transportation business and a natural gas marketing and
services business, both of which are reflected in the Company's financial
statements as discontinued operations. The Company sold its 150-mile intrastate
pipeline system for an adjusted net sale price of $27.9 million and recorded an
after-tax gain of $5.9 million. The Company also sold its natural gas marketing
operations. The Company has retained its natural gas gathering systems in Texas,
Montana and Louisiana, which primarily serve Company-operated wells.
29
<PAGE> 31
Approximately 84% of the Company's PV-10 of estimated proved reserves at
December 31, 1996 (excluding the impact of oil and gas hedging activities) and
90% of its total proved oil and gas reserves were attributable to properties in
which it has a working interest. The remaining 16% of PV-10 of proved reserves
(excluding the impact of oil and gas hedging activities) and 10% of proved
reserves were attributable to its reserves acquired through the VPP program. The
Company currently is the operator of properties comprising 72% of its reserves
(excluding VPP reserves) at December 31, 1996. The following table sets forth
data as of December 31, 1996 regarding the number of gross producing wells, the
estimated quantities of proved oil and gas reserves and the PV-10 attributable
to the Company's principal working interest and VPP properties. Except where
otherwise provided by contractual agreement, future cash inflows are estimated
using year-end prices. Oil and gas prices at December 31, 1996 are not
necessarily reflective of the prices the Company expects to receive in the
future. Other than gas sold under certain contractual arrangements, including
swaps, futures contracts and options, average realized gas prices of $3.54 per
Mcf and average realized oil prices of $22.45 per bbl were in effect at December
31, 1996.
<TABLE>
<CAPTION>
ESTIMATED PROVED RESERVES
GROSS ------------------------------- % OF
PRODUCING OIL NATURAL GAS TOTAL PV-10 TOTAL
LOCATION WELLS (MBBLS) (MMCF) (MMCFE) ($000'S) PV-10
-------- --------- ------- ----------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Rocky Mountain Region:
Manderson Field, Wyoming............. 32 3,574 13,027 34,471 $ 41,558 8%
Ignacio Blanco Field, Colorado....... 49 -- 9,944 9,944 7,646 1
Dragon Trail Field, Colorado......... 160 1 6,921 6,927 7,378 1
Others............................... 1,335 3,295 23,037 42,807 39,916 7
----- ------ ------- ------- -------- ---
Total............................. 1,576 6,870 52,929 94,149 96,498 17
Gulf Coast Region:
Bob West Field, Texas................ 50 -- 23,025 23,025 39,945 7
Langham Creek Area, Texas............ 12 193 16,232 17,390 33,935 6
Eugene Island 251, Gulf of Mexico.... 7 67 3,004 3,406 11,088 2
Bayou Rambio Field, Louisiana........ 1 23 2,600 2,738 6,621 1
South Timbalier 148, Gulf of
Mexico............................ 10 87 1,978 2,500 6,404 1
Laurel Ridge Field, Louisiana........ 2 71 1,329 1,755 6,303 1
Glasscock Ranch Field, Texas......... 10 70 2,863 3,283 5,736 1
Others............................... 314 1,380 23,660 31,940 69,215 13
----- ------ ------- ------- -------- ---
Total............................. 406 1,891 74,691 86,037 179,247 32
Mid-Continent/West Texas Region:
Sawyer Canyon Field, Texas........... 345 65 50,845 51,235 84,427 15
Elm Grove Field, Louisiana........... 29 50 17,278 17,578 38,409 7
Aubrey/Wilsonia Fields, Louisiana.... 7 228 2,512 3,880 10,596 2
Mills Ranch Field, Texas............. 16 8 4,078 4,126 8,126 2
Others............................... 594 2,453 33,793 48,511 71,925 13
----- ------ ------- ------- -------- ---
Total............................. 991 2,804 108,506 125,330 213,483 39
Other Regions:
Newhall-Potrero Field, California.... 35 1,758 1,577 12,125 11,559 2
Mayfield/Hayes Properties,
Michigan.......................... 6 196 2,681 3,857 8,845 2
Others............................... 24 36 498 720 1,214 --
----- ------ ------- ------- -------- ---
Total............................. 65 1,990 4,756 16,702 21,618 4
Total Working Interest
Properties................. 3,038 13,555 240,882 322,218 510,846 92
Volumetric Production Payments (VPP):
Niagaran Reef Trend, Michigan........ 95 803 11,060 15,878 46,539 8
Gulf of Mexico....................... 30 160 15,648 16,608 45,607 6
Others............................... 127 113 435 1,109 3,844 3
----- ------ ------- ------- -------- ---
Total VPP Properties......... 252 1,076 27,143 33,595 95,990 17
Hedging Effects.............. -- -- -- -- (49,224) (9)
Total Company.............. 3,290 14,631 268,025 355,813 $557,612 100%
===== ====== ======= ======= ======== ===
</TABLE>
30
<PAGE> 32
All of the Company's exploration and development activities are located
within the United States. Set forth below are descriptions of certain of the
Company's working interest and VPP producing properties and those targeted for
significant drilling activity during the remainder of 1997 and in 1998.
ROCKY MOUNTAIN REGION
General
In the Rocky Mountain Region, the Company's operations are focused
primarily in the Big Horn, Green River and Wind River Basins. Estimated proved
reserves in the region were 94,149 MMcfe at December 31, 1996. The Company has
budgeted $70 million for development and exploratory drilling activities in the
region during 1998 and expects to have spent $73 million for such activities
during 1997, including approximately $16 million for Manderson Field
infrastructure. During the nine months ended September 30, 1997, the Company
drilled 37 gross (37 net) development wells and 6 gross (5.3 net) exploratory
wells in the Rocky Mountain Region. It expects to drill another 18 gross (18
net) development wells by the end of the year and as many as 125 gross (125 net)
development wells and 8 gross (7.3 net) exploratory wells during 1998.
Rocky Mountain Acquisition
The Company's principal Rocky Mountain properties were acquired in November
1995 when the Company acquired substantially all of the oil and gas assets of
Natural Gas Processing Company for a purchase price of approximately $33
million. Included in the acquisition were interests in 531 gross (301 net) wells
located in over 30 different fields, principally in six producing basins located
in Wyoming, Colorado and Montana. Proved reserves were estimated at the time of
the acquisition to be 66,700 MMcfe, consisting of 40,900 MMcf of natural gas and
4,300 Mbbls of oil and representing an average net acquisition cost of $0.49 per
Mcfe. Since the acquisition, the Company has undertaken an aggressive field
development and acreage acquisition program in the region that has resulted in
significant increases in acreage holdings and numerous exploration and
development drilling opportunities, most notably in the Manderson Field.
The Rocky Mountain Acquisition also included approximately 197,000 gross
(160,000 net) acres of properties, which the Company believes contain extensive
development drilling opportunities. As the result of additional property
acquisitions and leasing, the Company has increased its leasehold acreage in the
Rocky Mountain region to approximately 514,072 gross (377,957 net) developed and
undeveloped acres as of September 30, 1997. Following the Rocky Mountain
Acquisition, the Company hired highly experienced and technically competent
exploration, engineering and operational personnel with experience in the Rocky
Mountain region who were formerly employed by the seller. The Company's staff in
the region totaled 80 persons as of September 30, 1997.
Manderson Field
The Manderson Field is located in the Big Horn Basin of north central
Wyoming. The field was discovered in 1951, and 14 wells targeting the Phosphoria
Dolomite were drilled using primarily 320 and 640-acre spacing from 1951 to 1954
(with average reserve recovery for the wells of approximately 150 Mbbls of oil
per well). The Company has expanded its holdings in the field from approximately
7,500 acres obtained in the Rocky Mountain Acquisition to more than 61,000 gross
(56,000 net) acres at September 30, 1997, covering an area 20 miles long and 14
miles wide. The field has multiple reservoirs ranging from 4,500 to 8,600 feet
that are producing or potentially productive, including the Phosphoria Dolomite
and the Muddy, Octh Louie, Frontier, Lakota, Dakota and Tensleep sands. All of
these formations except the Phosphoria and Tensleep are known to produce sweet
oil and/or gas.
Through September 30, 1997, the Company had drilled a total of 54 wells
targeting the Phosphoria, Muddy, Frontier and Octh Louie formations. Based on
drilling and production results, coupled with the acquisition and interpretation
of additional seismic data, the Company believes that the seven productive
formations located in its holdings in the greater Manderson Field area have
significant potential. As a result, the Company has commenced an extensive
development drilling program in the area. At December 31, 1996,
31
<PAGE> 33
the Company's proved reserves included 3,574 Mbbls of oil and 13,027 MMcf of gas
from its acreage in the field, representing 10% of its proved reserves.
Through September 30, 1997, of the 54 wells the Company had drilled, 42
wells targeted the Phosphoria in the Manderson Field. As of September 30, 1997,
eight of the completed Phosphoria wells were stimulated and tested at rates
ranging from 200 to 1,900 bbls of oil per day and from 450 to 4,000 Mcf of
natural gas per day. The presence of sour gas from the Phosphoria formation and
the limitations imposed by the State of Wyoming and the federal government on
the amount of sour gas that can be flared have severely limited production from
the completed Phosphoria wells, most of which have been shut-in for extended
periods of time awaiting completion of a sour gas processing facility (amine
plant) and an associated acid gas injection system. As of September 30, 1997,
nine wells drilled to the Phosphoria had been plugged back to the shallower Octh
Louie or Muddy formations due to well bore damage caused by being shut-in, 11
Phosphoria wells were awaiting completion, 13 wells were awaiting stimulation or
remediation and one Phosphoria well had been completed to a full-stream
re-injection well. In addition, eight previously stimulated wells may require
remediation due to effects of being shut-in for extended periods. Through
September 30, 1997, the Company also drilled 12 wells targeting the Muddy,
Frontier and Octh Louie formations and had completed two wells to the Muddy, one
to the Frontier and five to the Octh Louie, with four wells still in the process
of being completed.
In February 1997, the Company began construction of an amine plant to
process the sour gas produced from the Phosphoria formation. Testing of the
plant's systems commenced in May 1997 and the Company began to test processing
sour gas in late July 1997. Although operation of the amine plant had been
severely limited due to delays in receipt of acid gas disposal equipment,
operations at the plant and the associated acid gas injection system commenced
on December 3, 1997. Once fully operational, the Company's treatment plant will
have the design capacity to treat up to 28,000 Mcf of sour gas (20% hydrogen
sulfide content level) per day to pipeline specifications. Assuming a
steady-state 2 Mcf to 1 bbl gas/oil ratio, the plant's design capacity, assuming
treatment to pipeline specifications, would permit oil production from the
Manderson Field at up to 14,000 bbls of oil per day. There can be no assurance
that the Company will be able to produce oil and gas from the Manderson Field at
rates sufficient to fully utilize such capacities. See "Risk Factors --
Operating Risks." The plant's sour gas handling capacity would be substantially
higher if the Company elected to treat its 20% sour gas to a 3% hydrogen sulfide
content level and then transport the 3% sour gas to an existing gas treatment
facility owned by a third party for processing to pipeline specifications. That
facility is currently undergoing modifications to safely handle such sour gas.
The Company has also drilled and completed an acid gas injection well, and
has received an approved permit to drill and complete a second such well, in
order to inject the acid gas by-product (approximately 98% hydrogen sulfide
content level) from its amine plant back into the ground. The Company plans to
drill the second acid gas injection well early in the first quarter of 1998. The
Company expects each of these injection wells to have sufficient capacity to
inject the plant's acid gas for a significant number of years. As of September
30, 1997, the Company operated two full-stream gas re-injection wells, had
permits pending for a third and was engineering a fourth re-injection well. Each
of the re-injection wells is expected to have the capacity to re-inject from
2,000 to 2,500 Mcf per day of 20% sour gas back into the Phosphoria. Once fully
operational, these four gas re-injection wells could permit the production of up
to 4,000 to 5,000 bbls of oil per day, assuming a steady-state 2 Mcf to 1 bbl
gas/oil ratio. The Company expects to use this sour gas re-injection capacity
primarily as a backup for its amine plant.
The Btu content of the sweet gas produced from the shallower formations in
the Manderson Field (the Muddy, Frontier, Octh Louie, Lakota and Dakota sands)
ranges from 1,050 to 1,350 MMBtu per Mcf. As a result, the rich gas must be
processed to remove the natural gas liquids prior to shipment. The Company has
several options for the removal of these liquids, including contracting for
processing services from existing nearby liquids processing facilities with
available capacity or the procurement, installation and operation by the Company
of its own liquids processing plant. The Company also has the option of treating
the sour gas produced from the Phosphoria to pipeline specification at its own
amine plant and using the nearby third-party gas treatment facility to remove
the natural gas liquids from sweet gas from the shallower formations. Based
32
<PAGE> 34
on currently anticipated production levels, the Company does not expect that
production will be constrained due to the need to remove the natural gas
liquids.
At November 30, 1997, the Company had two drilling rigs and eight
completion rigs in the field and plans to have drilled at least 70 wells
targeting the Phosphoria, Muddy, Octh Louie and Frontier formations by year-end
1997, 50 of which it estimates will be on line (although less than one-third
will have been stimulated). In 1998, the Company plans to drill an additional 70
to 100 wells in the field. The exact mix of formations to be targeted will
depend on several factors, including relative oil and gas pricing, sour gas
treatment plant and gas re-injection capacity, timing of receipt of permits, the
availability of natural gas liquids processing and gas and oil transportation
capacity. During September 1997, the average production attributable to the
Company's interest in the Manderson Field was 4,252 (2,833 re-injected) Mcf of
natural gas and 352 bbls of oil per day, as most of the Company's wells remained
shut-in pending completion of the amine plant and related acid gas injection
facilities. Operations at the amine plant and the acid gas injection system
commenced on December 3, 1997.
Other Big Horn Basin Properties
In addition to its holdings in the Manderson Field, the Company also has
interests in five other producing properties with many of the same formations as
the Manderson Field in the Big Horn Basin, totaling 114,381 gross (114,024 net)
acres. The most significant of these fields is the Fourteen-Mile Field, located
in Washakie County southwest of the Manderson Field in the Big Horn Basin where
the Company currently has lease holdings on 70,000 gross (70,000 net) acres. As
of September 30, 1997, one new well had been drilled and completed to the Dakota
sand at a depth of approximately 11,000 feet and pipe had been set on a second
well which was awaiting a completion rig. The Company plans to drill at least 10
wells during 1998. Drilling results also indicate the presence of possible
hydrocarbons in the Muddy, Frontier, Cody, Mesa Verde, Phosphoria and the
Tensleep formations.
GULF COAST REGION
The Company's Gulf Coast Region operations are comprised primarily of
onshore properties in Texas and Louisiana, including the Bob West Field in south
Texas and the Langham Creek Area near Houston, Texas. The Company also owns
non-operated interests in the Gulf of Mexico. Estimated proved reserves in the
region, (exclusive of VPP interests) were 86,037 MMcfe as of December 31, 1996.
The Company has budgeted $35 million for development and exploratory drilling
activities in the region during 1998 and expects to have spent $34 million for
such activities during 1997. During the nine months ended September 30, 1997,
the Company drilled 12 gross (7.0 net) development wells and 16 gross (7.7 net)
exploratory wells in the Gulf Coast Region. It expects to drill another 4 gross
(3.65 net) development wells and 5 gross (4.25 net) exploratory wells by the end
of 1997 and expects to participate in approximately 16 gross development wells
and 17 gross exploratory wells during 1998.
Bob West Field
The Company has interests in approximately 863 gross (599 net) acres in
this field located in Zapata and Starr Counties, Texas. Historically, the Bob
West field has been the Company's most significant producing property,
accounting for approximately 35% of gas production and 61% of oil and gas
revenues during the six-year period ended December 31, 1996. The field produces
natural gas from a series of 20 different Upper Wilcox sands with formation
depths ranging from 9,500 to 13,500 feet that require stimulation by hydraulic
fracturing to effectively recover the reserves. Because the majority of this
field is situated under Lake Falcon on the Rio Grande River, most wells were
drilled directionally under the lake from common lakeshore drill sites. The
Company owns interests in two principal areas in the Bob West Field.
The Company has an effective 12.5% working interest in all production from
the Guerra "A" and Guerra "B" units containing 34 producing wells. The Company
also owns a 100% working interest in and operates 511 acres referred to as the
Falcon/Bob West Field which contains 16 producing natural gas wells. During
33
<PAGE> 35
September 1997, the average combined rate of production attributable to the
Company's net revenue interest in these areas was approximately 6,815 Mcf of
natural gas per day.
Langham Creek Area
This area is comprised of the Cypress, Cypress Deep and Langham Creek
Fields in western Harris County, Texas, where the Company has interests in
10,187 gross (8,590 net) acres and is the operator. Multiple horizons in this
area produce oil and gas from Eocene age sandstones in the Yegua formation from
6,000 to 7,500 feet and in the Wilcox formation from 9,000 to 16,500 feet.
The Company acquired additional working interests in the Langham Creek Area
in Harris County, Texas in May 1997, which added 14,000 MMcfe of proved reserves
and the potential for significant additional reserves for approximately $17
million. With this acquisition, the Company's third in a series of acquisitions
in this field, KCS assumed operatorship and now owns working interests varying
from 33% to 87% in 15 wells in this area, representing an average working
interest of approximately 61%. During September 1997, the average production
attributable to the Company's interest was approximately 11,140 Mcf of natural
gas and 100 bbls of condensate per day. The geological and geophysical evidence
indicates the potential for as many as four to eight additional development
drilling locations, with the upper-middle Wilcox sands as the primary target.
The Company plans to continue active development in the area and plans to drill
as many as five additional wells targeting these sands in 1998. In addition, the
Company is currently completing a 16,500-foot well to test the deeper Wilcox
sands on trend with North Milton Field, which field has produced approximately
200 Bcf to date, and has initiated a 3-D seismic survey to better delineate
potential drilling locations. Results of the 3-D seismic survey are expected to
be completed during the first quarter of 1998 and could change the number of
potential drilling locations.
Gulf of Mexico
The Company has working interests ranging from 1% to 14% in 13 offshore
fields (including blocks located in the Eugene Island, Ship Shoal, South
Timbalier, Vermilion, West Cameron and Galveston Island areas) which are
operated by other companies, primarily Newfield Exploration Company
("Newfield"). The Company has interests in 53 gross (5.0 net) wells with an
average working interest of approximately 9%. During September 1997, average
daily production from this area attributable to the Company's interest was
approximately 8,700 Mcf of natural gas and 364 bbls of oil.
These fields produce from various Pleistocene, Pliocene and Miocene sands
ranging from 6,000 feet to 15,000 feet in depth. The Company's participation
with Newfield in the development of these offshore reserves was initiated in
1990. The last year of active participation in new leasehold acquisitions with
Newfield was 1992, although the Company has continued to participate in the
development of the properties where it already owns leases.
During 1997, Newfield drilled one successful development well at the South
Timbalier 148 field and one unsuccessful exploration well at the South Timbalier
111 field. The Company has aggregate working interests in proved reserves of
11.8 Bcfe in the Gulf of Mexico, of which 96% are proved developed.
The Company also has acquired substantial reserves in the Gulf of Mexico
under its VPP program. See "-- Volumetric Production Payment Program."
Laurel Ridge Field
The Company is the operator of this field located in Iberville Parish,
Louisiana and has a 26% net revenue interest in 3,773 gross (1,221 net) acres
around two discovery wells. The #1 Claiborne Plantation was completed in August
1995 in the Cibicides hazzardi (Frio) sand and the #2 Claiborne Plantation was
completed in December 1995 in the shallower Miogyp (Frio) formation. A 3-D
seismic program has been shot and is currently being evaluated to identify
additional locations. During September 1997, the average production attributable
to the Company's interest was 1,340 Mcf of natural gas and 126 bbls of oil per
day.
34
<PAGE> 36
MID-CONTINENT/WEST TEXAS REGION
General
In the Mid-Continent/West Texas Region, the Company has active development
and exploration drilling programs in the Anadarko, Ardmore, Arklatex, Arkoma,
and Permian Basins. Estimated proved reserves in the region were 125,330 MMcfe
as of December 31, 1996. The Company has budgeted $30 million for development
and exploratory drilling activities in the region during 1998 and expects to
have spent $29 million for such activities during 1997. During the nine months
ended September 30, 1997, the Company participated in the drilling of 22 gross
(16.5 net) development wells and 1 gross (0.9 net) exploratory wells. The
Company expects to drill 12 gross (7.5 net) additional development wells and 1
gross (0.4 net) additional exploratory wells by the end of the year. The Company
plans to continue to exploit areas of the various basins that require
development wells for adequate reserve drainage and intends to drill 40
locations in these areas during 1998. Also, the Company plans to drill two
exploratory wells in 1998.
Medallion Acquisition
Effective December 31, 1996, the Company acquired all of the outstanding
stock of InterCoast Oil and Gas Company (formerly Medallion Production Company),
GED Energy Services, Inc. and InterCoast Gas Services Company, for a total price
of $199.1 million. The Medallion Acquisition more than doubled the Company's
reserve base and rate of oil and gas production and added management and
technical expertise, particularly in the new Mid-Continent region. Medallion's
principal oil and gas assets were estimated as of December 31, 1996 to be
187,458 MMcfe of proved oil and gas reserves, consisting of 140,320 MMcf of
natural gas (78% of total proved reserves) and 7,856 Mbbls of oil and
condensate, representing an average net acquisition cost of $0.98 per Mcfe.
These reserves were located primarily in west Texas, the Texas panhandle,
northwest Oklahoma and north Louisiana.
Sawyer Canyon Field
The Company's holdings in the Sawyer Canyon Field, located in Sutton
County, Texas, represented 14% of the Company's proved reserves as of December
31, 1996. As of September 30, 1997, the Company owned interests in 345 gross
(309 net) wells, of which it operates 332 gross (309 net) wells. The Company's
average working interest in this field was 90%, and its leasehold position at
September 30, 1997 consisted of approximately 34,887 gross (34,053 net) acres.
During September 1997, the average combined rate of production attributable to
the Company's interest was approximately 14,600 Mcf of natural gas and 4 bbls of
condensate per day.
The main producing formation in the Sawyer Canyon Field is the Canyon
sandstone at a depth of approximately 5,500 feet. These Canyon reservoirs tend
to be discontinuous and generally exhibit lower porosity and permeability,
characteristics which reduce the area that can be effectively drained by a
single well to units as small as 40 acres.
The Company's 51,235 MMcfe of proved reserves attributable to the Sawyer
Canyon Field at December 31, 1996 are 97% proved developed. The Company has
continued to optimize the field's production and cash flow performance by
maintaining close well, compressor and operating expense surveillance. The
Company currently plans to drill up to seven additional locations, one of which
will be drilled in the fourth quarter of 1997, to exploit the remaining proved
undeveloped reserves. The Company also believes that additional proved reserves
may ultimately be attributed to many of the 30 or more 40-acre drilling
locations remaining on the property. The Company has drilled and is producing
one of these additional locations in 1997 and a second location is scheduled to
be drilled in the fourth quarter of 1997. In addition to exploiting these Canyon
sand development opportunities, the Company intends to continue to evaluate
portions of the Sawyer Canyon Field for potential in the shallower Wolfcamp and
deeper Strawn formations which have been found to be productive in the area.
35
<PAGE> 37
Elm Grove Field
The Company's reserve holdings of 17,578 MMcfe in the Elm Grove Field,
Bossier Parish, Louisiana represent approximately 5% of the Company's total
proved reserves as of December 31, 1996 and are 97% proved developed. Production
from the Elm Grove Field is primarily natural gas from the Hosston and Cotton
Valley formations at depths of 7,000 to 9,600 feet. As of September 30, 1997,
the Company owned an interest in 29 gross (25 net) wells, of which 27 gross (25
net) were operated by the Company. The Company's operated leasehold position
consisted of approximately 5,760 gross (5,545 net) acres. Average daily
production from the Elm Grove Field, net to its interest, was approximately
4,400 Mcf of natural gas and 12 bbls of oil during September 1997.
The Company has drilled and completed one Cotton Valley well this year and
plans to re-fracture one of the thirteen wells drilled by the Company since it
first acquired its interest in the field in September 1994. Also, the Company
has identified three 2,500-foot Tuscaloosa development locations which it plans
to drill in the fourth quarter of this year. The Company has identified several
behind pipe zones and plans to drill three to five additional Cotton Valley and
Tuscaloosa wells in 1998.
OTHER REGIONS
Newhall-Potrero Field
The Company's Newhall-Potrero Field is located in Los Angeles County,
California, outside the city of Valencia. At December 31, 1996, net proved
reserves were 12,125 MMcfe, all of which were proved developed. The Company is
the operator and owns a 100% working interest in 35 active wells. Average daily
production from the area, net to its interest, was approximately 836 Mcf of
natural gas and 417 bbls of oil during September 1997. The Company has been able
to maintain the oil production at or above the same daily rate as the field was
producing when it was acquired by Medallion in 1993 by converting certain wells
from gas lift to pumping unit operations and reworking other wells, and was able
to reduce the per barrel lifting cost. The Company believes that there are other
production enhancement opportunities in the Newhall-Potrero Field through the
recompletion of wells or the drilling of high angle laterals to undrained
portions of the oil reservoirs.
Niagaran Reef Trend (Michigan)
The Company owns non-operated working interests averaging 19% in 23 active
producing wells located in the northern Niagaran Reef trend of Michigan. At
December 31, 1996, net proved reserves attributed to these interests were 3,179
MMcf and 231 Mbbls with a total PV-10 of $10.1 million. Of this PV-10 amount,
59% was attributable to three wells in the Mayfield "28" reef and 29% was
attributable to five wells in the Hayes "11" reef. During September 1997, daily
production net to the Company's interests from all the Michigan wells averaged
approximately 95 bbls of oil and 750 Mcf of gas. The Niagaran Reef reservoirs
are tall carbonate mounds (limestones & dolomites) varying from several hundred
to more than 600 feet in height and are typically found at depths of 4,000 to
6,500 feet.
The Company acquired its ownership in the Michigan properties in December
1995 in conjunction with a VPP transaction with a subsidiary of Hawkins Oil and
Gas, Inc. ("Hawkins"), which currently operates the majority of the wells in
which the Company has an interest. The Company intends to become the operator of
these properties on or about January 1, 1998. During 1997, the Company began
expanding its involvement in the area by acquiring a 30% working interest in a
28 square mile 3-D seismic exploration project designed to identify and drill
for Niagaran Reefs in a previously underexplored area of the northern reef
trend. This project area offsets a portion of the existing productive reef trend
that statistically contains more than 1.5 reefs per square mile, where per well
cumulative productions have exceeded 450 Mbbls of oil. This project is currently
in the final stages of seismic processing, and, following interpretation, the
project's operator expects to finalize leasing and embark on a multi-well
drilling program that could result in the drilling of 30 or more test wells over
the next several years.
36
<PAGE> 38
VOLUMETRIC PRODUCTION PAYMENT PROGRAM
General
The Company augments its working interest ownership of properties with a
volumetric production payment ("VPP") program, a method of acquiring oil and gas
reserves scheduled to be delivered in the future at a discount to the current
market price in exchange for an up-front cash payment. A volumetric production
payment is comparable to a term royalty interest in oil and gas properties and
entitles the Company to a priority right to a specified volume of oil and gas
reserves scheduled to be produced and delivered over a stated time period.
Although specific terms of the 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 drilling and lease operating
costs and, in certain cases, free of state severance taxes. The Company is
currently not the operator of any of the properties underlying its volumetric
production payments, and it does not bear any development or lease operating
expenses. The Company intends to become the operator of the properties
underlying the Michigan VPP transaction on or about January 1, 1998. After
delivery of the oil and gas volumes, the Company arranges for further downstream
transportation and sells such volumes to available markets. The Company believes
that its VPP 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. Typically, the estimated proved reserves of
the properties underlying a volumetric production payment are substantially
greater than the specified reserve volumes required to be delivered pursuant to
the production payment.
In the three years ended September 30, 1997, the Company had invested $124
million in 25 separate transactions under the VPP program, and had acquired
proved reserves of 80,865 MMcfe, consisting of 71,805 MMcf of natural gas and
1,510 Mbbls of oil. This represents an average net acquisition cost of $1.54 per
Mcfe, without the burden of development and lease operating expenses. Through
September 30, 1997, the Company had recovered approximately $75 million from the
sale of oil and gas received under its VPP program. Scheduled for delivery under
the VPP program after September 30, 1997 are 42,328 MMcf of gas and 1,008 Mbbls
of oil. The Company's unrecovered cost under its VPP program, including future
commitments of $10.6 million, is $1.17 per Mcfe. The VPP program accounted for
33,595 MMcfe (10%) of the Company's total proved oil and gas reserves as of
December 31, 1996. The properties underlying the VPP program are principally
located in two major regions, the Gulf of Mexico and the Niagaran Reef trend in
Michigan.
During the nine months ended September 30, 1997, the Company invested $45.5
million in 10 separate VPP transactions and acquired 22,805 MMcf of gas and 110
Mbbls of oil. The newly acquired reserves are primarily located in 11 blocks in
the offshore Gulf of Mexico.
The following table shows, as of September 30, 1997, the oil and gas
deliveries to the Company scheduled to be made pursuant to its VPP program over
the period from October 1, 1997 through December 31, 2006. Total future net cash
flows to the Company from the volumetric production payment deliveries scheduled
below are estimated to be $126.6 million, based on spot market prices in effect
at September 30, 1997 ($2.57 per MMBtu (Henry Hub) and $17.63 per bbl (Koch WTI
EDQ posting), before adjustments for appropriate basis differentials and Btu
content).
<TABLE>
<CAPTION>
NATURAL GAS OIL TOTAL % OF
PERIOD FROM TO (MMCFE) (MBBLS) (MMCFE) TOTAL
----------- -- ----------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
October 1, 1997 December 31, 1997......... 4,389 87 4,911 10%
January 1, 1998 December 31, 1998......... 22,145 386 24,461 51
January 1, 1999 December 31, 1999......... 10,087 173 11,125 23
January 1, 2000 December 31, 2000......... 1,803 109 2,457 5
January 1, 2001 December 31, 2001......... 1,369 75 1,819 4
January 1, 2002 December 31, 2006......... 2,535 178 3,603 7
------ ----- ------ ---
42,328 1,008 48,376 100%
====== ===== ====== ===
</TABLE>
37
<PAGE> 39
Niagaran Reef Trend (Michigan) VPP Properties
The Company's northern and southern Niagaran Reef trend properties, located
in Michigan, were acquired in December 1995. The VPP program reserves are being
produced largely from a group of 25 wells located in 12 fields, currently
operated by Hawkins. The Niagaran Reef reservoirs are typically found at depths
between 4,000 and 6,500 feet. The Company intends to become the operator of the
properties underlying the Michigan VPP transaction on or about January 1, 1998.
Of the remaining 9,187 MMcf and 645 Mbbls to be delivered under the volumetric
production payment, the Company is scheduled to receive 603 MMcf and 47 Mbbls
during the last three months of 1997, 2,195 MMcf and 162 Mbbls in 1998, with the
balance to be delivered between 1999 and 2006.
Gulf of Mexico VPP Properties
Hall-Houston Oil Company Properties. The Company has acquired interests in
12 blocks off the coast of Texas and Louisiana through volumetric production
payment contracts with Hall-Houston Oil Company ("HHOC"), which is the operator
of all of the blocks. The blocks contain 20 wells drilled during 1994, 1995,
1996 and the first nine months of 1997 in the shallow waters of the Gulf of
Mexico, producing at depths ranging from 4,500 to 10,000 feet. Pursuant to the
HHOC volumetric production payments, the Company received deliveries totaling
9,640 MMcf during 1996 and 4,400 MMcf during the nine months ended September 30,
1997 and is scheduled to receive deliveries totaling 2,173 MMcf during the
balance of 1997, 7,164 MMcf in 1998, and 4,922 MMcf in 1999.
ATP Oil & Gas Properties. The Company has acquired interests in 8 blocks
off the coast of Louisiana, one block off the coast of Texas and one onshore
property in Texas through volumetric production payment contracts with ATP Oil &
Gas Co. of Houston, Texas ("ATP"), which is the operator of all of the blocks.
The blocks contain 10 wells drilled during 1996 and the first nine months of
1997 that are at depths ranging from 3,000 to 13,500 feet in the shallow waters
of the Gulf of Mexico. Pursuant to the ATP volumetric production payments, the
Company received deliveries totaling 427 MMcfe during 1996 and 928 MMcfe during
the nine months ended September 30, 1997 and is scheduled to receive deliveries
totaling 1,765 MMcfe during the balance of 1997, 13,904 MMcfe in 1998, and 3,791
MMcfe in 1999. The terms of the VPP with ATP specify that the Company receives a
fixed percentage of the production attributable to ATP's working interest until
payout of the Company's investment, then a reduced percentage until the
Company's return on its initial investment reaches a defined level, at which
time the Company would be entitled to a continuing overriding royalty interest
for the remaining life of the reserves. As a result, the exact volumes to be
delivered to the Company will vary depending on a number of factors including
the timing of production and the actual realized oil and gas prices.
Other VPP Properties
The Company is also scheduled to receive deliveries totaling 88 MMcfe
during the remainder of 1997 and 352 MMcfe from 1998 to 1999 from several
smaller volumetric production payments.
EXPLORATION PROGRAM
During the three-year period ended December 31, 1996, the Company
participated in the drilling of 70 exploratory wells with a 46% success rate.
Discoveries included wells in the Langham Creek Area, the Laurel Ridge Field,
the Tensas Parish Area and the Manderson Field. During the first nine months of
1997, the Company participated in the drilling of 23 exploratory wells and
completed 10 wells. Of the 1997 exploration budget of $25 million, $16.8 million
was spent during the nine months ended September 30, 1997. The Company plans to
participate in approximately 60 exploratory prospects in 1998, committing
approximately 40% of its $30 million 1998 exploration budget to higher risk,
higher potential projects.
The Company's policy is to commit no more than 25% of its operating cash
flow to exploration activities and generally to have no more than a $750,000 dry
hole cost exposure for any exploratory well. The Company has established an
initial budget of $30 million for exploration in 1998 and intends to participate
in drilling a wide variety of prospects, including both moderate-risk and
high-risk, high-potential prospects in order to
38
<PAGE> 40
maintain a balanced drilling program with the potential for significant reserve
additions. During 1998, the Company plans to continue 3-D and 2-D seismic data
acquisition and analysis. Exploration activities will focus primarily on
properties located in the onshore Gulf Coast regions of Texas and Louisiana and
in the Rocky Mountains. Major ongoing exploration projects include the Franklin
Deep, Laurel Ridge, Bayou Carlin and Bayou Segnett prospects in south Louisiana;
the Langham Creek Deep and Buna Gap prospects in southeast Texas; the Buck
prospect in northeast Texas; the Wilde Horse Butte in Wyoming, the Breeze
Anticline prospect in Colorado; the Montana Tyler prospect in Montana and the
Spearfish and Lodgepole prospects in North Dakota.
OIL AND GAS RESERVES
All information in this Prospectus relating to estimates of the Company's
proved reserves is derived from reports prepared for the Company by Ryder Scott
Company, H.J. Gruy and Associates, Inc., R.A. Lenser and Associates, Inc. and
Netherland, Sewell and Associates, Inc., each in accordance with the rules and
regulations of the SEC. These independent reserve engineers' estimates were
based upon a review of production histories and other geologic, economic,
ownership and engineering data provided by the Company or third party operators.
Although reserve engineers' reports with respect to reserves underlying the
Company's VPP program are utilized by the Company to support its own analysis of
such reserves, the proved reserves, related future net revenues and PV-10 that
the Company reports with respect to volumetric production payments are taken
directly from the amounts contracted for pursuant to the VPP agreements (which
amounts are substantially less than the net working interest production
reflected in the independent reserve engineers' reports).
The following table sets forth as of December 31, 1996, the historical
summary information with respect to (i) the estimates made by the reserve
engineers of the Company's proved oil and gas reserves attributable to working
interests plus (ii) the reserve amounts contracted for pursuant to the VPP
agreements.
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
PROVED RESERVES:
Oil (Mbbls)................................................. 14,631
Natural gas (MMcf).......................................... 268,025
Total (MMcfe).......................................... 355,813
Future net revenues ($000).................................. $849,265
Present value of future net revenues before income taxes
($000).................................................... $557,612
PROVED DEVELOPED RESERVES:
Oil (Mbbls)................................................. 12,133
Natural gas (MMcf).......................................... 236,454
Total (MMcfe).......................................... 309,252
Future net revenues ($000).................................. $750,990
Present value of future net revenues before income taxes
($000).................................................... $494,240
</TABLE>
In accordance with SEC guidelines, the estimates of future net revenues
from the Company's proved reserves and the present value thereof are made using
oil and gas sales prices in effect as of the dates of such estimates and are
held constant throughout the life of the properties except where such guidelines
permit alternate treatment, including, in the case of natural gas contracts, the
use of fixed and determinable contractual price escalations. As of December 31,
1996, spot market gas prices of $3.90 per Mcf (Henry Hub) and $23.38 per bbl
(Koch WTI EDQ posting) were in effect. These prices were substantially higher
than spot market prices as of September 30, 1997, which were $2.57 per Mcf
(Henry Hub) and $17.63 per bbl (Koch WTI EDQ posting). The prices for natural
gas and, to a lesser extent, oil, are subject to substantial seasonal
fluctuations, and prices for each are subject to substantial fluctuations as a
result of numerous other factors. See "Risk Factors -- Volatile Nature of Oil
and Gas Markets; Fluctuations in Prices" and "-- Uncertainty of Estimates of Oil
and Gas Reserves and Future Net Cash Flows."
39
<PAGE> 41
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting future rates of production and
future amounts and timing of development expenditures, including underground
accumulations of crude oil and gas that cannot be measured in an exact manner,
and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Estimates of proved undeveloped reserves are inherently less certain than
estimates of proved developed reserves. The quantities of oil and gas that are
ultimately recovered, production and operating costs, the amount and timing of
future development expenditures, geologic success and future oil and gas sales
prices may all differ from those assumed in these estimates. In addition, the
Company's reserves may be subject to downward or upward revision based upon
production history, purchases or sales of properties, results of future
development, prevailing oil and gas prices and other factors. Therefore, the
present value shown above should not be construed as the current market value of
the estimated oil and gas reserves attributable to the Company's properties. See
"Risk Factors -- Volatile Nature of Oil and Gas Markets; Fluctuations in Prices"
and "-- Uncertainty of Estimates of Oil and Gas Reserves and Future Net Cash
Flows."
ACREAGE
The following table sets forth certain information with respect to
developed and undeveloped leased acreage of the Company as of September 30,
1997. The leases in which the Company has an interest are for varying primary
terms, and many require the payment of delay rentals to continue the primary
term. The leases may be surrendered by the operator at any time by notice to the
lessors, by the cessation of production, fulfillment of commitments, or by
failure to make timely payments of delay rentals. Excluded from the table are
the Company's interests in the properties subject to volumetric production
payments. See "-- Volumetric Production Payment Program and Underlying Principal
Properties."
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
----------------- -----------------
STATE GROSS NET GROSS NET
----- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Wyoming........................................ 257,425 207,259 50,548 50,548
Texas.......................................... 122,714 71,157 42,330 22,407
Montana........................................ 85,433 46,938 29,047 22,222
Louisiana...................................... 114,393 27,911 39,857 32,576
Oklahoma....................................... 49,217 19,302 12,006 7,559
Colorado....................................... 27,254 12,946 7,020 5,270
Other.......................................... 64,569 11,639 84,533 26,988
------- ------- ------- -------
Total................................ 721,005 397,152 265,341 167,570
======= ======= ======= =======
</TABLE>
TITLE TO OIL AND GAS PROPERTIES
Substantially all of the Company's property interests not the subject of
its VPP program are held pursuant to leases from third parties. A title opinion
is typically obtained prior to acquiring these properties. The Company or the
relevant operator routinely obtain title opinions on substantially all of the
properties that the Company has drilled or participated in drilling. With
respect to acquisitions of proved properties, the Company generally obtains
updated title opinions covering properties constituting at least 80% of the
value of the acquisition, and there are usually older, existing opinions
covering the remaining properties. The Company believes that it has satisfactory
title to its properties in accordance with standards generally accepted in the
oil and gas industry. In addition, the Company's properties are subject to
customary royalty interests, overriding royalty interests, liens for current
taxes, and other burdens.
The Company typically takes the same approach to approving title for
volumetric production payments as it does in drilling its own wells or in
property acquisitions. The operator will generally have a drilling title opinion
or a division order title opinion (on producing wells) for the properties being
conveyed. In most cases, the Company will require that the operator update any
existing title opinions to reflect the current working interest and net revenue
interest subjected to the volumetric production payment conveyed to the Company.
By updating the title, any existing mortgages, liens, lawsuits and potential
encumbrances will be disclosed.
40
<PAGE> 42
Only when the Company believes that it has satisfactory title to the properties
in accordance with generally accepted industry standards will the Company
proceed with a volumetric production payment.
MARKETING OF OIL AND GAS PRODUCTION
The Company markets substantially all of the oil and gas production from
Company-operated wells and its volumetric production payment volumes to
pipelines, local distribution companies and third-party natural gas marketers.
The Company believes that its marketing activities add value by giving the
Company opportunities to obtain competitive prices for products, minimize
pipeline and purchaser balancing problems, maintain continuous sales of
production and secure prompt payment.
Substantially all of the Company's natural gas is sold under short-term
contracts (one year or less) providing for variable or market sensitive prices.
The Company sells its oil production in each of its producing regions pursuant
to contracts based on postings by major purchasers.
The price of natural gas is influenced by supply and demand factors for
natural gas in the United States, Mexico and Canada, as well as prices of
competing fuels. Average oil prices are reflective of the world oil market
during the applicable period. Market prices for oil and gas, which are volatile
in nature, have a significant impact on the Company's revenue, net income and
cash flow.
In connection with the marketing of its oil and gas production, the Company
engages in oil and gas price risk management activities primarily through the
use of oil and gas futures and options contracts and "fixed for floating" price
swap agreements. The Company utilizes oil and gas futures contracts for the
purpose of hedging the risks associated with fluctuating oil and gas prices and
accounts for such contracts in accordance with FASB Statement No. 80,
"Accounting for Futures Contracts." Since these contracts qualify as hedges and
correlate to market price movements of oil and gas, any gains or losses
resulting from market changes will be offset by losses or gains on corresponding
physical transactions. The swap agreements on notional volumes require payments
to (or the receipt of payments from) counterparties to such agreements based on
the differential between a fixed and variable price for the oil or gas. The
Company maintains coverage of such notional volumes with adequate physical
volume deliveries at the hub points used to price such arrangements. The Company
records these transactions under settlement accounting guidelines and,
accordingly, includes gains or losses in oil and gas revenues in the period of
the swapped production. The Company intends to continue to consider various risk
management arrangements to stabilize cash flow and earnings and reduce the
Company's susceptibility to volatility in oil and gas prices.
The Company has two separate natural gas price swaps in place as a result
of the Medallion Acquisition. For the calendar years 1996, 1997 and 1998, these
transactions cover 11.7 million MMBtu, 8.1 million MMBtu and 4.8 million MMBtu
of natural gas, respectively, and result in annual weighted average prices per
MMBtu of $2.072, $2.020 and $1.983, respectively.
SIGNIFICANT CUSTOMER
One customer, Tennessee Gas, accounted for approximately 82%, 72% and 40%
of the oil and gas revenue for the years ended December 31, 1994, 1995, and
1996, respectively. No other single customer accounted for more than 10% of the
Company's consolidated revenue during these periods or in the nine months ended
September 30, 1997. Effective January 1, 1997, the Company's contract with
Tennessee Gas was terminated.
REGULATION
General. The Company's business is affected by numerous governmental laws
and regulations, including energy, environmental, conservation, tax and other
laws and regulations relating to the energy industry. Changes in any of these
laws and regulations could have a material adverse effect on the Company's
business. In view of the many uncertainties with respect to current and future
laws and regulations, including their applicability to the Company, the Company
cannot predict the overall effect of such laws and regulations on its future
operations.
41
<PAGE> 43
The Company believes that its operations comply in all material respects
with all applicable laws and regulations and that the existence and enforcement
of such laws and regulations have no more a restrictive effect on the Company's
method of operations than on other similar companies in the energy industry.
The following discussion contains summaries of certain laws and regulations
and is qualified in its entirety by the foregoing.
State Regulation of Energy. The Company's production investments are
subject to regulation at the state level. Such regulation varies from state to
state but generally includes requiring permits for the drilling of wells,
maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, the
plugging and abandoning of wells, and the disposal of fluids used in connection
with operations. The Company's operations are also subject to various state
conservation laws and regulations. These include regulation of the size of
drilling and spacing units or proration units, the density of wells which may be
drilled, and the unitization or pooling of oil and gas properties. In addition,
state conservation laws establish maximum rates of production from oil and gas
wells, restrict the venting or flaring of gas and impose certain requirements
regarding the ratability of production. These regulatory burdens may affect
profitability, and the Company is unable to predict the future cost or impact of
complying with such regulations.
Federal Regulation of the Sale and Transportation of Oil and Gas. Various
aspects of the Company's oil and gas operations are regulated by agencies of the
federal government. The FERC regulates the transportation of natural gas in
interstate commerce pursuant to the Natural Gas Act of 1938 (the "NGA" ) and the
Natural Gas Policy Act of 1978 (the "NGPA"). In the past, the federal government
had regulated the prices at which the Company's produced oil and gas could be
sold. Currently, "first sales" of natural gas by producers and marketers, and
all sales of crude oil, condensate and natural gas liquids, can be made at
uncontrolled market prices, but Congress could reenact price controls at any
time.
Commencing in April 1992, the FERC issued its Order No. 636 and related
clarifying orders ("Order No. 636"), which, among other things, purported to
restructure the interstate natural gas industry and to require interstate
pipelines to provide transportation services separate, or "unbundled," from the
pipelines' sales of natural gas. Order No. 636 and certain related proceedings
have been the subject of a number of judicial appeals and orders on remand by
the FERC. Although Order No. 636 has largely been upheld on appeal, several
appeals remain pending in related restructuring proceedings. The Company cannot
predict when these remaining appeals will be completed or their impact on the
Company. FERC continues to address Order 636-related issues (including capacity
brokering, alternative and negotiated ratemaking and transportation policy
matters) in a number of pending proceedings. In May 1997, FERC held a public
conference and inquiry to receive comments on the FERC's future regulatory
policies and priorities in the post-Order 636 environment. It is not possible
for the Company to predict what effect, if any, the ultimate outcome of the
FERC's various initiatives will have on the Company's operations. However, the
court's decision is still subject to further action.
Although Order No. 636 does not directly regulate the Company's production
activities, Order No. 636 was issued to foster increased competition within all
phases of the natural gas industry. It is unclear what future impact, if any,
increased competition within the natural gas industry under Order No. 636 and
related orders will have on the Company's activities. Although Order No. 636
could provide the Company with better access to markets and the ability to
utilize new types of transportation services, it could also subject the Company
to more restrictive pipeline imbalance tolerances and greater penalties for
violation of those tolerances. The Company believes that Order No. 636 has not
had any significant impact on the Company as a producer or on the Company's
natural gas marketing efforts.
The FERC has announced several important transportation-related policy
statements and proposed rule changes, including a statement of policy and a
request for comments concerning alternatives to its traditional cost-of-service
ratemaking methodology to establish the rates that pipelines may charge for
their services. A number of pipelines have obtained FERC authorization to charge
negotiated rates as one such alternative. In February 1997, the FERC announced a
broad inquiry into issues facing the natural gas industry to assist the FERC in
establishing regulatory goals and priorities in the post-Order No. 636
environment. While these
42
<PAGE> 44
changes would affect the Company only indirectly, they are intended to further
enhance competition in the natural gas markets.
The FERC has also recently issued numerous orders confirming the sale and
abandonment of natural gas gathering facilities previously owned by interstate
pipelines and acknowledging that if the FERC does not have jurisdiction over
services provided thereon, then such facilities and services may be subject to
regulation by state authorities in accordance with state law. A number of states
have either enacted new laws or are considering inadequacy of existing laws
affecting gathering rates and/or services. For example, the Texas Railroad
Commission has recently changed its regulations governing transportation and
gathering services provided by intrastate pipelines and gatherers to prohibit
undue discrimination in favor of affiliates. Other state regulation of gathering
facilities generally includes various safety, environmental, and in some
circumstances, nondiscriminatory take requirements, but does not generally
entail rate regulation. Thus, natural gas gathering may receive greater
regulatory scrutiny by state agencies in the future. The Company's gathering
operations could be adversely affected should they be subject in the future to
increased state regulation of rates or services, although the Company does not
believe that it would be affected by such regulation any differently than other
natural gas producers or gatherers. In addition, FERC's approval of transfers of
previously-regulated gathering systems to independent or pipeline affiliated
gathering companies that are not subject to FERC regulation may affect
competition for gathering or natural gas marketing services in areas served by
those systems and thus may affect both the costs and the nature of gathering
services that will be available to interested producers or shippers in the
future. The Company believes that its natural gas gathering facilities meet the
traditional tests that the FERC has used to establish a pipeline's status as a
gatherer not subject to FERC jurisdiction. However, whether on state or federal
land or in offshore waters subject to the Outer Continental Shelf Land Act
("OCSLA") natural gas gathering may receive greater federal regulatory scrutiny
in the post-Order No. 636 environment. The effects, if any, of these policies on
the Company's operations are uncertain.
The Company's natural gas transportation and gathering operations are
generally subject to safety and operational regulations relating to the design,
installation, testing, construction, operation, replacement and management of
facilities and to state regulation of the rates of such service. To a more
limited degree, a portion of the Company's transportation services may be
subject to FERC oversight in accordance with the provisions of the NGPA.
Pipeline safety issues have recently become the subject of increasing focus in
various political and administrative arenas at both the state and federal
levels. At the federal level, in October 1996, the President signed the
Accountable Pipeline Safety and Partnership Act of 1996, which, among other
things, gives the public an opportunity to comment on pipeline risk management
programs, promotes communication regarding safety issues to residents along
pipeline right-of-ways, and encourages the examination of remote control valves
along pipelines. The Company believes its operations, to the extent they may be
subject to current natural gas pipeline safety requirements, comply in all
material respects with such requirements. The Company cannot predict what
effect, if any, the adoption of additional pipeline safety legislation might
have on its operations, but the natural gas industry could be required to incur
additional capital expenditures and increased costs depending upon future
legislative and regulatory changes.
Sales of crude oil, condensate and natural gas liquids by the Company are
not regulated and are made at market prices. The price the Company receives from
the sale of these products is affected by the cost of transporting the products
to market. Effective as of January 1, 1995, the FERC implemented regulations
establishing an indexing system for transportation rates for oil pipelines,
which would generally index such rates to inflation, subject to certain
conditions and limitations. The Company is not able to predict with certainty
what effect, if any, these regulations will have on it, but other factors being
equal, the regulations may tend to increase transportation costs or reduce
wellhead prices under certain conditions.
The Company also operates federal oil and gas leases, which are subject to
the regulation of the United States Minerals Management Service ("MMS"). The MMS
has issued a notice of proposed rulemaking in which it proposes to amend its
regulations governing the calculation of royalties and the valuation of crude
oil produced from federal leases. This proposed rule would modify the valuation
procedures for both arm's length and non-arm's length crude oil transactions to
decrease reliance on oil posted prices and assign a value to crude oil that
better reflects its market value, establish a new MMS form for collecting
differential data, and
43
<PAGE> 45
amend the valuation procedure for the sale of federal royalty oil. The Company
cannot predict what action the MMS will take on this matter, nor can it predict
how the Company will be affected by any change to this regulation.
In April 1997, after two years of study, the MMS withdrew proposed changes
to the way it values natural gas for royalty payments. These proposed changes
would have established an alternative market-based method to calculate royalties
on certain natural gas sold to affiliates or pursuant to non-arm's length sales
contracts. Informal discussions among the MMS and industry officials are
continuing, although it is uncertain whether, and what changes may be proposed
regarding gas royalty valuation. In addition, MMS has recently announced its
intention to issue a proposed rule that would require all but the smallest
producers to be capable of reporting production information electronically by
the end of 1998.
MMS leases contain relatively standardized terms requiring compliance with
detailed MMS regulations and, in the case of offshore leases, orders pursuant to
OCSLA (which are subject to change by the MMS). For such offshore operations,
lessees must obtain MMS approval for exploration, development, and production
plans prior to the commencement of such operations. The MMS has promulgated
regulations requiring offshore production facilities located on the OCS to meet
stringent engineering and construction specification. The MMS also has proposed
additional safety-related regulations concerning the design and operating
procedures for OCS production platforms and pipelines, but these proposed
regulations were withdrawn pending further discussions among interested federal
agencies. With respect to conservation, the MMS has regulations restricting the
flaring or venting of natural gas and has amended such regulations to prohibit
the flaring of liquid hydrocarbons and oil without prior authorization. The MMS
has also promulgated other regulations governing the plugging and abandonment of
wells located offshore and the removal of all production facilities. To cover
the various obligations of lessees on the OCS, the MMS generally requires that
lessees post substantial bonds or other acceptable assurances that such
obligations will be met. The cost of such bonds or other surety can be
substantial and there is no assurance that any particular lease operator can
obtain bonds or other surety in all cases. Under certain circumstances, the MMS
may require operations on federal leases to be suspended or terminated. Any such
suspension or termination could adversely affect the Company's interests.
Additional proposals and proceedings that might affect the oil and gas
industry are pending before Congress, the FERC, the MMS, state commissions and
the courts. The Company cannot predict when or whether any such proposals may
become effective. In the past, the natural gas industry historically has been
very heavily regulated. There is no assurance that the current regulatory
approach pursued by various agencies will continue indefinitely into the future.
Notwithstanding the foregoing, it is not anticipated that compliance with
existing federal, state and local laws, rules and regulations will have a
material or significantly adverse effect upon the capital expenditures, earnings
or competitive position of the Company.
Taxation. The operations of the Company, as is the case in the energy
industry generally, are significantly affected by federal tax laws, including
the Tax Reform Act of 1986. In addition, federal as well as state tax laws have
many provisions applicable to corporations in general which could affect the
potential tax liability of the Company.
Operating Hazards and Environmental Matters. The oil and gas business
involves a variety of operating risks, including the risk of fire, explosions,
blow-outs, pipe failure, casing collapse, abnormally pressured formations and
environmental hazards such as oil spills, natural gas leaks, ruptures and
discharge 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. Such hazards may hinder or delay
drilling, development and on-line production operations.
Extensive federal, state and local laws and regulations govern oil and gas
operations regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. These laws and
regulations may require the acquisition of a permit before drilling commences,
restrict or prohibit the types, quantities and concentration of substances that
can be released into the environment or wastes that can be disposed of in
connection with drilling and production activities, prohibit drilling activities
on certain lands
44
<PAGE> 46
lying within wetlands or other protected areas and impose substantial
liabilities for pollution or releases of hazardous substances resulting from
drilling and production operations. Failure to comply with these laws and
regulations may also result in civil and criminal fines and penalties. Moreover,
state and federal environmental laws and regulations may become more stringent.
The Company owns, leases, or operates properties that have been used for
the exploration and production of oil and gas, and owns and operates a natural
gas pipeline and natural gas gathering systems. Hydrocarbons, mercury,
polychlorinated biphenyls ("PCBs") or other wastes may have been disposed of or
released on or under the properties owned, leased, or operated by the Company or
on or under other locations where such wastes have been or are taken for
disposal, although the Company has no knowledge of any such occurrences. The
Company's properties and any wastes that may have been disposed thereon may be
subject to federal or state environmental laws that could require the Company to
remove the wastes or remediate any contamination identified on the Company's
properties.
For example, soil contamination and possible groundwater contamination
exist on properties in the Newhall-Potrero Field in California acquired by the
Company in the Medallion Acquisition. The surface landowner has notified the
Company and some prior operators of the Newhall-Potrero Field properties that
the landowner expects them to remediate the contamination. Oryx Energy Company
("Oryx"), the successor to one of the prior operators in the field, has in the
past performed some remediation of contamination in the field to the
satisfaction of the surface landowner. However, the additional remediation
demanded by the surface landowner is estimated to cost between $4 million and
$47 million, with the most probable costs ranging between $5 million and $14
million. The Company acquired the Newhall-Potrero Field properties when it
acquired InterCoast Oil and Gas Company, InterCoast Gas Services Company, and
GED Energy Services, Inc. (collectively "InterCoast"). InterCoast had been
indemnified for 100% of the cost of remediation and restoration activities at
the properties by the company from which it acquired the properties, and the
Company believes that it is a valid successor to InterCoast's indemnity. In
addition, the Company received an indemnity from the owners of InterCoast
(InterCoast Energy and affiliated entities) for 90% of any costs the Company is
required to incur in relation to remediation and restoration activities at the
Newhall-Potrero Field. This indemnity was guaranteed by MidAmerican Capital
Company and it covers environmental claims that are filed against the Company
before January 2, 1999. The Company and Oryx have been negotiating with the
surface landowner and have reached a tentative agreement regarding the scope of
the additional remediation to be performed in the field. The tentative agreement
requires Oryx to pay for substantially all of the additional remediation and
requires only minimal expenditures by the Company. Given the indemnities
available to the Company with respect to this matter and the tentative agreement
obligating Oryx to perform substantially all of the additional remediation and
restoration activities on the properties, management does not expect the Company
to incur any material environmental costs in connection with historical
contamination in the Newhall-Potrero Field.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the original conduct, on certain classes of persons who are
considered to be responsible for the release of a "hazardous substance" into the
environment. These persons include the owner or operator of the disposal site or
sites where the release occurred and companies that disposed or arranged for the
disposal of the hazardous substances. Under CERCLA, such persons may be subject
to joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment, for damages to natural
resources and for the costs of certain health studies, and it is not uncommon
for neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of hazardous
substances.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of certain
pollution control requirements with respect to air emissions from the operations
of the Company. The EPA and states have been developing regulations to implement
these requirements. The Company may be required to incur certain capital
expenditures in the next several years for air pollution control equipment in
connection with maintaining or obtaining permits and approvals addressing
45
<PAGE> 47
other air emission-related issues. The Company does not believe, however, that
its operations will be materially adversely affected by any such requirements.
In addition, the U.S. Oil Pollution Act ("OPA") requires owners and
operators of facilities that could be the source of an oil spill into "waters of
the United States" (a term defined to include rivers, creeks, wetlands, and
coastal waters) to adopt and implement plans and procedures to prevent any spill
of oil into any waters of the United States. OPA also requires affected facility
owners and operators to demonstrate that they have at least $35 million in
financial resources to pay for the costs of cleaning up an oil spill and
compensating any parties damaged by an oil spill. Such financial assurances may
be increased by as much as $150 million if a formal assessment indicates such an
increase is warranted.
Operations of the Company are also subject to the federal Clean Water Act
("CWA") and analogous state laws. In accordance with the CWA, the state of
Louisiana has issued regulations prohibiting discharges of produced water in
state coastal waters effective July 1, 1997. The Company may be required to
incur certain capital expenditures in the next several years in order to comply
with the prohibition against the discharge of produced waters into Louisiana
coastal waters or increase operating expenses in connection with offshore
operations in Louisiana coastal waters. Pursuant to other requirements of the
CWA, the EPA has adopted regulations concerning discharges of storm water
runoff. This program requires covered facilities to obtain individual permits,
participate in a group permit or seek coverage under an EPA general permit.
While certain of its properties may require permits for discharges of storm
water runoff, the Company believes that it will be able to obtain, or be
included under, such permits, where necessary, and make minor modifications to
existing facilities and operations that would not have a material effect on the
Company.
In addition, the disposal of wastes containing naturally occurring
radioactive material which are commonly generated during oil and gas production
are regulated under state law. Typically, wastes containing naturally occurring
radioactive material can be managed on-site or disposed of at facilities
licensed to receive such waste at costs that are not expected to be material.
LEGAL PROCEEDINGS
The Company is a party to three lawsuits involving the holders of royalty
interests on the acreage that was covered by the Tennessee Gas Contract. The
Company is a co-plaintiff in the first of these lawsuits that was filed in
Dallas County, Texas, and is a defendant in two subsequently filed suits in
Zapata County, Texas. On May 30, 1997, one of the Zapata County suits was
dismissed in connection with a partial settlement with certain of the royalty
owners that is discussed below. On October 22, 1997, the other Zapata County
suit was dismissed by the court on its own motion, inasmuch as the suit had been
abated since September 15, 1995 in favor of the earlier-filed suit in Dallas
County.
The Dallas County action was instituted to obtain a declaratory judgment
that the royalty holders' claim that their royalty payments should be based on
the price paid by Tennessee Gas for the natural gas purchased by it under the
Tennessee Gas Contract is erroneous. The Company paid royalties for this natural
gas produced from the Guerra "A", Guerra "B" and Jesus Yzaguirre Units based
upon the spot market price. Because its leases have market-value royalty
provisions, the Company believes it is in full compliance under the leases with
its royalty holders. Its position has been confirmed in the Dallas County suit,
where the trial judge has granted the Company and its co-plaintiffs' motions for
summary judgment on this issue. In addition, the Dallas County trial judge has
granted summary judgment against the royalty owners with respect to their
various counterclaims concerning the Company's Jesus Yzaguirre Unit and the
jointly-owned Guerra "A" and Guerra "B" Units. The royalty owners had also
counterclaimed against the Company with respect to the Jesus Yzaguirre Unit,
alleging (i) that the largest lease contained therein had terminated in December
1975 and (ii) that certain of the royalty owners were entitled to royalties
based upon the Tennessee Gas Contract price because of their execution of
certain division orders in 1992 that allegedly varied the market-value royalty
provision of their lease. On May 30, 1997, the Company and these royalty owners
settled the issue of lease termination, and on June 2, 1997, the trial judge
signed an order of dismissal with prejudice as to that issue. On the issue of
the effect of the 1992 division orders, the parties filed renewed motions for
summary judgment.
46
<PAGE> 48
On August 12, 1997, the trial judge signed an order granting the Company's
motion and denying the royalty owners' motion.
At a hearing on October 29, 1997, the trial judge entered a final judgment
in favor of the Company based upon the prior separate summary judgments in favor
of the Company's position on the issues and counterclaims involved with the
Jesus Yzaguirre Unit lawsuit.
The royalty owners in the Guerra "A" and Guerra "B" Units and in the Jesus
Yzaguirre Unit have appealed the trial court's decision to the Fifth District
Court of Appeals in Dallas, Texas. While the Company believes its positions are
meritorious and that it should prevail, there can be no assurance as to the
ultimate outcome of these matters.
The Company is also party to various other lawsuits and governmental
proceedings, all arising in the ordinary course of business. Although the
outcome of these lawsuits cannot be predicted with certainty, the Company does
not expect such matters to have a material adverse effect, either singly or in
the aggregate, on the financial position or results of operations of the
Company.
47
<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND CERTAIN KEY EMPLOYEES
The following table sets forth the name, age and present position with the
Company of each of the Company's executive officers, directors and certain other
key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
James W. Christmas....... 49 President, Chief Executive Officer and Director
Henry A. Jurand.......... 48 Senior Vice President, Chief Financial Officer and
Secretary
C.R. Devine.............. 51 Vice President, Oil and Gas Operations; President,
KCS Resources, Inc.
Frederick Dwyer.......... 37 Vice President and Controller
Kathryn M. Kinnamon...... 33 Vice President, Treasurer and Asst. Secretary
Harry Lee Stout.......... 49 President, KCS Energy Services, Inc.
Gene C. Daley............ 47 President, KCS Medallion Resources, Inc.
J. Chris Jacobsen........ 42 Senior Vice President, KCS Medallion Resources, Inc.
Dan A. Magee............. 55 Vice President, KCS Resources, Inc. d/b/a KCS
Mountain Resources, Inc.
G. Stanton Geary......... 63 Director
Stewart B. Kean.......... 63 Director and Chairman of the Board
James E. Murphy, Jr. .... 41 Director
Robert G. Raynolds....... 45 Director
Joel D. Siegel........... 55 Director
Christopher A.
Viggiano............... 43 Director
</TABLE>
James W. Christmas has served as President and Chief Executive Officer and
as a director of the Company since its inception in 1988. Prior to joining the
Company, Mr. Christmas spent ten years with NUI Corporation, serving in a
variety of officer capacities and as President of several of its subsidiaries.
While Mr. Christmas was Vice President of Planning of NUI Corporation, he was in
charge of the spin-off of its non-regulated businesses that resulted in the
formation of KCS Energy, Inc. Mr. Christmas began his career with Arthur
Andersen & Co.
Henry A. Jurand was appointed Senior Vice President in March 1997. He has
served as Chief Financial Officer since January 1996, Vice President of the
Company from September 1990 to March 1997, as Treasurer from March 1991 to
December 1995, and as Secretary since February 1992. From 1988 to 1990, he was a
Senior Vice President of Private Capital Partners, Inc., in New York City. From
1977 to 1988, he was employed by Baltimore Gas and Electric Company, holding
management positions including Vice President and Chief Financial Officer of
Constellation Holdings, Inc., a subsidiary, and President of Constellation
Investments, Inc. On September 15, 1997, Mr. Jurand announced his retirement
from the Company, effective December 31, 1997, to pursue a career in academia.
The Company has initiated a search for his successor.
C. R. Devine was named Vice President, Oil and Gas Operations of the
Company in December 1992 and President of KCS Resources, Inc., a subsidiary of
the Company engaged in oil and gas exploration and production, in December 1993.
He has served as principal operating officer of the Company's oil and gas
operations since 1988. He has been employed by the Company and its predecessor
companies since 1974.
Frederick Dwyer was appointed Vice President and Controller of the Company
in March 1997. He served as Assistant Vice President and Controller from May
1996 to March 1997. He joined the Company upon its formation in 1988, holding
various management and supervisory positions. He is a certified public
accountant and began his career with Peat, Marwick, Mitchell & Co.
Kathryn M. Kinnamon was appointed Vice President and Treasurer of the
Company in March 1997. She served as Treasurer since January 1996, as Assistant
Vice President from May 1996 to March 1997 and as Assistant Treasurer from May
1991 to December 1995. She joined the Company upon its formation in 1988,
holding various management and supervisory positions.
48
<PAGE> 50
Harry Lee Stout has served as President of KCS Energy Marketing, Inc., the
Company's subsidiary, since joining the Company in August 1991. In September
1996, he was named President of KCS Energy Services, Inc., the subsidiary of the
Company engaged in the volumetric production payment program. From 1990 to 1991,
he was Vice President of Minerex Corporation in Houston, Texas. From 1978 to
1990, he was employed by Enron Corp. of Houston, Texas, holding various
management positions including Senior Vice President of Houston Pipe Line
Company and Executive Vice President, Enron Gas Marketing Company, both of which
are subsidiaries of Enron Corp.
Gene C. Daley was named President of KCS Medallion Resources, Inc. in
December 1997. He previously served as Senior Vice President, Exploration and
Development of KCS Medallion Resources, Inc. (formerly InterCoast Oil and Gas
Company) since 1991. Prior to joining InterCoast he served as President of
Carter Resources, Inc. from its inception in 1974 until its acquisition by
InterCoast in 1991. From 1972 to 1974 he was an offshore exploration geologist
for Texaco, Inc.
J. Chris Jacobsen has served as Senior Vice President, Exploration,
Development and Reserves of KCS Medallion Resources, Inc. since 1994 and also
has responsibility as director of reservoir engineering for all of the Company.
From 1982 to 1994 he was Senior Vice President of Netherland, Sewell &
Associates. From 1977 to 1982 he was employed by Exxon Company U.S.A. holding
various engineering and supervisory positions.
Dan A. Magee has served as Vice President of KCS Resources, Inc., d/b/a KCS
Mountain Resources, Inc. since May 1996. Prior to May 1996 he was a consultant
to KCS Resources, Inc. in connection with acquisition activities beginning May
1995. From 1992 to 1995 he was a consulting engineer and Manager of Acquisitions
at Hanson Production Company. From 1974 to 1992 he was the Production, Drilling
and Operations Manager for Edwin L. Cox and Cox Oil & Gas, Inc.
G. Stanton Geary has served as a director of the Company since 1988. He is
proprietor of Gemini Associates, Pomfret, Connecticut, a venture capital
consulting firm, and business manager of the Rectory School, Pomfret,
Connecticut.
Stewart B. Kean has served as Chairman of the Board of Directors of the
Company since 1988. He was President of Utility Propane Company, a former
subsidiary of the Company, from 1965 to 1989. He is past President of the
National LP Gas Association and past President of the World LP Gas Forum. He
currently serves as President of the Liberty Hall Foundation. Mr. Kean is Robert
G. Raynolds' uncle.
James E. Murphy, Jr. has served as a director of the Company since 1988.
Mr. Murphy heads his own political and governmental relations consulting firm
offering strategic planning and management consulting services to Republican
candidates nationwide, with extensive experience at the presidential, state and
congressional levels. Based in Gaithersburg, Maryland, he also advises
corporations and industry groups on strategic planning, governmental relations
and grassroots lobbying projects.
Robert G. Raynolds has served as a director of the Company since August
1995. He has been an independent consulting geologist for several major and
independent oil and gas companies from 1992 until the present and was a
geologist with Amoco Production Company from 1983 until 1992. Mr. Raynolds is
Stewart B. Kean's nephew.
Joel D. Siegel has served as a director of the Company since 1988. He is an
attorney-at-law and has been President of the law firm, Orloff, Lowenbach,
Stifelman & Siegel, P.A. of Roseland, New Jersey, since 1975. Orloff, Lowenbach,
Stifelman & Siegel, P.A. serves as outside legal counsel to the Company. Mr.
Siegel served as President and Chief Executive Officer of Constellation Bancorp,
Elizabeth, New Jersey, and Constellation Bank, Elizabeth, New Jersey, for the
period April 26, 1991 to December 6, 1991.
Christopher A. Viggiano has served as a director of the Company since 1988.
Mr. Viggiano has been President, Chairman of the Board and majority owner of
O'Bryan Glass Corp., Queens, New York, since December 1, 1991, and served as
Vice President and a member of the board of directors of O'Bryan Glass Corp.
from 1985 to December 1, 1991. He is a Certified Public Accountant.
49
<PAGE> 51
SECURITY OWNERSHIP BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
As of September 30, 1997, there were 29,394,894 shares of the Company's
Common Stock outstanding. These shares were held by 1,149 holders of record. The
following table sets forth information as to the number and percentage of shares
owned beneficially as of September 30, 1997 by each executive officer and
director of the Company, by all executive officers and directors as a group and
by each person known by the Company to be a beneficial owner of more than 5% of
the Company's Common Stock.
<TABLE>
<CAPTION>
SHARES OWNED PERCENT
BENEFICIALLY(1) OF CLASS
--------------- --------
<S> <C> <C>
James W. Christmas...................................... 1,007,023(2)(3) 3.4%
C. R. Devine............................................ 116,869(2) *
Henry A. Jurand......................................... 37,615(2) *
Frederick Dwyer......................................... 7,794(2) *
Kathryn M. Kinnamon..................................... 3,712(2) *
Harry Lee Stout......................................... 61,724(2) *
G. Stanton Geary........................................ 12,654(2) *
Stewart B. Kean......................................... 2,761,829(2)(4) 9.4%
James E. Murphy, Jr..................................... 30,884(2) *
Robert G. Raynolds...................................... 7,160(2) *
Joel D. Siegel.......................................... 191,388(2)(5) *
Christopher A. Viggiano................................. 58,388(2) *
Executive officers and directors as a group (12
persons).............................................. 4,297,040 14.3%
Metropolitan Life Insurance Company(6).................. 3,361,000 11.4%
One Madison Avenue
New York, New York 10010
Warburg, Pincus Counsellors, Inc........................ 1,918,100 6.5%
466 Lexington Avenue
New York, New York 10017
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, beneficial owner has sole voting and investment
power.
(2) Includes shares that (i) may be purchased as a result of options granted
that are exercisable within 60 days of November 1, 1997 of 600,000, 27,500,
17,500, 30,000 and 200 for Messrs. Christmas, Devine, Jurand, Stout, and
Dwyer, respectively; 200 for Ms. Kinnamon; 8,000 each for Messrs. Geary,
S.B. Kean, Murphy, Siegel and Viggiano and 4,000 for Mr. Raynolds and (ii)
are allocated to the beneficial owner's account under 401(k) plans.
(3) Includes 36,000 shares held in trusts established for the benefit of Mr.
Christmas' children, the beneficial ownership of which is disclaimed by Mr.
Christmas.
(4) Includes 1,025,648 shares held under certain family trusts as to which Mr.
Kean shares voting and investment power.
(5) Includes 16,000 shares held in trusts established for the benefit of Mr.
Siegel's children, the beneficial ownership of which is disclaimed by Mr.
Siegel.
(6) Includes 3,337,600 shares (11.4%) owned by an affiliate of Metropolitan Life
Insurance Company, State Street Research and Management Company, One
Financial Center, 30th Floor, Boston, Massachu-
setts 02111.
In December 1994, the Board of Directors adopted a policy requiring minimum
levels of ownership of the Company's Common Stock by its directors and by
executive officers of the Company and its subsidiaries. Within a four-year
period, directors are required to become beneficial owners of Common Stock with
a market value equivalent to four times their annual retainer. During such
period, the president and chief executive officer must become the owner of
Common Stock with a market value of four times his annual base salary. For
50
<PAGE> 52
vice presidents of the Company and presidents of subsidiaries, the multiple of
annual base salary is two and one-half times and for vice presidents of
subsidiaries it is one-half.
DESCRIPTION OF EXISTING INDEBTEDNESS
The Company and certain of its subsidiaries borrow funds for working
capital and property acquisitions from several banks under two Bank Credit
Facilities. The following summaries of the Credit Facility and Revolving Credit
Agreement do not purport to be complete and are subject to, and qualified in
their entirety by reference to the applicable credit agreements. The lenders
under the Bank Credit Facilities have provided waivers or consents as the
Company has determined to be necessary to permit the issuance of the Notes.
CREDIT FACILITY
Certain subsidiaries of the Company are borrowers under the Credit Facility
with a group of banks which provides for revolving credit and letters of credit
for up to $150 million in the aggregate (the "Commitment Amount").
The Credit Facility matures on September 30, 2000. The actual amount
available for borrowing under the Credit Facility is determined by a fluctuating
borrowing base (the "Borrowing Base") that is a function of a periodic valuation
by the lenders of the borrowers' oil and gas reserves. The amount of credit
available to the borrowers under the Credit Facility is the lesser of the
Borrowing Base or the Commitment Amount. The Borrowing Base is currently $75
million. Although the oil and gas reserves pledged as collateral under the
Credit Facility may support borrowings greater than $75 million, the Senior
Notes Indenture effectively limits the borrowing base under this facility to the
greater of $75 million or 15% of adjusted consolidated net tangible assets (as
defined in the Senior Notes Indenture).
Repayment of principal under the Credit Facility is required to the extent
the aggregate amount of borrowing and letters of credit outstanding exceeds the
Borrowing Base as calculated from time to time.
The obligations of the borrowers under the Credit Facility are secured by
first liens on (a) those oil and gas properties owned by the borrowers which are
included in the calculation of the Borrowing Base and on the hydrocarbon
production from those oil and gas properties and (b) the other assets of the
borrowers, including accounts receivable, inventory and machinery and equipment
related to the oil and gas properties.
Commitment fees of 3/8 of 1% per annum are paid on the difference between
the amount actually borrowed and the lesser of the Commitment Amount and the
Borrowing Base. The borrowers have the option of borrowing at the following
rates of interest per annum (subject to immaterial adjustments): (i) the prime
rate, plus a spread ranging from 0% to 0.50%, (ii) the London Interbank Offered
Rate ("LIBOR") plus a spread ranging from 0.625% to 1.50%. The spread under each
alternative rate is determined quarterly based upon the consolidated
debt-to-EBITDA ratio of the Company and its subsidiaries. At December 26, 1997,
there was $74.5 million outstanding under the Credit Facility.
To the extent that the lenders have a commitment to make advances under the
Credit Facility, or outstanding indebtedness exists under the Credit Facility,
the borrowers may not incur or have outstanding any other indebtedness, except
as expressly permitted by the credit agreement. The credit agreement permits the
borrowers to incur indebtedness to the Company and other subsidiaries of the
Company under certain circumstances, to incur obligations under oil and gas
leases entered into in the ordinary course of business, to continue to pay in
accordance with their terms certain specified indebtedness, to incur
indebtedness of up to $1 million which otherwise would be prohibited under the
Credit Facility and to incur purchase money indebtedness and indebtedness under
equipment leases, the aggregate outstanding principal balance of which does not
exceed $1 million at any time. Other covenants and provisions in the Credit
Facility prohibit or restrict, among other things, the borrowers' ability to (a)
encumber its assets; (b) enter into negative pledge agreements with respect to
its assets; (c) merge or consolidate; (d) dissolve or liquidate; (e) amend its
corporate charter or corporate structure, activities or nature in any manner
which could have a material adverse effect; (f) become a general partner, joint
venturer or venturer with respect to any transaction except
51
<PAGE> 53
joint operating agreements, exploration agreements and similar arrangements,
containing customary terms and entered into in the ordinary course of business;
(g) declare or pay certain dividends or make certain payments on account of
capital stock or redeem, retire or otherwise acquire for value any of its
capital stock at any time an Event of Default exists; (h) make any distribution
of assets; (i) repay any indebtedness to the Company or any affiliate of the
Company at any time an Event of Default exists, except for certain inter-company
indebtedness specified in the Credit Facility; (j) lend money or acquire any
securities, other than a fractional undivided interest in oil and gas
properties, obligations of the United States of America, certificates of deposit
and other institutional debt obligations, certain specified loans and advances,
advances in accordance with the Company's cash management program and repurchase
agreements (within specified limits); (k) enter into transactions with an
affiliate on terms less favorable to the Company than would be available in a
comparable arms-length transaction; (l) sell or otherwise dispose of assets
except in the ordinary course of business; (m) enter into sale-leaseback
transactions; and (n) prepay any debt.
Events of default under the Credit Facility include, among other things,
(a) a failure of the borrowers to pay principal, interest or any other payment
due under the Credit Facility; (b) certain defaults in respect of other
indebtedness; (c) a material breach of any representation or warranty; (d) a
breach of certain agreements and covenants, including all negative covenants,
contained in the Credit Facility; (e) a breach of any other covenants in the
Credit Facility which has not been cured within 30 days; (f) a failure by the
Company to perform, observe or comply with the negative covenants and financial
covenants contained in the Company's guaranty described below, (g) certain acts
of bankruptcy, insolvency or dissolution and (h) the rendering of a final
judgment in excess of $2.5 million that is not discharged or stayed within a
specified period.
The Company has guaranteed the obligations of its subsidiary borrowers
under the Credit Facility pursuant to a Guaranty Agreement. This guaranty
prohibits or restricts, among other things, the Company's ability to (a) merge
or consolidate, (b) dissolve or liquidate, (c) amend its corporate charter or
corporate structure, activities or nature in any manner which could have a
material adverse effect and (d) pay dividends in excess of 50% of Consolidated
Net Income (as defined in the guaranty) for the period from September 30, 1993
to the time such dividend is paid. Additionally, the guaranty requires that (a)
the Company and its subsidiaries on a consolidated basis maintain a minimum
Consolidated Tangible Net Worth (as defined in the guaranty), and (b) the
Company and its subsidiaries on a consolidated basis maintain a minimum EBITDA
to interest expense ratio. The Company is currently in compliance with all such
covenants.
REVOLVING CREDIT AGREEMENT
In January 1997, simultaneous with the consummation of the Medallion
Acquisition, the Company and certain of its subsidiaries entered into the
Revolving Credit Agreement with a group of banks. The Revolving Credit Agreement
will mature September 30, 2000. The amount of credit available at any time under
the Revolving Credit Agreement is the lesser of (i) the maximum credit
commitment of $150 million (the "Revolving Commitment Amount") and (ii) the
aggregate amount of indebtedness (the "Revolving Borrowing Base") which can be
supported by the lenders' evaluation of the oil and gas reserves attributable to
the oil and gas properties pledged as collateral to the lenders. In addition to
the oil and gas properties, the stock of the subsidiaries acquired in the
Medallion Acquisition were also pledged as collateral. The Revolving Borrowing
Base is currently set at $90 million.
Commitment fees of 3/8 of 1% per annum are paid on the difference between
the amounts actually borrowed and the lesser of the Revolving Commitment Amount
and the Revolving Borrowing Base. The borrowers have the option of borrowing at
the following rates of interest per annum (subject to immaterial adjustments):
(i) the prime rate, plus a spread ranging from 0% to 0.625%, (ii) the LIBOR plus
a spread ranging from 0.75% to 1.625%. The spread under each alternative rate is
determined quarterly based upon the consolidated debt-to-EBITDA ratio of the
Company and its subsidiaries. At December 26, 1997, there was $66.1 million
outstanding under the Revolving Credit Agreement, not including $0.5 million
reserved for existing letters of credit.
52
<PAGE> 54
The Revolving Credit Agreement includes customary affirmative and negative
covenants which, among other things, require the meeting of certain financial
tests and limit the borrowers with respect to incurrence of additional
indebtedness, liens, mergers, consolidation or changes in its corporate
structure, dividends, loans, transactions with affiliates, disposition of assets
and sale and leaseback agreements similar to those described above with respect
to the Credit Facility. The borrowers are currently in compliance with all such
covenants.
Events of default under the Revolving Credit Agreement include, among other
things, (a) a failure of the borrowers to pay principal, interest or any other
payment due under the Credit Facility; (b) certain defaults in respect of other
indebtedness; (c) a material breach of any representation or warranty; (d) a
breach of certain agreements and covenants, including all negative covenants,
contained in the Credit Facility; (e) a breach of any other covenants in the
Credit Facility which has not been cured within 30 days; (f) a failure by the
Company to perform, observe or comply with the negative covenants and financial
covenants contained in the Company's guaranty described below; (g) certain acts
of bankruptcy, insolvency or dissolution and (h) the rendering of a final
judgment in excess of $2.5 million that is not discharged or stayed within a
specified period.
11% SENIOR NOTES DUE 2003
In January 1996, the Company privately offered and sold $150,000,000
aggregate principal amount at maturity of 11% Senior Notes due 2003, Series A,
pursuant to the Senior Notes Indenture between the Company and State Street Bank
and Trust Company (as successor trustee to Fleet National Bank of Connecticut).
Subsequent to the private offering and sale of the original senior notes, the
Company filed a Registration Statement with the Commission and exchanged such
original senior notes for 11% Senior Notes due 2003, Series B ("Senior Notes"),
of the Company with terms substantially identical to such notes, except that the
new securities did not contain transfer restrictions on the resale of such
securities. Interest on the Senior Notes is payable on January 15 and July 15 of
each year. Such payment commenced on July 15, 1996. The Senior Notes are
redeemable at the option of the Company, in whole or in part, at anytime on or
after January 15, 2000, at the redemption prices set forth in the Senior Notes
Indenture, together with accrued interest to the date of redemption.
In the event the Company consummates a Public Equity Offering (as defined
in the Senior Notes Indenture) on or prior to January 15, 1999, the Company 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 Senior 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 Senior Notes remains outstanding immediately after
such redemption.
The Senior Notes are unconditionally guaranteed on a senior unsecured basis
by each of the Company's current and certain of the Company's future
subsidiaries, and such subsidiary guarantees rank pari passu in right of payment
with all existing and future senior indebtedness of the subsidiary guarantors
and senior to all subordinated indebtedness of the subsidiary guarantors.
The Senior Notes are senior unsecured obligations of the Company ranking
pari passu in right of payment with all existing and future senior indebtedness
of the Company and senior to all subordinated indebtedness of the Company.
The Senior Notes and the subsidiary guarantees, however, are 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 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.
Upon the occurrence of a Change of Control (as defined in the Senior Notes
Indenture), each holder of Senior Notes will have the right to require the
Company to purchase all or a portion of such holder's Senior Notes at a price
equal to 101% of the aggregate principal amount thereof, together with accrued
interest to the date of purchase.
53
<PAGE> 55
The Senior Notes 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. In addition, the Senior Notes Indenture includes various
circumstances that will constitute, upon occurrence and subject in certain cases
to notice and grace periods, an event of default thereunder.
DESCRIPTION OF THE NOTES
The Notes will be issued under an indenture (the "Indenture") to be entered
into 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 Medallion Resources, Inc., KCS Energy Services, Inc.,
Medallion California Properties Co., Medallion Gas Services, Inc., National
Enerdrill Corporation and Proliq, Inc., as Subsidiary Guarantors, and State
Street Bank and Trust Company, as trustee (the "Trustee"). The Indenture will be
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 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. A form of the
Indenture is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. 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 unsecured senior subordinated obligations of the Company
limited to $125 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 at the office or agency of the Company in the City of New
York maintained for such purpose, and the Notes may be surrendered for transfer
or exchange at the corporate trust office of the Trustee. 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 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 subordinated basis by the Subsidiary Guarantors. See "-- Subsidiary
Guarantees of Notes."
MATURITY, INTEREST AND PRINCIPAL PAYMENTS
The Notes will mature on , 2008. Interest on the Notes will
accrue from , 1998 at the rate of % per annum and will be
payable semiannually in cash on and of each year, commencing
, 1998, to the Persons in whose name the Notes are registered in the
Note Register at the close of business on the or next
preceding such interest payment date. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months.
54
<PAGE> 56
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 , 2003, 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 of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C> <C>
2003............................................... %
2004............................................... %
2005............................................... %
2006 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 ,
2001, 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 % of the principal amount
thereof, together with accrued and unpaid interest to the date of redemption,
provided that at least $90 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."
SUBORDINATION
The payment of principal of, premium, if any, and interest, on the Notes
and any other payment obligations of the Company in respect of the Notes
(including any obligation to repurchase the Notes) will be subordinated in
certain circumstances in right of payment, as set forth in the Indenture, to the
prior payment in full of the Senior Notes and all other Senior Indebtedness of
the Company, whether outstanding on the date of the Indenture or thereafter
incurred. The Subsidiary Guarantees will also be subordinated (to the same
extent and in the same manner as the Notes are subordinated to Senior
Indebtedness of the Company) to the prior payment in full of all Senior
Indebtedness of the Subsidiary Guarantors. See "-- Subsidiary Guarantees of
Notes." As of September 30, 1997, Senior Indebtedness of the Company and the
Subsidiary Guarantors on a consolidated basis was approximately $276.2 million.
The Notes and the Subsidiary Guarantees will rank prior in right of payment only
to other Indebtedness of the Company or the Subsidiary Guarantors, as the case
may be, which is expressly subordinated in right of payment to the Notes or the
Subsidiary Guarantees, as the case may be. There is currently no Indebtedness of
the Company or any Subsidiary Guarantor which would constitute such Subordinated
Indebtedness. Subject to certain limitations, the Company and its Subsidiaries
may incur additional Indebtedness (including Senior Indebtedness) in the future.
See " -- Certain Covenants -- Limitation on Indebtedness and Disqualified
Capital Stock."
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its
55
<PAGE> 57
property, an assignment for the benefit of creditors or any marshaling of the
Company's assets and liabilities, the holders of Senior Indebtedness will be
entitled to receive payment in full of all amounts due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the Holders
of Notes will be entitled to receive any payment with respect to the Notes, and
until all amounts due with respect to Senior Indebtedness are paid in full, any
distribution to which the Holders of Notes would be entitled shall be made to
the holders of Senior Indebtedness (except that Holders of Notes may receive
securities that are subordinated at least to the same extent as the Notes to
Senior Indebtedness of the Company and any securities issued in exchange for
Senior Indebtedness of the Company and Holders of Notes may also receive
payments made from the trust described under "-- Legal Defeasance or Covenant
Defeasance of Indenture").
The Company also may not make any payment upon or in respect of the Notes
(except in such subordinated securities or from the trust described under
"-- Legal Defeasance or Covenant Defeasance of Indenture") if (i) a default in
the payment of the principal of, premium, if any, or interest on Designated
Senior Indebtedness of the Company occurs and is continuing beyond any
applicable period of grace or (ii) any other default occurs and is continuing
with respect to Designated Senior Indebtedness of the Company that permits, or
with the giving of notice or passage of time or both (unless cured or waived)
will permit, holders of the Designated Senior Indebtedness as to which such
default relates to accelerate its maturity and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the Company or the holders of
any Designated Senior Indebtedness of the Company. Payments on the Notes shall
be resumed (a) in the case of a payment default, upon the earliest of the date
on which such default is cured or waived or holders of such Designated Senior
Indebtedness agree to such resumption or such Designated Senior Indebtedness has
been repaid in full and (b) in case of a nonpayment default, the earliest of the
date on which such nonpayment default is cured or waived or holders of such
Designated Senior Indebtedness agree to such resumption or such Designated
Senior Indebtedness has been repaid in full or 179 days after the date on which
the applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Indebtedness of the Company has been accelerated (and such
acceleration has not been rescinded or annulled). No new period of payment
blockage may be commenced unless and until (i) 360 days have elapsed since the
date of commencement of the immediately prior Payment Blockage Notice and (ii)
all scheduled payments of principal, premium, if any, and interest on the Notes
that have come due have been paid in full in cash. No nonpayment default that
existed or was continuing on the date of delivery of any Payment Blockage Notice
to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice, unless such default has been cured or waived for a period of not less
than 90 consecutive days commencing after the date of delivery of such Payment
Blockage Notice. In no event will a payment blockage period extend beyond 179
days from the date of the receipt by the Trustee of the notice and there must be
a 181 consecutive day period in any 360-day period during which no payment
blockage period is in effect. In the event that, notwithstanding the foregoing,
the Company makes any payment or distribution to the Trustee or the Holder of
any Note prohibited by the subordination provisions of the Indenture, then such
payment or distribution will be required to be paid over and delivered forthwith
to the holders (or their representative) of Designated Senior Indebtedness of
the Company.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions described above, such failure would constitute an Event of Default
under the Indenture and would enable the Holders of the Notes to accelerate the
maturity thereof. See "-- Events of Default."
The Indenture will further require that the Company promptly notify holders
of Senior Indebtedness if payment of the Notes is accelerated because of an
Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency of the Company, Holders of Notes may recover less
ratably than creditors of the Company who are holders of Senior Indebtedness,
and funds which would be otherwise payable to the Holders of the Notes will be
paid to the holders of the Senior Indebtedness of the Company to the extent
necessary to pay such Senior Indebtedness in full, and the Company may be unable
to meet its obligations in full with respect to the Notes.
56
<PAGE> 58
SUBSIDIARY GUARANTEES OF NOTES
Each Subsidiary Guarantor will 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 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 Guarantee of each Subsidiary Guarantor will be unsecured and
subordinated (to the same extent and in the same manner as the Notes are
subordinated to Senior Indebtedness of the Company) to the prior payment in full
of all Senior Indebtedness of such Subsidiary Guarantor.
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 release 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 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.
57
<PAGE> 59
CERTAIN COVENANTS
The Indenture will contain, among others, the covenants described below.
Limitation on Indebtedness and Disqualified Capital Stock. 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.
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 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, 1997 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),
(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 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
58
<PAGE> 60
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) $25 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), (iii) and (iv) 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;
(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; and
(iv) repurchases, acquisitions or retirements of shares of Qualified
Capital Stock of the Company deemed to occur upon the exercise of stock options
or similar rights issued under employee benefit plans of the Company if such
shares represent all or a portion of the exercise price or are surrendered in
connection with satisfying any federal income tax obligation.
The actions described in clauses (i), (ii), (iii) and (iv) 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. This covenant will not restrict dispositions of more than 50% of the
Capital Stock of a Restricted Subsidiary, but any such disposition would be
subject to the covenant described below under "Limitation on Asset Sales."
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
59
<PAGE> 61
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,
employees and other agents of the Company or any Restricted Subsidiary permitted
by corporate charter or other organizational document, 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 Other Senior Subordinated Indebtedness. The Company will not
incur any Indebtedness that is expressly subordinate or junior in right of
payment to any Senior Indebtedness of the Company and senior in right of payment
to the Notes, and no Subsidiary Guarantor will incur any Indebtedness that is
expressly subordinate or junior in right of payment to any Senior Indebtedness
of such Subsidiary Guarantor and senior in right of payment to its Subsidiary
Guarantee; provided, however, that the foregoing limitations will not apply to
distinctions between categories of Indebtedness that exist by reason of any
Liens arising or created in respect of some but not all such Indebtedness.
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
in right of payment 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 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.
60
<PAGE> 62
In order to effect such Change of Control Offer, the Company shall, not
later than the 30th day after the Change of Control, give 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 would result in the holders of any
then outstanding Senior Notes having the right under the Senior Indenture to
require the Company to make an offer to purchase all of such Senior Notes upon
substantially the same terms as the Notes. Further, the existing Bank Credit
Facilities contain, and any future credit agreements or other agreements
relating to Indebtedness or other obligations of the Company may contain,
prohibitions or restrictions on the Company's ability to effect a Change of
Control Offer, which would then also be blocked by the subordination provisions
of the Indenture. In the event a Change of Control occurs at a time when such
prohibitions or restrictions are in effect, the Company could seek the consent
of its lenders to the repurchase of Notes or could attempt to refinance the
borrowings or renegotiate the agreements that contain such prohibitions. If the
Company does not obtain such a consent or repay such borrowings or change such
agreements, the Company will be effectively prohibited from repurchasing Notes.
Failure by the Company to purchase the Notes when required would result in an
Event of Default, whether or not such purchase is permitted by the subordination
provisions of the Indenture. See " -- Subordination" and " -- Events of
Default." There can be no assurance that the Company would have adequate
resources to repay or refinance all Indebtedness and other obligations owing
under the Bank Credit Facilities and such other agreements and to fund the
purchase of the Senior Notes and 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 definition of Change of Control includes a phrase relating to the
disposition of "all or substantially all" of the properties and assets of the
Company and its Restricted Subsidiaries, taken as a whole. Although there is a
developing body of case law interpreting the phrase "substantially all," there
is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a Holder of the Notes to require the Company to
purchase such Notes as a result of a disposition of less than all of the
properties and assets of the Company and its Restricted Subsidiaries, taken as a
whole, to another Person may be uncertain.
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 75% 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
61
<PAGE> 63
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 Senior Indebtedness (including Senior Notes) or Pari Passu
Indebtedness (provided that in connection with the reduction of Pari Passu
Indebtedness, the Company or such Restricted Subsidiary redeems a pro rata
portion of the Notes) 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 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
62
<PAGE> 64
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 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
63
<PAGE> 65
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 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 "-- 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 will be "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
(even if such payment is prohibited by the subordination provisions of the
Indenture); 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
64
<PAGE> 66
specified in (i), (ii) or (iii) above) for a period of 60 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
(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
$5.0 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 $5.0 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.
65
<PAGE> 67
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 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.
66
<PAGE> 68
The Company will be 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.
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
67
<PAGE> 69
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 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) modify
any provisions of the Indenture relating to subordination of the Notes or the
Subsidiary Guarantees in a manner adverse to the Holders 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
State Street Bank and Trust Company will serve as trustee under the
Indenture.
The Indenture (including provisions of the Trust Indenture Act incorporated
by reference therein) will contain 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 will permit
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.
68
<PAGE> 70
State Street Bank and Trust Company is also the trustee under the Senior
Notes Indenture. Pursuant to the Trust Indenture Act, should a default occur
with respect to either the Senior Notes or the Notes, State Street Bank and
Trust Company would be required to resign as trustee under one of the indentures
within 90 days of such default, unless such default were cured, duly waived or
otherwise eliminated.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees will be governed by,
and construed and enforced in accordance with, the laws of the State of New
York.
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 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.
"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.
69
<PAGE> 71
"Bank Credit Facilities" means (i) that certain Credit Agreement dated
effective as of September 25, 1996, as amended, among KCS Resources, Inc., KCS
Pipeline Systems, Inc., KCS Michigan Resources, Inc., and KCS Energy Marketing,
Inc., as Borrowers, KCS Energy, Inc., as Guarantor, and Canadian Imperial Bank
of Commerce, New York Agency, as Agent, CIBC, Inc., as Collateral Agent, Bank
One, Texas, N.A., as Co-Agent, and NationsBank of Texas, N.A., as Co-Agent, and
(ii) that certain Credit Agreement dated as of January 2, 1997, as amended,
among KCS Medallion Resources, Inc., KCS Energy, Inc., KCS Energy Services, Inc.
and Medallion Gas Services, Inc., as Borrowers, and Canadian Imperial Bank of
Commerce, New York Agency, as Agent, and CIBC, Inc., as Collateral Agent, 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 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
70
<PAGE> 72
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 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 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 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 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
71
<PAGE> 73
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.
"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 Unrestricted Subsidiary and (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.
"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.
72
<PAGE> 74
"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).
"Default" means any event, act or condition that is, or after notice or
passage of time or both would become, an Event of Default.
"Designated Senior Indebtedness" means (i) any Senior Indebtedness under or
in respect of any of the Bank Credit Facilities and the Senior Notes and (ii)
any other Senior Indebtedness permitted under the Indenture the principal amount
of which is $5 million or more and, in the case of this clause (ii), that has
been designated by the Company in an Officers' Certificate delivered to the
Trustee as "Designated Senior Indebtedness."
"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 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.
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.
73
<PAGE> 75
"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 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.
74
<PAGE> 76
"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.
"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.
"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 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.
75
<PAGE> 77
"Pari Passu Indebtedness" means (i) Indebtedness of the Company that ranks
pari passu in right of payment to the Notes and (ii) Indebtedness of any
Restricted Subsidiary that ranks pari passu in right of payment to the
Subsidiary Guarantees.
"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 $165 million or
the borrowing base thereunder (the "Maximum Credit Amount"), plus all interest
and fees under such facilities and any guarantee of any such Indebtedness;
(ii) Indebtedness under the Notes;
(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 $25 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 exceed $10 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
76
<PAGE> 78
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 or any Restricted Subsidiary;
(d) Liens securing Senior Indebtedness that is permitted by the terms of
the Indenture;
(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 and attachment 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;
(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
(including, without limitation, those acquired indirectly through the
acquisition of stock or other ownership interests) 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;
77
<PAGE> 79
(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;
(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 (including, without limitation, those acquired indirectly through the
acquisition of stock or other ownership interests) by the Company or any
Restricted Subsidiary with the proceeds of such Non-Recourse Indebtedness; and
(x) Liens resulting from the deposit of funds or evidences of Indebtedness
in trust for the purpose of defeasing Indebtedness of the Company or any of its
Restricted Subsidiaries.
Notwithstanding anything in clauses (a) through (x) 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.
"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
78
<PAGE> 80
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 any premium required to
be paid in connection with such renewal, extension or refinancing, refunding or
repurchase pursuant to the terms of the Indebtedness being renewed, extended,
refinanced, refunded or repurchased or the amount of any premium reasonably
determined by the Company as necessary to accomplish such renewal, extension,
refinancing, refunding or repurchase, 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.
"Senior Indebtedness" means (i) Indebtedness or other obligations under or
in respect of any of the Bank Credit Facilities, (ii) Indebtedness under or in
respect of the Senior Notes, (iii) any other Indebtedness permitted to be
incurred by the Company or any Restricted Subsidiary under the terms of the
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Notes or the Subsidiary Guarantees, as the case may be, (iv) all
interest, fees and other obligations in respect of any Indebtedness referred to
in the foregoing clauses (i) through (iii) and (v) any amounts due to the
Trustee under the Indenture as fees or indemnities.
"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.
"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,
79
<PAGE> 81
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 Medallion Resources, Inc., (vii)
KCS Energy Services, Inc., (viii) Medallion California Properties Co., (ix)
Medallion Gas Services, Inc., (x) National Enerdrill Corporation, (xi) Proliq,
Inc., (xii) 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 (xiii) 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 "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).
FORM, DENOMINATION AND REGISTRATION
The Notes will be issued in fully registered form, without coupons, in
denominations of $1,000 in principal amount and integral multiples thereof.
80
<PAGE> 82
Global Notes; Book-Entry Form
Except as set forth below, the Notes will initially be issued in the form
of one or more registered Notes in global form (the "Global Notes"). Each Global
Note will be deposited on its issue date with, or on behalf of, DTC and
registered in the name of Cede & Co. ("Cede"), as nominee.
The Holders of Notes may hold their interests in the Global Notes directly
through DTC if such Holder is a participant in DTC, or indirectly through
organizations which are participants in DTC (the "Participants"). Transfers
between Participants will be effected in the ordinary way in accordance with DTC
rules and will be settled in same day funds. The laws of some states require
that certain persons take physical delivery of securities in definitive form.
Consequently, the ability to transfer beneficial interests in the Global Notes
to such persons may be limited.
The Holders of Notes who are not Participants may beneficially own
interests in the Global Notes held by DTC only through Participants or certain
banks, brokers, dealers, trust companies and other parties that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants"). So long as Cede, as the nominee of DTC, is
the registered owner of the Global Notes, Cede for all purposes will be
considered the sole holder of the Global Notes.
Payment of interest on and the redemption price or Change of Control
Purchase Price (upon redemption at the option of the Company or repurchase at
the option of the Holder upon a Change of Control) of the Global Notes will be
made to Cede, the nominee for DTC, as the registered owner of the Global Notes,
by wire transfer of immediately available funds. Neither the Company, the
Trustee nor any Paying Agent 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 Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company has been informed by DTC that, with respect to any payment of
interest on and the redemption price or Change of Control Purchase Price (upon
redemption at the option of the Company or repurchase at the option of the
Holder upon a Change of Control) of the Global Notes, DTC's practice is to
credit Participants' accounts on the payment date therefor with payments in
amounts proportionate to their respective beneficial interests in the Notes
represented by the Global Notes as shown on the records of DTC, unless DTC has
reason to believe that it will not receive payment on such payment date.
Payments by Participants to owners of beneficial interests in Notes represented
by the Global Notes held through such Participants will be the responsibility of
such Participants, as is now the case with securities held for the accounts of
customers registered in "street name."
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in Notes represented by the Global Notes to pledge
such interest to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of such interest, may be affected by the
lack of a physical certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar or other agent under
the Indenture) 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. DTC has advised the Company
that it will take any action permitted to be taken by a holder of Notes
(including, without limitation, the presentation of Notes for exchange as
described below), only at the direction of one or more Participants to whose
account with DTC interests in the Global Note are credited, and only in respect
of the principal amount of the Notes represented by the Global Note as to which
such Participant or Participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC holds securities that its Participants
deposit with DTC. DTC also facilitates the clearance and settlement of
securities transactions between Participants through electronic book-entry
81
<PAGE> 83
changes to the 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. Certain of such
Participants (or their representatives), together with other entities, own DTC.
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.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in each Global Note among Participants, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days, or at the Company's election at any time, the
Company will cause the Notes to be issued in definitive form in exchange for the
Global Notes.
Certificated Notes
Holders of Notes may request that certificated Notes be issued in exchange
for Notes represented by the Global Note. In addition, certificated Notes may be
issued in exchange for Notes represented by the Global Note in the circumstances
described in the paragraph immediately prior to this one.
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), each of the
underwriters named below (the "Underwriters") has severally agreed to purchase
from the Company the principal amount of Notes set forth opposite the name of
such Underwriter below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
------------ ----------------
<S> <C>
Salomon Brothers Inc........................................ $
Prudential Securities Incorporated .........................
CIBC Oppenheimer Corp. .....................................
Jefferies and Company, Inc. ................................
Morgan Keegan & Company, Inc. ..............................
------------
Total............................................. $125,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters will be obligated to take and pay for all of the
Notes offered hereby (other than those covered by the over-allotment option
described below) if any of such Notes are purchased.
The Underwriters initially propose to offer part of the Notes offered
hereby directly to the public at the public offering price set forth on the
cover page of this Prospectus and part of the Notes offered hereby to certain
dealers at a price which represents a concession not in excess of % of the
principal amount per Note under the price to public. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of % of the
principal amount per Note to certain other dealers. After the Offering, the
public offering price and such concessions may be changed by the Underwriters.
In connection with the Offering and in compliance with applicable law, the
Underwriters may engage in transactions which stabilize or maintain the market
price of the Notes at levels above those which might otherwise prevail in the
open market. Specifically, the Underwriters may over-allot in connection with
the Offering creating a short position in the Notes for their own account. For
the purposes of covering a syndicate short position or stabilizing the price of
the Notes, the Underwriters may place bids for the Notes or effect purchases of
the Notes in the open market. A syndicate short position may also be covered by
exercise of the over-allotment option described above. Finally, the Underwriters
may impose a penalty bid on certain
82
<PAGE> 84
Underwriters and dealers. This means that the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Notes in the Offering if the syndicate repurchases previously distributed Notes
in transactions to cover syndicate short positions, in stabilization
transactions or otherwise. The Underwriters are not required to engage in any of
these activities and any such activities, if commenced, may be discontinued at
any time.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
The Company will apply for listing of the Notes on the NYSE. The Company
has been advised by the Underwriters that they currently intend to make a market
in the Notes. However, the Underwriters are not obligated to do so, and any
market making may be discontinued at any time without any notice. There can be
no assurance as to whether an active trading market for the Notes will develop.
Canadian Imperial Bank of Commerce ("CIBC"), a lender to the Company under
the Bank Credit Facilities, will receive its proportionate share of any
repayment by the Company of amounts outstanding under the Bank Credit Facilities
from the proceeds of the Offering. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Debt Financing." CIBC is an
affiliate of CIBC Oppenheimer Corp., a member of the National Association of
Securities Dealers, Inc. ("NASD"), who is participating in the distribution of
the Offering. The Offering is therefore being conducted in accordance with Rule
2710(c)(8) of the NASD's Conduct Rules, and the price at which the Notes will be
distributed to the public will be established pursuant to Rule 2720(c)(3) of the
Conduct Rules. Salomon Brothers Inc is acting as a "qualified independent
underwriter" within the meaning of such rules and is assuming the
responsibilities of acting as such in pricing the Offering and conducting due
diligence. Salomon Brothers Inc will receive no separate fee for its services as
qualified independent underwriter.
Certain of the Underwriters acted as representatives of the underwriters
for the Company's public offering of Common Stock in January 1997 for which they
received customary fees.
CERTAIN LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Mayor, Day, Caldwell & Keeton, L.L.P., Houston, Texas. Certain legal
matters relating to the sale of the Notes will be passed upon for the
Underwriters by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The audited Consolidated Financial Statements and schedules of the Company
included or incorporated by reference in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon said firm as experts in giving said reports.
Information set forth in this Prospectus relating to the Company's
estimated proved oil and gas reserves at December 31, 1996, the related
calculations of future net production revenues and the net present value thereof
have been derived from independent reserve engineering reports prepared for the
Company by Ryder Scott Company, H.J. Gruy and Associates, Inc., R.A. Lenser and
Associates, Inc. and Netherland, Sewell 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.
Although reserve engineers' reports with respect to reserves underlying the
Company's VPP program are utilized by the Company to support its own analysis of
such reserves, the proved reserves, related future net revenues and PV-10 that
the Company reports with respect to volumetric production payments are not
derived from independent reserve engineers' report, but rather are taken
directly from the amounts contracted for, pursuant to the agreements relating to
each volumetric production payment (which amounts are less than the net interest
production reflected in the reserve reports). A report prepared for the Company
by Ryder Scott
83
<PAGE> 85
Company (covering the VPP program properties owned by the Company in the
offshore Gulf Coast region) includes all the reserves of each field from which
the Company's VPP interest is taken.
AVAILABLE INFORMATION
The Company is subject to the information 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
Securities and Exchange Commission (the "SEC" or "Commission"). The reports,
proxy statements and other information may be inspected and copied at the
offices of the Commission as stated above or at its regional offices located in
The Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies
of such material also can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
In addition, the Commission maintains a web site that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the Commission at ,http://www.sec.gov.. The Common Stock,
par value $.01 per share, of the Company is traded on the New York Stock
Exchange, and as a result the reports, proxy statements and other information
concerning the Company may be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed a Registration Statement on Form S-3, including
amendments thereto, relating to the Notes offered hereby (the "Registration
Statement") with the Commission. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which are omitted in accordance with rules
and regulations of the Commission. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement or as
previously filed with the Commission and incorporated herein by reference. For
further information with respect to the Company and the Notes offered hereby,
reference is made to such Registration Statement, exhibits and schedules. A copy
of the Registration Statement may be inspected by anyone without charge at the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of all or any part thereof may be obtained from the Commission upon
payment of certain fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's (i) Annual Report on Form 10-K for the year ended December
31, 1996, (ii) Quarterly Report on Form 10-Q for the three months ended March
31, 1997, (iii) Quarterly Report on Form 10-Q for the three months ended June
30, 1997 and (iv) Quarterly Report on Form 10-Q for the three months ended
September 30, 1997 are incorporated into this Prospectus by reference.
Each document filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior
to the termination of the offering of Notes made hereby shall be deemed to be
incorporated herein by reference and to be a part hereof from the date of filing
of such document. Any statement contained herein or in a document all or a
portion of which is incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a 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 statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the request of any such person, a copy of any
or all of the foregoing documents incorporated herein by reference (other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into such documents). Requests should be directed to the Company at
379 Thornall Street, Edison, New Jersey 08837, Attention: Corporate Secretary
(telephone: (732) 632-1770).
84
<PAGE> 86
GLOSSARY
The following are abbreviations and definitions of oil and gas terms used
throughout this Prospectus.
Amine. An aqueous organic chemical compound that has the ability to absorb
acid gases (i.e. CO(2) and H(2)S) entrained in a natural gas stream that may
then be regenerated by heating to expel these gases.
bbl. Barrel of 42 U.S. gallons of crude oil or other liquid hydrocarbons.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet of natural 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 oil
or 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.
EBITDA. EBITDA represents income before depletion, depreciation,
amortization, interest expense, interest and other income and income taxes.
EBITDA is a financial measure commonly used in the Company's industry and should
not be considered in isolation or as a substitute for net income, cash flow
provided by operating activities or other income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure of a
company's profitability or liquidity.
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.
Finding Cost. An amount per Mcfe equal to the sum of all costs incurred
relating to oil and gas property acquisition, exploration and development
activities, less changes in unevaluated costs, divided by the sum of all
additions and revisions to estimated proved reserves, including reserve
purchases.
Mcf equivalent ("Mcfe"). Mcf 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 natural gas equivalent.
MMcf. One million cubic feet.
MMcfe. One million cubic feet of natural gas equivalent.
Net Acquisition Cost. An amount per Mcfe equal to the total purchase price
allocated to oil and gas properties divided by the estimated proved reserves
acquired.
Net acres or net wells. The sum of the fractional working interests net to
the Company owned in gross acres or gross wells.
85
<PAGE> 87
Net production. Production after royalties and production due others.
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.
Pre-tax present value of estimated future net revenues ("PV-10"). Estimated
future net revenues before income taxes with no price or cost escalation or
deescalation, 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. Calculation derived by dividing year-end reserves by total
production in that year.
Reserve replacement. Calculation derived by dividing additions to reserves
from acquisitions, extensions, discoveries and revisions of previous estimates
in a year by total production in that year.
Sour gas. A natural gas stream containing more than 1/4 grain of hydrogen
sulfide per 100 cubic feet of natural gas. 1/4 grain = 0.0003975% or 3.975 ppm
(parts per million).
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.
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.
86
<PAGE> 88
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
KCS Energy, Inc. and Subsidiaries
Report of Independent Public Accountants.................. F-2
Statements of Consolidated Income for the years ended
December 31, 1994, 1995 and 1996 and for the nine
months ended September 30, 1996 and 1997 (unaudited)... F-3
Consolidated Balance Sheets at December 31, 1995 and 1996
and September 30, 1997 (unaudited)..................... F-4
Statements of Consolidated Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996 and for
the nine months ended September 30, 1997 (unaudited)... F-5
Statements of Consolidated Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and for the nine
months ended September 30, 1996 and 1997 (unaudited)... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 89
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To KCS Energy, Inc.:
We have audited the accompanying consolidated balance sheets of KCS Energy,
Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1996 and 1995,
and the related statements of consolidated income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. 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 financial statements 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KCS Energy, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
February 26, 1997
F-2
<PAGE> 90
KCS ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Oil and gas revenue........... $ 66,215 $ 86,629 $ 108,015 $ 79,051 $ 100,396
Other revenue, net............ 1,185 486 359 377 3,702
----------- ----------- ----------- ----------- -----------
Total................. 67,400 87,115 108,374 79,428 104,098
Operating costs and expenses:
Leasing operating expenses.... 6,218 6,156 9,167 6,582 20,470
Production taxes.............. 845 467 2,526 1,671 4,354
General and administrative
expenses................... 4,853 4,704 7,825 5,411 7,302
Depreciation, depletion and
amortization............... 18,783 38,231 45,460 33,128 42,486
----------- ----------- ----------- ----------- -----------
Total................. 30,699 49,558 64,978 46,792 74,612
----------- ----------- ----------- ----------- -----------
Operating income................ 36,701 37,557 43,396 32,636 29,486
Interest and other income,
net........................... 1,175 4,472 5,086 4,820 388
Interest expense................ (2,004) (6,807) (14,085) (11,193) (15,146)
----------- ----------- ----------- ----------- -----------
Income from continuing
operations before income
taxes......................... 35,872 35,222 34,397 26,263 14,728
Federal and state income
taxes......................... 12,269 11,817 12,680 9,483 5,452
----------- ----------- ----------- ----------- -----------
Income from continuing
operations.................... 23,603 23,405 21,717 16,780 9,276
Discontinued operations:
Net income (loss) from
operations................. 554 (2,099) (1,845) (1,974) (72)
Net gain on disposition....... -- -- -- -- 5,461
----------- ----------- ----------- ----------- -----------
Net income...................... $ 24,157 $ 21,306 $ 19,872 $ 14,806 $ 14,665
=========== =========== =========== =========== ===========
Earnings per share:
Continuing operations......... $ 1.00 $ 1.00 $ 0.91 $ 0.70 $ 0.32
Discontinued operations....... 0.02 (0.09) (0.08) (0.08) 0.18
----------- ----------- ----------- ----------- -----------
Total................. $ 1.02 $ 0.91 $ 0.83 $ 0.62 $ 0.50
=========== =========== =========== =========== ===========
Average shares of common stock
and common stock equivalents
outstanding................... 23,609,978 23,521,402 23,810,872 23,772,868 29,449,391
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 91
KCS ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents............................... $ 5,846 $ 5,100 $ 3,858
Trade accounts receivable............................... 13,248 30,307 33,720
Receivable from Tennessee Gas........................... 56,437 -- --
Net assets of discontinued operations................... 14,980 26,658 5,110
Other current assets.................................... 1,798 8,392 7,925
-------- -------- --------
Current assets....................................... 92,309 70,457 50,613
-------- -------- --------
Property, plant and equipment
Oil and gas properties, full cost method, less
accumulated DD&A -- 1995, $86,936; 1996, $131,521 and
September 30, 1997, $172,469......................... 204,958 415,870 540,896
Other property, plant and equipment, at cost less
accumulated depreciation -- 1995, $1,485; 1996,
$2,887 and September 30, 1997, $4,472................ 5,370 14,483 14,510
-------- -------- --------
Property, plant and equipment, net................... 210,328 430,353 555,406
-------- -------- --------
Investments and other assets.............................. 3,927 11,010 8,024
-------- -------- --------
$306,564 $511,820 $614,043
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable........................................ $ 6,869 $ 24,144 $ 32,953
Accrued liabilities..................................... 3,487 15,558 9,953
-------- -------- --------
Current liabilities.................................. 10,356 39,702 42,906
-------- -------- --------
Deferred credits and other liabilities
Deferred federal and state income taxes................. 26,172 34,097 41,884
Other................................................... 2,931 2,052 1,540
-------- -------- --------
Deferred credits and other liabilities............... 29,103 36,149 43,424
-------- -------- --------
Long-term debt............................................ 165,529 310,347 275,723
-------- -------- --------
Commitments and contingencies
Preferred stock, authorized 5,000,000
shares -- unissued...................................... -- -- --
Stockholders' equity
Common stock, par value $0.01 per share, authorized
50,000,000 shares, issued 24,759,770 and 24,976,340
at December 31, 1995 and 1996, respectively and
31,198,390 shares issued at September 30, 1997....... 248 249 312
Additional paid-in capital.............................. 24,786 30,463 143,718
Retained earnings....................................... 79,814 98,298 111,348
Less treasury stock, 1,785,496 and 1,801,496 shares, at
December 31, 1995 and 1996, respectively, and
1,801,496 shares at September 30, 1997,
respectively -- at cost.............................. (3,272) (3,388) (3,388)
-------- -------- --------
Total stockholders' equity...................... 101,576 125,622 251,990
-------- -------- --------
$306,564 $511,820 $614,043
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 92
KCS ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993............. $246 $ 23,163 $ 36,761 $(1,326) $ 58,844
Stock issuances -- option and benefit
plans............................... -- 380 -- -- 380
Tax benefit on stock option
exercises........................... -- 229 -- -- 229
Net income............................. -- -- 24,157 -- 24,157
Dividends ($0.045 per share)........... -- -- (1,033) -- (1,033)
Purchase of treasury stock............. -- -- -- (1,909) (1,909)
---- -------- -------- ------- --------
Balance at December 31, 1994............. 246 23,772 59,885 (3,235) 80,668
Stock issuances -- option and benefit
plans............................... 2 187 -- -- 189
Tax benefit on stock option
exercises........................... -- 201 -- -- 201
Stock warrants issued.................. -- 626 -- -- 626
Net income............................. -- -- 21,306 -- 21,306
Dividends ($0.06 per share)............ -- -- (1,377) -- (1,377)
Purchase of treasury stock............. -- -- -- (37) (37)
---- -------- -------- ------- --------
Balance at December 31, 1995............. 248 24,786 79,814 (3,272) 101,576
Stock issuances -- option and benefit
plans............................... 1 682 -- -- 683
Tax benefit on stock option
exercises........................... -- 665 -- -- 665
Stock warrants issued.................. -- 4,998 -- -- 4,998
Repurchase of stock warrants........... -- (668) -- -- (668)
Net income............................. -- -- 19,872 -- 19,872
Dividends ($0.06 per share)............ -- -- (1,388) -- (1,388)
Purchase of treasury stock............. -- -- -- (116) (116)
---- -------- -------- ------- --------
Balance at December 31, 1996............. 249 30,463 98,298 (3,388) 125,622
Stock issuance -- public offering...... 60 110,572 -- -- 110,632
Stock issuances -- option and benefit
plans............................... 3 1,757 -- -- 1,760
Tax benefit on stock option
exercises........................... -- 926 -- -- 926
Net income............................. -- -- 14,665 -- 14,665
Dividends ($0.05 per share)............ -- -- (1,615) -- (1,615)
---- -------- -------- ------- --------
Balance at September 30, 1997
(unaudited)............................ $312 $143,718 $111,348 $(3,388) $251,990
==== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 93
KCS ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -------------------------
1994 1995 1996 1996 1997
-------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 24,157 $ 21,306 $ 19,872 $ 14,806 $ 14,665
Non-cash charges (credits):
Depreciation, depletion and
amortization........................... 19,740 39,209 46,611 33,933 42,486
Deferred income taxes.................... 10,896 9,756 7,925 4,195 4,581
Gain on sale of discontinued
operations............................. -- -- -- -- (5,461)
Other non-cash charges and credits,
net.................................... (65) 820 1,440 1,248 1,320
-------- --------- --------- --------- ---------
54,728 71,091 75,848 54,182 57,591
Net changes in assets and liabilities:
Trade accounts receivable................ 19,107 (11,672) (33,887) 18,906 58,054
Receivable from Tennessee Gas............ (13,569) (42,868) 56,437 56,437 --
Fuel inventories......................... (1,126) 1,727 (238) (102) (398)
Other current assets..................... (1,299) 490 (6,822) (1,681) (511)
Accounts payable and accrued
liabilities............................ (10,724) 14,163 34,732 (22,689) (54,579)
Federal and state income taxes........... (119) 178 (2,572) (1,419) 800
Other, net............................... 3,118 (2,999) (2,150) 1,493 938
-------- --------- --------- --------- ---------
Net cash provided by operating activities..... 50,116 30,110 121,348 105,127 61,895
-------- --------- --------- --------- ---------
Cash flows from investing activities:
Investment in oil and gas properties(1)..... (73,682) (121,265) (267,133) (50,552) (169,773)
Proceeds from the sale of oil and gas
properties............................... -- 4,069 16,634 16,384 3,800
Investment in natural gas transportation
systems.................................. (700) (5,969) (6,059) (843) (171)
Proceeds from the sale of pipeline assets... -- -- -- -- 27,907
Investment in other property, plant and
equipment, net........................... (571) (1,465) (4,026) (1,340) (1,940)
-------- --------- --------- --------- ---------
Net cash used in investing activities......... (74,953) (124,630) (260,584) (36,351) (140,177)
-------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt................ 49,431 141,298 325,636 165,145 117,300
Repayments of long-term debt................ (26,247) (38,774) (180,900) (180,900) (151,991)
Issuance of common stock.................... 380 189 683 521 112,492
Issuance of stock warrants.................. -- 626 -- -- --
Repurchase of stock warrants................ -- -- (668) -- --
Tax benefit on stock option exercises....... 229 201 665 567 926
Purchase of treasury stock.................. (1,909) (37) (116) (116) --
Dividends paid.............................. (919) (1,377) (1,388) (1,042) (1,374)
Deferred financing costs and other, net..... (509) (2,748) (5,422) (5,200) (313)
-------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities.................................. 20,456 99,378 138,490 (21,025) 77,040
-------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents................................. (4,381) 4,858 (746) 47,751 (1,242)
Cash and cash equivalents at beginning of
year........................................ 5,369 988 5,846 5,846 5,100
-------- --------- --------- --------- ---------
Cash and cash equivalents at end of year...... $ 988 $ 5,846 $ 5,100 $ 53,597 $ 3,858
======== ========= ========= ========= =========
</TABLE>
- ---------------
(1) The amount included in the year ended December 31, 1996 does not include
$4,998 (non-cash) related to stock warrants issued in connection with the
1996 Medallion Acquisition.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 94
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
KCS Energy, Inc. is an independent energy company engaged in the
acquisition, exploration, development and production of natural gas and crude
oil.
Recapitalization (Quasi-reorganization)
At September 30, 1988, prior to the start of the Company's first full year
of operations as a separate legal entity with independent management, an amount
equal to the cumulative retained earnings deficit of the KCS subsidiaries
($25,109,000) was eliminated against additional paid-in capital in connection
with a quasi-reorganization.
Basis of Presentation
The consolidated financial statements include the accounts of KCS Energy,
Inc. and its wholly owned subsidiaries ("KCS" or "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain previously reported amounts have been reclassified to conform to current
year presentations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Futures Contracts
The Company utilizes oil and natural gas futures contracts for the purpose
of hedging the risks associated with fluctuating crude oil and natural gas
prices and accounts for such contracts in accordance with FASB Statement No. 80,
"Accounting for Futures Contracts." These contracts permit settlement by
delivery of commodities and, therefore, are not financial instruments, as
defined by FASB Statement Nos. 107 and 119. Changes in the market value of these
transactions are deferred until the gain or loss on the underlying item is
recognized. See Note 8 for further discussion of the Company's price risk
management activities.
Imbalances
The Company follows the entitlements method of accounting for production
imbalances, where revenues are recognized based on its interest in oil and gas
production from a well. Imbalances arise when a purchaser takes delivery of more
or less from a well than the Company's actual interest in the production from
that well. The difference between cash received and revenue recorded is a
receivable or payable. Such imbalances are reduced either by subsequent
balancing of over and under deliveries or by cash settlement, as required by
applicable contracts.
Property, Plant and Equipment
The Company follows the full cost method of accounting, under which all
productive and nonproductive costs associated with its exploration, development
and production activities are capitalized in a country-wide
F-7
<PAGE> 95
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cost center. Such costs include lease acquisitions, geological and geophysical
services, drilling, completion, equipment and certain general and administrative
costs directly associated with acquisition, exploration and development
activities. General and administrative costs related to production and general
overhead are expensed as incurred.
The Company provides for depreciation, depletion and amortization of
evaluated costs using the future gross revenue method based on recoverable
reserves valued at current prices. Under accounting procedures prescribed by the
Securities and Exchange Commission ("SEC"), capitalized oil and gas property
costs are limited to the present value of future net income from estimated
production of proved oil and gas reserves discounted at 10%, plus the value of
unproved properties. To the extent that the capitalized costs exceed the
estimated present value of future net revenues at the end of any fiscal quarter,
such excess costs are written down with a corresponding charge to income.
Significant declines in oil and gas prices, like those experienced in early
1997, if not offset by increases in proved oil and gas reserves, could cause the
Company's capitalized oil and gas property costs to exceed the limitation on
such costs, as described above.
Unevaluated properties and associated costs not currently being amortized
and included in oil and gas properties were $7.3 million and $10.6 million at
December 31, 1995 and 1996. Such costs relate to projects which were at such
dates undergoing exploration or development activities or in which the Company
intends to commence such activities in the future. The Company will begin to
amortize these costs when proved reserves are established or impairment is
determined.
Depreciation of other property, plant and equipment is provided on a
straight-line basis over the useful lives of the assets, except for certain
natural gas gathering pipelines which are depreciated based on the estimated
lives of the gas wells served. Repairs of all property, plant and equipment and
replacements and renewals of minor items of property are charged to expense as
incurred.
Income Taxes
The Company accounts for income taxes in accordance with FASB Statement No.
109, "Accounting for Income Taxes." Deferred income taxes reflect the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end.
For income tax purposes, the Company deducts the difference between market
value and exercise price arising from the exercise of stock options. The tax
effect of this deduction which, for financial reporting purposes, is accounted
for as an increase to additional paid-in capital, amounted to $229,000, $201,000
and $665,000 in 1994, 1995 and 1996, respectively.
Earnings Per Share
Earnings per share have been computed by dividing net earnings by the
weighted average number of common shares outstanding during the periods,
adjusted for the dilutive effects of stock options and warrants.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standard Board issued Statements of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" and No. 123, "Accounting for
Stock-Based Compensation." SFAS Nos. 121 and 123 are effective for financial
statements for fiscal years beginning after December 15, 1995. SFAS 121 was
adopted as of January 1, 1996 and had no impact on the financial position or
results of operations of the Company. As permitted under SFAS 123, the Company
will continue to account for such compensation under the provisions of APB
Opinion No. 25.
F-8
<PAGE> 96
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities" (the
SOP), which was adopted by the Company in the first quarter of 1997. The SOP
provided guidance concerning the recognition, measurement and disclosure of
environmental remediation liabilities. The adoption of the SOP did not have a
material effect on the Company's financial position or results of operations.
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS
128). This statement simplifies the computation of earnings per share (EPS).
Basic EPS includes no dilution and is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding for the
period. FAS 128 is effective for periods ending after December 15, 1997.
Pro-forma EPS under the methodology required by FAS 128 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
DOLLARS IN THOUSANDS
(EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income from continuing operations........................... $23,603 $23,405 $21,717 $16,780 $ 9,276
Income (loss) from discontinued operations.................. 554 (2,099) (1,845) (1,974) 5,389
------- ------- ------- ------- -------
Net income.................................................. $24,157 $21,306 $19,872 $14,806 $14,665
======= ======= ======= ======= =======
Average shares of common stock outstanding.................. 22,970 22,960 23,114 23,094 28,670
Pro-forma basic EPS
Continuing operations..................................... $ 1.03 $ 1.02 $ 0.94 $ 0.73 $ 0.32
Discontinued operations................................... 0.02 (0.09) (0.08) (0.09) 0.19
------- ------- ------- ------- -------
$ 1.05 $ 0.93 $ 0.86 $ 0.64 $ 0.51
======= ======= ======= ======= =======
</TABLE>
2. RECENT ACQUISITIONS
Medallion Acquisition. As of December 31, 1996, the Company completed the
arrangements for the acquisition of all of the outstanding stock of InterCoast
Oil and Gas Company (formerly Medallion Production Company), GED Energy
Services, Inc. and InterCoast Gas Services Company (collectively referred to as
the Medallion entities), indirect wholly-owned subsidiaries of MidAmerican
Energy Holdings Company ("MidAmerican"), for a purchase price of approximately
$199.1 million, consisting of a cash payment of $194.1 million and warrants to
purchase 870,000 shares of Common Stock at an exercise price of $22.50 per share
and a four-year term (the "Medallion Acquisition").
Medallion's principal assets are proved oil and gas reserves of 187.5 Bcfe
as of December 31, 1996, consisting of 140.3 Bcf of natural gas and 7.9 MMbbls
of oil and liquids. The Company also acquired a natural gas gathering system as
well as oil and gas equipment and supplies. The Medallion Acquisition more than
doubled the Company's reserve and production base.
Rocky Mountain Acquisition. On November 8, 1995, the Company acquired
substantially all of the oil and gas assets of Natural Gas Processing Company
(the "Rocky Mountain Acquisition") for $33 million, subject to adjustments for a
July 1, 1995 effective date. Proved reserves attributable to the properties
acquired were estimated to be 66.7 Bcfe at September 30, 1995, consisting of
40.9 Bcf of natural gas and 4.3 MMbbls of oil. The Company also acquired a
significant inventory of oil and gas equipment and supplies, vehicles and
buildings as well as natural gas gathering systems consisting of approximately
200 miles of pipeline.
F-9
<PAGE> 97
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Michigan Acquisition. On December 7, 1995, the Company acquired 24.6 Bcfe
of proved 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 an exploration program
(collectively, the "Michigan Acquisition"). The volumetric production payment
provides for the delivery to the Company of 13.7 Bcf of natural gas and 1.1
MMbbls of oil to be delivered (without any burden of development and lease
operating expenses) from December 1995 through January 2006. Based on
independent reserve reports as of September 30, 1995, the separately acquired
working interests added 3.1 Bcf of natural gas and 219 Mbbls of oil to the
Company's proved reserves.
These acquisitions were accounted for using the purchase method. The
results of operations for the acquired entities are included in the Company's
consolidated results of operations from the dates of acquisition.
The following are the unaudited pro forma revenue, net income and earnings
per share of the Company giving effect to the Medallion, Rocky Mountain and
Michigan acquisitions and the January 1997 common stock offering for the years
ended December 31, 1995 and 1996, as if such transactions had occurred at the
beginning of such years. 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 had occurred as presented or that may
be obtained in the future.
<TABLE>
<CAPTION>
PRO FORMA YEARS
ENDED DECEMBER 31,
------------------------
1995 1996
---------- ----------
DOLLARS IN THOUSANDS
(EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenue..................................................... $164,339 $180,112
-------- --------
Net income.................................................. $ 26,652 $ 35,120
-------- --------
Earnings per common share................................... $ 0.91 $ 1.18
-------- --------
</TABLE>
3. RETIREMENT BENEFIT PLANS
The Company had a trusteed, non-contributory Retirement Plan ("Plan"). The
Plan was amended to freeze the accrual of future benefits as of October 31,
1991. Prior to October, 1991, the Plan covered substantially all full-time
employees of KCS and its participating subsidiaries. The Company's funding
policy for the Plan was to make annual contributions that met the minimum
funding requirements of the Employee Retirement Income Security Act of 1974.
The Board of Directors took action to terminate the Plan effective
September 30, 1995. The Company filed all required standard termination
applications with both the Internal Revenue Service and the Pension Benefit
Guaranty Corporation. In July, 1996, the Company completed the termination of
the Plan and satisfied all obligations thereunder, recording a pre-tax expense
of $262,000.
The Company sponsors a Savings and Investment Plan ("Savings Plan") under
Section 401(k) of the Internal Revenue Code. Eligible employees may contribute
up to 16% of their base salary to the Savings Plan subject to certain IRS
limitations. The Company may make matching contributions, which have been set by
the Board of Directors at 50% of the employee's contribution (up to 6% of annual
base compensation) since the inception of the Savings Plan in June 1988. The
Savings Plan also contains a profit-sharing component whereby the Board of
Directors may declare annual discretionary profit-sharing contributions.
Profit-sharing contributions are allocated to each eligible employee based upon
their pro-rata share of total eligible compensation. Employee and profit-sharing
contributions are invested at the direction of the employee in one or more funds
or can be directed to purchase common stock of the Company at fair market value.
Company
F-10
<PAGE> 98
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
matching contributions are invested in shares of KCS common stock. Eligible
employees vest in both the Company matching and discretionary profit-sharing
contributions over a four-year period based upon their years of service with the
Company. Company contributions to the Savings Plan were $293,622 in 1994,
$253,666 in 1995 and $102,455 in 1996.
4. STOCK OPTION AND INCENTIVE PLANS
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
Accounting for Stock-Based Compensation ("SFAS 123"). As permitted under SFAS
123, the Company has elected to continue to account for such compensation under
the provisions of APB Opinion No. 25. The Company has complied with the required
disclosures under SFAS 123. Had compensation cost for the following plans been
determined consistent with SFAS 123, the impact on the Company's net income and
earnings per share would not be material.
Under the 1988 Stock Plan and the 1992 Stock Plan (the "Employee Incentive
Plans"), stock options, stock appreciation rights and restricted stock may be
granted to employees of KCS. The 1992 Stock Plan also provides that bonus stock
may be granted to employees.
The 1994 Directors' Stock Plan provides that each non-employee director be
granted stock options for 2,000 shares annually. This plan also provides that in
lieu of cash, each non-employee director be issued KCS stock with a fair market
value equal to 50% of their annual retainer.
Each plan provides that the option price of shares issued be equal to the
market price on the date of grant. All options expire 10 years after the date of
grant. At December 31, 1996, options for 779,812 shares were exercisable.
Transactions during the last three years involving stock options under the
above plans are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- -------------
<S> <C> <C>
Options outstanding, December 31, 1993.................... 959,400 $ 0.69-$11.44
1994 -- Granted........................................... 212,000 $ 7.25-$13.44
-- Exercised........................................ (64,400) $ 0.69-$ 3.13
1995 -- Granted........................................... 210,000 $ 6.50-$ 8.16
-- Exercised........................................ (45,200) $ 0.69-$ 0.99
-- Forfeited........................................ (6,200) $11.44-$13.44
1996 -- Granted........................................... 12,000 $ 11.44
-- Exercised........................................ (183,000) $ 0.75-$11.44
-- Forfeited........................................ (35,450) $ 6.50-$11.44
--------- -------------
Options outstanding, December 31, 1996.................... 1,059,150 $ 0.92-$13.44
========= =============
</TABLE>
Restricted shares awarded under the Employee Incentive Plans have a fixed
restriction period during which ownership of the shares cannot be transferred
and the shares are subject to forfeiture if employment terminates. Restricted
stock has the same dividend and voting rights as other common stock and is
considered to be currently issued and outstanding. The cost of the awards,
determined as the fair market value of the shares at the date of grant, is
expensed ratably over the period the restrictions lapse. This cost was
immaterial during the three years ended December 31, 1996. Restricted stock
totaling 8,000 shares was outstanding under the Employee Incentive Plans at
December 31, 1996.
Bonus stock awards under the 1992 Stock Plan convert to shares of
restricted stock if certain three-year performance goals are met. The restricted
stock then vests over a two-year period. The cost of the awards is
F-11
<PAGE> 99
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expensed ratably based on the current market price of the Company's common stock
and the extent to which the performance goals are being met. This cost was
immaterial during the three years ended December 31, 1996. Bonus stock grants
totaling 17,600 shares were outstanding at December 31, 1996.
At December 31, 1996, 212,662 shares were available for future grants
(including bonus stock awards) under the Employee Incentive Plans.
Under the 1988 KCS Energy, Inc. Employee Stock Purchase Program (the
"Program"), all eligible employees and directors may purchase full shares from
the Company at a price per share equal to 90% of the market value determined by
the closing price on the date of purchase. The minimum purchase is 50 shares.
The maximum annual purchase is the number of shares costing no more than 10% of
the eligible employee's annual base salary, and for directors, 6,000 shares. The
number of shares issued in connection with the Program was 14,876, 13,794 and
15,326 during 1994, 1995 and 1996, respectively. At December 31, 1996, there
were 872,064 shares available for issuance under the Program.
A summary of the status of the Employee Incentive Plans and the 1994
Directors' Stock Plan at December 31, 1996 and 1995 and changes during the years
then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
1995 1996
--------------------- ---------------------
WTD. AVG. WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........... 1,107,000 $ 4.50 1,265,600 $ 4.95
Grant...................................... 210,000 6.58 12,000 11.44
Exercised.................................. (45,200) 0.81 (183,000) 1.81
Forfeited.................................. (6,200) 12.09 (35,450) 7.85
--------- ------ --------- ------
Outstanding at end of year................. 1,265,600 4.95 1,059,150 5.46
--------- ------ --------- ------
Exercisable at end of year................. 777,600 $ 3.30 779,812 $ 4.68
--------- ------ --------- ------
Weighted average fair value of options
granted.................................. $ 2.41 $ 4.36
====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 CONTRACTUAL LIFE EXERCISE PRICE 1996 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
<C> <C> <C> <C> <C> <C>
$ 0.92 -
$ 3.12....... 360,000 4.01 $ 0.98 360,000 $ 0.98
3.12 - 4.68 104,800 5.92 3.13 104,800 3.13
4.69 - 7.01 185,000 8.91 6.50 46,250 6.50
7.02 - 10.52 195,000 7.92 7.74 102,500 7.33
10.53 - 13.44 214,350 7.04 11.53 166,262 11.56
- --------------- --------- ----- ------ ------- ------
$ 0.92 - $13.44 1,059,150 6.38 $ 5.46 779,812 $ 4.68
=============== ========= ===== ====== ======= ======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 5.73% and 6.52%; expected dividend yield of .33%; expected lives of 5.1
years; expected stock price volatility of 30%.
F-12
<PAGE> 100
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Master Note Facility............................. $ 76,255 $ -- $ --
Receivables Facility............................. 26,900 -- --
VPP Facility..................................... 38,000 -- --
Note Financing................................... 24,374 -- --
Credit Facility.................................. -- 55,600 74,500
11% Senior Notes Due 2003........................ -- 149,456 149,523
Revolving Credit Agreement....................... -- 105,000 51,700
Other............................................ -- 291 --
-------- -------- --------
165,529 310,347 275,723
Less current maturities.......................... -- -- --
-------- -------- --------
Long-term debt................................... $165,529 $310,347 $275,723
======== ======== ========
</TABLE>
SENIOR NOTES
On January 25, 1996, KCS Energy, Inc. (the "Parent") completed a Rule 144A
private offering of $150 million 11% senior notes due January 15, 2003 (the
"Senior Notes"). The Senior Notes are noncallable for four years and are
unsecured obligations of the Parent. Prior to January 15, 1999, the Parent may
use proceeds from a public equity offering to redeem up to $35 million of the
Senior Notes. The subsidiaries of the Parent have guaranteed the Senior Notes on
a senior unsecured basis. The net proceeds of approximately $145 million were
used to reduce the amounts outstanding under certain of the agreements discussed
below.
The Senior Notes contain certain restrictive covenants which, among other
things, limit the Company's ability to incur additional indebtedness, require
the repurchase of the Senior Notes upon a change of control and restrict the
aggregate cash dividends paid to 50% of the Company's cumulative net income
during the period beginning October 1, 1995.
On June 6, 1996, the Parent completed an offer to exchange the $150 million
outstanding Senior Notes for registered notes of the same tenor (the "Registered
Notes") pursuant to a registration statement declared effective by the
Securities and Exchange Commission on May 7. The Registered Notes are identical
in all material respects to the form and terms of the Senior Notes except for
certain transfer restrictions and registration rights applicable to the Senior
Notes. The Registered Notes evidenced the same debt, and were issued under and
entitled to the benefits of the same Indenture, as the Senior Notes.
CREDIT FACILITY
On September 25, 1996, the Company assigned the collateral pledged under
both the Master Note Facility and VPP Facility, described below, and effectively
amended these facilities to create one consolidated revolving credit facility
("Credit Facility") which matures on September 30, 2000. The Credit Facility is
used for general corporate purposes, including working capital and to support
the Company's capital expenditure program. The borrowing base, or actual
availability under the Credit Facility, is currently limited to $75 million
under the terms of the Senior Notes. The borrowing base is reviewed at least
semiannually and may be adjusted based on the lenders' valuation of the
borrowers' oil and gas reserves and other factors.
F-13
<PAGE> 101
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Substantially all of the Company's oil and gas reserves (excluding those pledged
under the Revolving Credit Agreement) have been pledged to secure the Credit
Facility.
The Credit Facility permits the Borrowers to choose interest rate options
based on the bank's prime rate or LIBOR and from maturities ranging up to twelve
months. The applicable spread over the prime rate or LIBOR is determined each
quarter based on KCS' consolidated debt-to-EBITDA ratio. A commitment fee of
0.375% is paid on the unused portion of the borrowing base. The weighted average
effective interest rate for 1996 was 8.71%. As of December 31, 1996, the
weighted average effective interest rate on the outstanding borrowings was
8.25%. Immediately following the Medallion Acquisition, $55.6 million was
outstanding under the Credit Facility.
REVOLVING CREDIT AGREEMENT
Simultaneous with the completion of the Medallion Acquisition, the Company
entered into a revolving credit agreement ("Revolving Credit Agreement") with a
group of banks. The Revolving Credit Agreement is used for general corporate
purposes, including working capital and to support the Company's capital
expenditure program. The Revolving Credit Agreement had an initial borrowing
base of $105 million and matures on September 30, 2000. The obligations under
the Revolving Credit Agreement are secured by substantially all of the oil and
gas reserves of the Medallion entities and a pledge of the Medallion entities'
common stock. The borrowing base is reviewed at least semiannually and may be
adjusted based on the lenders' valuation of the borrowers' oil and gas reserves
and other factors.
The Revolving Credit Agreement permits KCS to borrow at interest rates
based on the bank's prime rate or LIBOR and from maturities ranging up to twelve
months. The applicable spread over the prime rate or LIBOR is determined each
quarter based on KCS' consolidated debt-to-EBITDA ratio. A commitment fee of
0.375% is paid on the unused portion of the borrowing base. Immediately
following the Medallion Acquisition, $105 million was outstanding under the
Revolving Credit Agreement at a weighted average effective interest rate of
7.8%.
Following the completion of the common stock offering (see Note 12), the
amount outstanding under the Revolving Credit Agreement was reduced to $0.2
million. The Revolving Credit Agreement also included a $30 million term loan
component which was never utilized and was terminated on February 18, 1997.
TERMINATED FACILITIES
The Master Note Facility was used primarily to support the oil and gas
exploration and production and natural gas transportation businesses. On
September 25, 1996, the primary collateral pledged to secure the Master Note
Facility was assigned to the Credit Facility described above. Simultaneous with
the collateral assignment, the Company's obligations under the Master Note
Facility were fully satisfied. The weighted average effective interest rate was
7.98% in 1995 and 8.86% in 1996.
The VPP Facility was used primarily to support the natural gas marketing
subsidiary's volumetric production payment program. On September 25, 1996, the
collateral pledged to secure the VPP Facility was assigned to the Credit
Facility described above. Simultaneous with the collateral assignment, the
Company's obligations under the VPP Facility were fully satisfied. The weighted
average effective interest rate was 8.17% in 1995 and 7.94% in 1996.
The Receivable Facility was used primarily to support the natural gas
marketing subsidiary's working capital requirements. In July 1996, the Company
paid all outstanding obligations and terminated the Receivable Facility. The
weighted average effective interest rate was 7.64% in 1995 and 7.69% in 1996.
The Note Financing was used primarily to fund the Company's oil and gas
property acquisitions and for general corporate purposes. In January 1996, the
Company paid all outstanding obligations and terminated the
F-14
<PAGE> 102
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note Financing. The Company also had issued to the purchaser under the Note
Financing a warrant to purchase 229,366 shares of the Company's common stock. In
October 1996, the Company exercised its option to buy back the warrant at a cost
of $668,000.
OTHER INFORMATION
KCS Energy, Inc. is a borrower under the Revolving Credit Agreement and has
guaranteed the obligations of its subsidiaries under the Credit Facility. The
agreements contain certain restrictive covenants which, among other things,
require the Company to maintain minimum levels of working capital, cash flow and
tangible net worth, as defined in the agreements. In addition, the Company is
restricted from incurring secured indebtedness under designated credit
facilities in an amount which is the greater of $75 million or 15% of adjusted
consolidated net tangible assets (as defined in the Senior Notes Indenture).
This restriction does not apply to purchase money indebtedness. The Company's
ability to pay cash dividends is limited by these agreements.
The fair value of the Company's Senior Notes, $162 million, is estimated
based upon the December 31, 1996 quoted market price of $108.00 for such issue.
The carrying amount of the remaining long-term debt reasonably approximates fair
value because its interest rates are based on current market rates. Interest
payments were $2.1 million in 1994, $6.8 million in 1995 and $10.9 million in
1996.
Scheduled maturities of long-term debt during the next five years are as
follows:
<TABLE>
<CAPTION>
PRO
ACTUAL FORMA(1)
------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1997................................................. -- --
1998................................................. -- --
1999................................................. -- --
2000................................................. $160,600 $49,900
2001................................................. -- --
</TABLE>
- ---------------
(1) Reflects the issuance of common stock in January 1997 and the repayment of
amounts outstanding under the Credit Facility and the Revolving Credit
Agreement.
6. LEASES
Future minimum lease payments under non-cancelable operating leases are as
follows: $825,000 in 1997, $752,000 in 1998, $578,000 in 1999, $535,000 in 2000
and $484,000 in 2001. Lease payments charged to operating expenses amounted to
$598,000, $466,000 and $564,000 during 1994, 1995 and 1996, respectively.
F-15
<PAGE> 103
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Federal and state income tax expense includes the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Currently payable....................................... $ 1,121 $ 2,545 $ 3,800
Deferred provision, net................................. 10,342 8,096 7,028
------- ------- -------
Federal income tax expense.............................. 11,463 10,641 10,828
State income taxes (deferred provision $204 in 1994,
$1,460 in 1995 and $578 in 1996)...................... 806 1,176 1,852
------- ------- -------
$12,269 $11,817 $12,680
======= ======= =======
Sources of deferred federal and state income taxes:
Intangible drilling costs............................. $10,278 $12,619 $16,529
Revenue recognition deferred.......................... 2,343 1,854 1,348
Depreciation, depletion and amortization.............. (2,233) (5,779) (5,134)
Tax credit carry forwards and other, net.............. 158 862 (5,137)
------- ------- -------
$10,546 $ 9,556 $ 7,606
======= ======= =======
Reconciliation of federal income tax expense at
statutory rate to provision for income taxes:
Income before income taxes.............................. $35,872 $35,222 $34,397
------- ------- -------
Tax provision at 35% statutory rate..................... 12,555 12,328 12,039
State income tax, net of federal income tax benefit..... 523 764 1,204
Statutory depletion..................................... (696) (676) (475)
Section 29 credits...................................... (388) (425) --
Other, net.............................................. 275 (174) (88)
------- ------- -------
$12,269 $11,817 $12,680
======= ======= =======
</TABLE>
The primary differences giving rise to the Company's deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ASSETS LIABILITIES
------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Income tax effects of:
Accelerated DD&A and other property related items......... $37,340
Deferred revenue.......................................... 6,183
Alternative minimum tax credit carry forwards............. $1,923
Net operating loss carry forward.......................... 6,500
Other, net................................................ 1,003
------ -------
$9,426 $43,523
====== =======
</TABLE>
Income tax payments were $1.3 million in 1994 and $5.6 million in 1996. No
income tax payments were made in 1995.
The Company had tax net operating losses ("NOL") of approximately $18.6
million at December 31, 1996. This NOL expires in 2011. The Company believes it
will generate future taxable income to realize the entire deferred tax asset
prior to the expiration of the NOL.
F-16
<PAGE> 104
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. FINANCIAL INSTRUMENTS
The Company has entered into swaps, futures contracts and options to manage
risks associated with fluctuations in the price of its natural gas and oil
production and marketing activities.
Commodity Price Swaps. Commodity price swap agreements require the Company
to make payments to (or entitle it to receive payments from) the counterparties
based upon the differential between a specified fixed and variable price. The
Company accounts for these transactions on a settlement basis and, accordingly,
gains or losses are included in oil and gas revenue in the period in which the
underlying natural gas is produced. These agreements do not impose cash margin
requirements on the Company. As a result of the Medallion Acquisition at
December 31, 1996, the Company was party to commodity price swap agreements
covering approximately 8.5 million MMBtu, 4.8 million MMBtu and 17.8 million
MMBtu of natural gas for the years 1997 and 1998 and for the period 1999 through
2005, respectively.
Futures and Options Contracts. Natural gas futures contracts require the
Company to buy or sell natural gas at a fixed price. The Company uses futures to
hedge price risk on a portion of its oil and gas production and to manage profit
margins on offsetting fixed-price purchase or sale commitments for physical
quantities of natural gas. Futures contracts mandate initial margin
requirements. The Company maintains such margin accounts and funds in cash any
daily settlement requirements relating to futures contracts. Natural gas options
used to hedge price risk only provide the right, not the requirement, to buy or
sell natural gas at a fixed price. The Company uses options to limit overall
price risk exposure.
At December 31, 1996, the Company's hedging activities consisted of 1,500
long contracts at an average price of $2.25 per Mcf and 635 short contracts at
an average price of $2.53 per Mcf maturing through 1999, covering 21,350 MMcf of
natural gas. At December 31, 1995, the Company's hedging activities consisted of
700 long contracts at an average price of $1.82 per Mcf and 587 short contracts
at an average price of $1.95 per Mcf maturing through 1996 covering 12,870 MMcf
of natural gas. Since these contracts qualify as hedges and correlate to market
price movements of natural gas, any gains or losses resulting from market
changes will be offset by losses or gains on corresponding physical
transactions. Deferred gains, net of deferred losses, were $1.0 million at
December 31, 1996. Deferred losses, net of deferred gains, were $0.1 million at
December 31, 1995.
Basis Swaps. Basis swap agreements require KCS to make payments to (or
entitle it to receive payments from) the counterparties based upon the
differential between the variable costs associated with the delivery of natural
gas production to specific delivery points and a contractually specified fixed
cost. As a result of the Medallion Acquisition at December 31, 1996, the Company
had basis swap arrangements relating to a total of approximately 2.2 million
MMBtu during 1997.
9. LITIGATION
Tennessee Gas Litigation
Prior to January 1, 1997, most of the Company's natural gas sold from the
Bob West Field in south Texas was covered by the Tennessee Gas Contract which
had been the subject of several lawsuits. The first such suit was filed by
Tennessee Gas in the 57th District Court of Bexar County, Texas, in August,
1990, and two subsequent suits were filed in the 49th District Court of Zapata
County, Texas, in November, 1994, and April, 1995.
In the suit in the District Court of Bexar County, Texas ("District Court")
against the Company and its co-sellers, Tennessee Gas claimed among other
things, that the price of natural gas under the Tennessee Gas Contract should be
determined under Section 101 of the NGPA rather than Section 102(b)(2), that
certain leases were no longer subject to the contract, that for purposes of the
contract the acreage subject to the contract could not be pooled with other
properties and that the contract was governed by Section 2.306 of the
F-17
<PAGE> 105
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Texas Uniform Commercial Code ("Section 2.306"). In July 1992, the District
Court ruled in favor of the Company on all of these issues and awarded damages
for past underpayments and legal fees. The District Court's judgment was
partially affirmed by the Court of Appeals, which held that the price of natural
gas under the contract was to be determined in accordance with Section
102(b)(2), that all leases were subject to the contract, and that pooling of the
property with a pro rata acreage allocation of production to the contract was in
accordance with the contract. However, the Court of Appeals reversed the
District Court's summary judgment holding that the Tennessee Gas Contract was
not an output contract subject to Section 2.306. Under the Court of Appeals
decision, new wells could be drilled and production increased , but any
production increase had to have complied with certain good faith and
reasonableness standards mandated by Section 2.306. The Court of Appeals also
set aside the District Court's awards to the Company of legal fees and past
underpayments pending the outcome of the trial on the Section 2.306 issue.
On August 1, 1995, the Texas Supreme Court affirmed the ruling of the Court
of Appeals, including its decision that Section 2.306 was applicable to the
Tennessee Gas Contract. The Texas Supreme Court remanded to the District Court
for plenary trial the question of whether, as required by Section 2.306, natural
gas volumes taken by Tennessee Gas under the contract were produced and
delivered in good faith and were not unreasonably disproportionate to a normal
or otherwise comparable prior output or the expectation of the parties. On
September 15, 1995, the Company filed a request for a rehearing in the Texas
Supreme Court of the Section 2.306 issue.
On April 18, 1996, the Texas Supreme Court granted the petitioners' request
for a rehearing, withdrew its August 1, 1995 opinion and issued a new opinion.
In its April 18, 1996 opinion, the Texas Supreme Court affirmed the Company's
position on all issues, stating that the price payable by Tennessee Gas
escalates monthly in accordance with Section 102(b)(2) of the Natural Gas Policy
Act of 1978 ("NGPA"); that KCS has the right to pool the leases; that Tennessee
Gas has no legal or contractual right to question or determine whether certain
leases are no longer committed to the Tennessee Gas Contract; and the Tennessee
Gas Contract is not an output contract governed by Section 2.306 of the Texas
Uniform Commercial Code. On June 3, 1996 Tennessee Gas filed a motion requesting
another rehearing and on August 16, 1996 the Texas Supreme Court denied
Tennessee Gas' motion. On September 30, 1996, the Company recovered
approximately $70 million that Tennessee Gas previously withheld under a series
of interim agreements, which was the balance of the purchase price for
production taken by Tennessee Gas from September 17, 1994 through April 30,
1996, plus interest. The terms of the Tennessee Gas Contract, in accordance with
judicial rulings in the case, governed performance by each of the parties
through the termination of the contract effective January 1, 1997.
On December 23, 1996, the Company and Tennessee Gas entered into a
settlement covering all claims and litigation between them related to the
Tennessee Gas Contract. As part of the settlement, the Tennessee Gas Contract
was terminated effective January 1, 1997, approximately two years prior to its
expiration date. The parties also agreed to the dismissal of the pending Zapata
County, Texas, lawsuits including the contract dispute that resulted in a
November 1996 jury award to Tennessee Gas of $143.2 million (including $114
million in punitive damages). The early termination of the Tennessee Gas
Contract with its above-market pricing provisions resulted in downward revisions
of $37.1 million for estimated future net revenues before income taxes (based
upon a natural gas price of $3.69 per Mcf, the assumed realized spot market
price on December 31, 1996) and $34.7 million for PV-10 as compared to prior
reserve reports prepared as of June 30, 1996.
The December 1996 settlement did not affect the Company's successful
conclusion of litigation earlier in the year relating to the validity and
pricing provisions of the Tennessee Gas Contract and its recovery of $70 million
of past underpayments (including interest and net of severance taxes and other
payables related to the contract) that had accrued under the contract.
F-18
<PAGE> 106
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Royalty Suits
The Company is a party to six lawsuits in the Texas State Courts involving
various claims asserted by various holders of royalty interests under leases on
the acreage that was dedicated to the Tennessee Gas Contract or pooled
therewith. One suit involves claims by the holder of an overriding royalty
interest in the dedicated acreage. Of the other five (the "Royalty Basis
Suits"), one seeks a declaratory judgment on the royalty payment basis for
non-dedicated acreage in which the Company owns no interest. The other four
suits seek declaratory judgements to determine whether royalties payable to the
holders of landowner royalty interests in the dedicated acreage should be based
on the net proceeds received by the Company for gas sales under the Tennessee
Gas Contract or on the spot market price. The Company paid royalties based upon
the spot market price to the holders of royalty interests (other than the
overriding royalty interest) because the Company's leases, which cover only
dedicated acreage, have market value royalty provisions.
The aggregate amount at issue in the Royalty Basis Suits, apart from
certain tort counterclaims and affirmative defenses alleged by the landowner
royalty holders, is a function of the quantity of natural gas for which
Tennessee Gas paid at the contract price. As of December 31, 1996, the amount of
natural gas taken by Tennessee Gas attributable to the royalty interests
involved in the Royalty Basis Suits was approximately 3.8 Bcf for which
royalties have been paid by the Company at the average price of approximately
$1.63 per Mcf, net of severance tax, compared to the average Tennessee Gas
Contract price of approximately $7.60 per Mcf, net of severance tax.
Consequently, if the Company loses in its litigation with these royalty interest
owners on these claims the Company faces a maximum liability in the Royalty
Basis Suits of approximately $22.7 million at December 31, 1996.
On March 4, 1997, the holder of an overriding royalty interest filed a
claim against the Company and its co-lessees alleging breach of duties arising
from the termination of the Tennessee Gas Contract and for certain tortious acts
yet to be discovered. The allegations are for joint and several liability,
damages exceeding $25 million, return of the 1/64th overriding royalty interest
acquired by the Company in 1990 under allegedly fraudulent circumstances and
unspecified punitive damages. The Company intends to vigorously contest these
claims. Discovery in this matter has not yet begun.
Initially, there were three Royalty Basis Suits, one in Dallas County,
Texas, in which the Company is a co-plaintiff and two subsequently filed suits
in Zapata County, Texas, in which the Company is a co-defendant. The Dallas suit
has been subsequently split into four separate lawsuits, based on issues
concerning (1) the dedicated acreage in the Guerra "A" and Guerra "B" Units, (2)
the non-dedicated acreage in those Units, (3) the Jesus Yzaguirre Unit, which
consists entirely of dedicated acreage owned only by the Company, and (4) the
overriding royalty interest in the dedicated acreage.
The Dallas Royalty Basis Suits involving the dedicated acreage in the
Guerra "A" and Guerra "B" Units and the Jesus Yzaguirre Unit have resulted in
separate summary judgments in favor of the Company's position that royalty
payments based upon the spot market price are all that is required to be paid
under the leases and dismissal of the royalty owners counterclaims and
affirmative defenses. The summary judgment has been appealed to the Fifth Court
of Appeals in Dallas by the royalty holders in the dedicated leases in the
Guerra "A" and Guerra "B" Units, who have requested oral argument on eleven
points of error. These points of error concern the granting of summary judgment
against them on issues of lease provisions on market value royalties;
counterclaims and affirmative defenses of fraud, negligent misrepresentations,
conspiracy and estoppel; denial of their efforts to supplement summary judgment
evidence; denial of efforts to transfer venue to Zapata County; failure to abate
the Dallas lawsuit in favor of the two lawsuits filed by them in Zapata County;
and the entry of final judgment in favor of the Company and its co-plaintiffs.
Given the inherent uncertainties of appellate matters and notwithstanding that
the Company's position on the market value and other issues is based upon
established decisional law in Texas, the Company is unable to provide any
assurance of a favorable outcome of this appeal from the summary judgments and
evidentiary rulings, inasmuch as the Appellants can obtain a reversal and remand
for plenary trial upon showing that summary judgment was
F-19
<PAGE> 107
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
improper because there exists an issue of material fact. Because of other issues
(discussed below) in the Royalty Basis Suit involving the Jesus Yzaguirre Unit,
the summary judgment in favor of the Company in that suit is not yet ripe for
appeal.
In the Jesus Yzaguirre Royalty Basis Suit, certain of the royalty owners
counterclaimed against the Company, asserting that the largest lease contained
therein had terminated in December, 1975, and that they were entitled to the
Tennessee Gas Contract Price because of the execution of certain division orders
in 1992 that allegedly varied the market value royalty provision of their lease.
The Company and these royalty owners have moved for summary judgment on the
issues of lease termination, lease ratification and the effect of division
orders. The trial judge has not yet ruled on these motions. The royalty owners
who have asserted these claims seek a declaratory judgment of their rights and
have not yet specified the amount or basis of the damages being sought. However,
the amount at issue could include the aggregate of the Company's capital costs
in the lease, the lease operating costs and the working interest revenues of the
lease (at market value of the gas production) since 1976.
Royalty Basis Suits -- Recent Events (unaudited)
The claim asserted by certain of the royalty owners in the Jesus Yzaguirre
Royalty Basis suit that the largest lease contained therein had terminated in
December 1975 has been settled, and on June 2, 1997, the trial judge signed an
Order of Dismissal with Prejudice as to that claim. On May 30, 1997, the Zapata
County suit brought by these same royalty owners was dismissed in connection
with this settlement.
On October 22, 1997, the other Zapata County suit was dismissed by the
court on its own motion, inasmuch as the suit had been abated since September
15, 1995 in favor of the earlier-filed suit in Dallas County.
On the issue of the effect of the 1992 division orders raised in the Jesus
Yzaguirre Royalty Basis suit, the trial judge on August 12, 1997 signed an order
granting the Company's motion for summary judgment and denying the royalty
owners' motion. At a hearing on October 29, 1997, the trial court entered a
final judgment in favor of the Company based upon the prior separate summary
judgments in favor of the Company's position on the issues and counterclaims
involved with this lawsuit.
In addition to the appeal filed by the royalty owners in Guerra "A" and
Guerra "B" Units, the royalty owners in the Jesus Yzaguirre Unit have indicated
that they will appeal the trial court's final judgment in that matter in due
course to the Fifth District Court of Appeals in Dallas, Texas.
Other
The Company is also a party to various other lawsuits and governmental
proceedings, all arising in the ordinary course of business. Although the
outcome of all of the above proceedings cannot be predicted with certainty,
management does not expect such matters to have a material adverse effect,
either singly or in the aggregate, on the financial position of the Company.
F-20
<PAGE> 108
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995
Revenue................................... $21,475 $21,496 $20,849 $23,295
Operating Income.......................... 9,916 9,520 8,224 9,897
Income From Continuing Operations......... 6,213 5,676 6,366 5,150
Income (Loss) From Discontinued
Operations............................. 7 (299) (2,280) 473
Net Income................................ 6,220 5,377 4,086 5,623
Earnings Per Common Share:
Continuing Operations.................. $ 0.27 $ 0.24 $ 0.27 $ 0.22
Discontinued Operations................ -- (0.01) (0.10) 0.02
------- ------- ------- -------
Earnings Per Common Share................. $ 0.27 $ 0.23 $ 0.17 $ 0.24
======= ======= ======= =======
1996
Revenue................................... $27,284 $26,098 $26,046 $28,946
Operating Income.......................... 11,835 10,721 10,080 10,760
Income From Continuing Operations......... 5,973 5,524 5,283 4,937
Income (Loss) From Discontinued
Operations............................. (118) (537) (1,319) 129
Net Income................................ 5,855 4,987 3,964 5,066
Earnings Per Common Share:
Continuing Operations.................. $ 0.26 $ 0.23 $ 0.22 $ 0.20
Discontinued Operations................ (0.01) (0.02) (0.05) --
------- ------- ------- -------
Earnings Per Common Share................. $ 0.25 $ 0.21 $ 0.17 $ 0.20
======= ======= ======= =======
1997
Revenue................................... $39,879 $32,551 $31,668
Operating Income.......................... 13,717 8,025 7,744
Income From Continuing Operations......... 5,405 2,292 1,579
Discontinued Operations
Net loss from operations............... (72) -- --
Net gain on disposition................ 5,461 -- --
Net Income................................ 10,794 2,292 1,579
Earnings Per Common Share:
Continuing Operations.................. $ 0.19 $ 0.08 $ 0.05
Discontinued Operations................ 0.18 -- --
------- ------- -------
Earnings Per Common Share................. $ 0.37 $ 0.08 $ 0.05
======= ======= =======
</TABLE>
11. OIL AND GAS PRODUCING OPERATIONS
The following data is presented pursuant to FASB Statement No. 69 with
respect to oil and gas acquisition, exploration, development and producing
activities, which 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 of remaining volumes,
prices, costs, and production rates. As discussed in Note 2, as of December 31,
1996 the Company completed the arrangements for the Medallion Acquisition. As
such, the associated reserves are included in the following tables.
F-21
<PAGE> 109
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Except where otherwise provided by contractual agreement, future cash
inflows are estimated using year-end prices. Oil and gas prices at December 31,
1996 are not necessarily reflective of the prices the Company expects to receive
in the future. Other than gas sold under contractual arrangements including
swaps, futures contracts and options, gas prices were $3.54 and $2.03 at
December 31, 1996 and 1995, respectively.
Volumetric production payment volumes represent oil and gas reserves
purchased from third parties which entitle the Company to a specified volume of
oil and gas to be delivered over a stated time period. The related volumes
stated herein reflect scheduled amounts of oil and gas to be delivered to the
Company at agreed delivery points, and are stated at year-end prices. The
Company does not bear any development or lease operating expenses associated
with the volumetric production payments.
PRODUCTION REVENUES AND COSTS
Information with respect to production revenues and costs related to oil
and gas producing activities is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
-------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenue........................................... $ 65,773 $ 85,424 $ 107,959
Production (lifting) costs........................ 7,063 6,623 11,693
Technical support and other....................... 2,671 2,373 4,401
Depreciation, depletion and amortization.......... 18,538 37,859 44,565
-------- -------- ---------
Total expenses.......................... 28,272 46,855 60,659
-------- -------- ---------
Pretax income from producing activities........... 37,501 38,569 47,300
Income taxes...................................... 12,041 12,549 17,381
-------- -------- ---------
Results of oil and gas producing activities
(excluding corporate overhead and interest)..... $ 25,460 $ 26,020 $ 29,919
======== ======== =========
Capitalized costs incurred:
Property acquisition............................ $ 27,772 $ 77,515 $ 198,927
Exploration..................................... 12,599 16,891 18,315
Development..................................... 33,311 26,859 54,889
-------- -------- ---------
Total capitalized costs incurred........ $ 73,682 $121,265 $ 272,131
Capitalized costs at year-end:
Proved properties............................... $169,624 $284,597 $ 536,817
Unproved properties............................. 5,074 7,297 10,574
-------- -------- ---------
174,698 291,894 547,391
Less accumulated depreciation, depletion and
amortization.................................... (49,077) (86,936) (131,521)
-------- -------- ---------
Net investment in oil and gas producing
properties...................................... $125,621 $204,958 $ 415,870
======== ======== =========
</TABLE>
DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
The following information relating to discounted future net cash flows has
been prepared on the basis of the Company's estimated net proved oil and gas
reserves in accordance with FASB Statement No. 69.
F-22
<PAGE> 110
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Future cash inflows......................................... $ 521,914 $1,213,604
Future costs:
Production................................................ (94,880) (320,457)
Development............................................... (21,985) (43,882)
Discount -- 10% annually.................................. (113,964) (291,653)
--------- ----------
Present value of future net revenues...................... 291,085 557,612
Future income taxes, discounted at 10%.................... (59,322) (120,013)
--------- ----------
Standardized measure of discounted future net cash flows.... $ 231,763 $ 437,599
========= ==========
</TABLE>
CHANGES IN DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVE QUANTITIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year......................... $160,884 $179,660 $231,763
Increases (decreases)
Sales, net of production costs................... (58,710) (78,801) (96,266)
Net change in prices, net of production costs.... (11,180) 9,593 50,328
Discoveries and extensions, net of future
production and development costs.............. 26,930 22,417 67,791
Changes in estimated future development costs.... (9,622) (862) 2,005
Change due to acquisition of reserves in place... 26,038 108,798 292,557
Development costs incurred during the period..... 13,924 9,672 10,411
Revisions of quantity estimates.................. 1,532 (19,256) (45,003)
Accretion of discount............................ 21,017 24,033 29,108
Net change in income taxes....................... (12,060) 2,021 (60,691)
Sales of reserves in place....................... -- (1,931) (11,507)
Changes in production rates (timing) and other... 20,907 (23,581) (32,897)
-------- -------- --------
Net increase..................................... 18,776 52,103 205,836
-------- -------- --------
Balance, end of year............................... $179,660 $231,763 $437,599
======== ======== ========
</TABLE>
F-23
<PAGE> 111
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESERVE INFORMATION (UNAUDITED)
The following information with respect to the Company's net proved oil and
gas reserves are estimates based on reports prepared by independent petroleum
engineers (principally Ryder Scott Company, R.A. Lenser and Associates, Inc. and
H. J. Gruy and Associates, Inc.). Proved developed reserves represent only those
reserves expected to be recovered through existing wells using equipment
currently in place. Proved undeveloped reserves represent proved reserves
expected to be recovered from new wells or from existing wells after material
recompletion expenditures. All of the Company's reserves are located within the
United States.
<TABLE>
<CAPTION>
1994 1995 1996
--------------- --------------- ----------------
GAS OIL GAS OIL GAS OIL
MMCF MBBL MMCF MBBL MMCF MBBL
------- ----- ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped
reserves
Balance, beginning of year....... 69,740 2,578 89,184 2,319 140,963 7,517
Production....................... (11,304) (211) (19,129) (196) (25,581) (758)
Discoveries, extensions, etc..... 10,924 33 10,399 202 21,998 2,196
Acquisition of reserves in
place.......................... 18,206 148 71,560 5,449 157,051 7,245
Sales of reserves in place....... -- -- (3,751) (3) (9,224) (492)
Revisions of estimates........... 1,618 (229) (7,300) (254) (17,182) (1,077)
------- ----- ------- ----- ------- ------
Balance, end of year............. 89,184 2,319 140,963 7,517 268,025 14,631
======= ===== ======= ===== ======= ======
Proved developed reserves
Balance, beginning of year..... 61,016 1,579 74,215 1,336 121,987 3,808
------- ----- ------- ----- ------- ------
Balance, end of year........... 74,215 1,336 121,987 3,808 236,454 12,133
======= ===== ======= ===== ======= ======
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
In January 1997, the Company completed a public offering of 6,000,000
shares (giving effect to the two-for-one stock split effective June 30, 1997) of
its common stock. The net proceeds to the Company of approximately $110.6
million were used to reduce outstanding indebtedness under the bank credit
facilities.
During the first quarter of 1997, the Board of Directors approved a plan to
discontinue the Company's natural gas transportation and marketing operations in
order to focus on the core oil and gas exploration and production operations. As
of March 31, 1997, the Company sold its Texas intrastate natural gas pipeline
system together with related marketing assets and a joint venture gathering
system for a net sales price of $27.9 million, resulting in an after tax gain of
approximately $5.9 million. The proceeds from the sale were used to fund a
portion of the Company's 1997 capital budget.
F-24
<PAGE> 112
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the third quarter of 1997, the Company sold its natural gas
marketing operations for a net sale price of $0.5 million and realized an
after-tax gain of $0.3 million. The results for the transportation and marketing
operations have been classified as discontinued operations for all periods
presented in the Statements of Consolidated Income. The assets and liabilities
of discontinued operations have been classified in the Consolidated Balance
Sheets as "Net assets of discontinued operations." Net assets of the Company's
discontinued operations at September 30, 1997 and December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Assets
Current Assets
Accounts receivable, net.......................... $44,804 $61,632 $ 816
Other............................................. 2,361 2,995 4,200
------- ------- ------
Total current assets......................... 47,165 64,627 5,016
Net property, plant and equipment.................... 18,987 17,977 600
Other noncurrent assets.............................. 2,877 1,964 1,384
------- ------- ------
Total........................................ 69,029 84,568 7,000
Liabilities
Current liabilities.................................. 54,049 55,701 1,890
Noncurrent liabilities............................... -- 2,209 --
------- ------- ------
Total........................................ 54,049 57,910 1,890
------- ------- ------
Net assets of discontinued operations.................. $14,980 $26,658 $5,110
======= ======= ======
</TABLE>
Summarized results of operations of the discontinued transportation and
marketing operations are as follows:
<TABLE>
<CAPTION>
FOR NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1994 1995 1996 1996 1997
-------- -------- -------- ---------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Revenues................................ $278,590 $360,627 $274,323 $225,438 $22,015
Costs and expenses*..................... 277,748 363,968 277,237 228,528 22,129
-------- -------- -------- -------- -------
Income (loss) before income taxes....... 842 (3,341) (2,914) (3,090) (114)
Provision (benefit) for income taxes.... 288 (1,242) (1,069) (1,116) (42)
-------- -------- -------- -------- -------
Income (loss) from discontinued
operations............................ 554 (2,099) (1,845) (1,974) (72)
======== ======== ======== ======== =======
Gain on disposal before income
taxes**............................... -- -- -- -- 8,668
Provision for income taxes.............. -- -- -- -- 3,207
-------- -------- -------- -------- -------
Net gain on disposal.................... $ -- $ -- $ -- $ -- $ 5,461
======== ======== ======== ======== =======
</TABLE>
- ---------------
* Includes allocated net interest expense of $0.7 million, $1.1 million and
$3.8 million for the years ended December 31, 1994, 1995 and 1996,
respectively and $2.6 million and $0.1 million for the nine-month periods
ended September 30, 1996 and 1997, respectively.
** The nine-month period ended September 30, 1997 includes a $1.1 million
provision for estimated losses during the wind-down period.
On May 6, 1997, the Company's Board of Directors approved a two-for-one
stock split of its common stock effective June 30, 1997 to stockholders of
record on June 3, 1997. All references in the financial statements and notes
thereto included in this Prospectus to the number of common shares and earnings
per share reflect the stock split.
F-25
<PAGE> 113
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THAT DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 10
Special Note on Forward-Looking
Statements........................... 16
Use of Proceeds........................ 17
Capitalization......................... 17
Selected Historical Financial
Information.......................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 19
Business and Properties................ 27
Management............................. 48
Security Ownership by Certain
Beneficial Owners and Management..... 50
Description of Existing Indebtedness... 51
Description of the Notes............... 54
Underwriting........................... 82
Certain Legal Matters.................. 83
Experts................................ 83
Available Information.................. 84
Incorporation of Certain Documents by
Reference............................ 84
Glossary............................... 85
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
======================================================
======================================================
$125,000,000
LOGO
KCS ENERGY, INC.
% SENIOR
SUBORDINATED NOTES
DUE 2008
------------
PROSPECTUS
, 1998
------------
SALOMON SMITH BARNEY
PRUDENTIAL SECURITIES INCORPORATED
CIBC OPPENHEIMER
JEFFERIES AND COMPANY, INC.
MORGAN KEEGAN & COMPANY, INC.
======================================================
<PAGE> 114
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of estimated expenses incurred in connection
with the Notes being registered hereby, other than underwriting discounts and
commissions.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 43,561
NASD Filing Fee............................................. 13,000
Printing and Engraving Expenses............................. 175,000
Legal Fees and Expenses..................................... 200,000
Accounting Fees and Expenses................................ 80,000
Transfer Agent and Registrar Fees and Expenses.............. 1,000
Trustee Fees and Expenses................................... 10,000
Blue Sky Fees and Expenses (including legal fees)........... 1,000
Miscellaneous............................................... 201,439
------------
Total............................................. $ 725,000
============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation -- a "derivative action"),
if they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with defense or settlement of such
action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
rights to which those seeking indemnification may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise.
Paragraph (b) of Article IX of the Company's Certificate of Incorporation
provides:
Each person who was or is made a party or is threatened to be made a party
to or is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she or a person of whom he or she is the legal representative,
is or was a director or officer, of the corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a director,
officer, employee, or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in this paragraph
(b), the Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to
II-1
<PAGE> 115
indemnification conferred in this paragraph (b) shall be a contract right and
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer of the Corporation (and not in
any other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding, shall be made
only upon delivery to the Corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same scope and effect as the foregoing indemnification of officers and
directors.
In addition, the Company's Certificate of Incorporation provides for claims
for indemnification to be brought against the Company, waives certain defenses
to such claims, acknowledges that indemnification shall not be deemed exclusive
of any other right which any such person may have or hereafter acquire under any
statute, provision of the Certificate of Incorporation, by-law, agreement, or
vote of stockholders or disinterested directors.
ITEM 16. EXHIBITS
<TABLE>
<S> <S>
1.1* -- Form of Underwriting Agreement
2.1 -- Stock Purchase Agreement dated November 14, 1996 by and
between the Registrant, InterCoast Energy Company and
InterCoast Gas Services Company filed as Exhibit 2.1 to
the Registrant's Amendment No. 1 to Current Report on
Form 8-K dated October 17, 1996 and incorporated by
reference herein
2.2 -- First Amendment to Stock Purchase Agreement, dated
December 31, 1996, filed as Exhibit 2.2 to the
Registrant's Amendment No. 2 to Current Report on Form
8-K dated October 17, 1996 and incorporated by reference
herein
2.3 -- Second Amendment to Stock Purchase Agreement, dated
January 2, 1997, filed as Exhibit 2.3 to the Registrant's
Amendment No. 2 to Current Report on Form 8-K dated
October 17, 1996 and incorporated by reference herein
4.1 -- Indenture dated as of January 15, 1996 between the
Registrant, certain of its subsidiaries and State Street
Bank and Trust Company, as successor trustee to Fleet
National Bank of Connecticut, filed as Exhibit 4 to the
Registrant's Current Report on Form 8-K dated January 25,
1996 and incorporated by reference herein
4.2 -- Form of 11% Senior Note, Series B due 2003 (included in
Exhibit 4.1)
4.3* -- Form of Indenture
5* -- Opinion of Mayor, Day, Caldwell & Keeton, L.L.P.
23.1* -- Consent of Arthur Andersen LLP
23.2* -- Consent of Mayor, Day, Caldwell & Keeton, L.L.P.
(included in Exhibit 5)
23.3* -- Consent of Ryder Scott Company
23.4* -- Consent of R.A. Lenser and Associates, Inc.
23.5* -- Consent of H.J. Gruy and Associates, Inc.
23.6* -- Consent of Netherland, Sewell and Associates, Inc.
24.1 -- Powers of Attorney (included on signature pages contained
in the initial filing of this Registration Statement)
25.1* -- Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 on Form T-1 of State Street
Bank and Trust Company
</TABLE>
- ---------------
* Filed herewith.
II-2
<PAGE> 116
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in this registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by any such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
or not such indemnification is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the undersigned
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; and (2) for the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offer of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 117
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Edison, State of New Jersey, on the 29th day of
December, 1997.
KCS ENERGY, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Senior Vice President, Chief
Financial
Officer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Chief Executive
- ----------------------------------------------------- Officer and Director
James W. Christmas (Principal Executive
Officer)
/s/ HENRY A. JURAND Senior Vice President, December 29, 1997
- ----------------------------------------------------- Chief Financial Officer
Henry A. Jurand and Secretary (Principal
Financial Officer)
* Vice President and
- ----------------------------------------------------- Controller (Principal
Frederick Dwyer Accounting Officer)
* Director
- -----------------------------------------------------
G. Stanton Geary
* Director and Chairman
- ----------------------------------------------------- of the Board
Stewart B. Kean
* Director
- -----------------------------------------------------
James E. Murphy, Jr.
* Director
- -----------------------------------------------------
Robert G. Raynolds
* Director
- -----------------------------------------------------
Joel D. Siegel
* Director
- -----------------------------------------------------
Christopher A. Viggiano
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Edison and the State of
New Jersey, on the 29th day of December, 1997.
KCS RESOURCES, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman, CEO and Director
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, CFO, December 29, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer)
* Vice President and
- ----------------------------------------------------- Controller (Principal
Gary M. Pedlar Accounting Officer)
* President, COO and
- ----------------------------------------------------- Director
C. R. Devine
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 119
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Edison and the State of
New Jersey, on the 29th day of December, 1997.
KCS MICHIGAN RESOURCES, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman, CEO and Director
- -----------------------------------------------------
James W. Christmas
* President, COO (Principal
- ----------------------------------------------------- Executive Officer)
Harry Lee Stout
/s/ HENRY A. JURAND Vice President, CFO and December 29, 1997
- ----------------------------------------------------- Secretary (Principal
Henry A. Jurand Financial Officer)
* Vice President and
- ----------------------------------------------------- Controller (Principal
Gary M. Pedlar Accounting Officer)
* Director
- -----------------------------------------------------
C.R. Devine
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 120
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Edison and the State of
New Jersey, on the 29th day of December, 1997.
KCS PIPELINE SYSTEMS, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman, CEO and Director
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, CFO, December 29, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer)
* Vice President and
- ----------------------------------------------------- Controller (Principal
Gary M. Pedlar Accounting Officer)
* President, COO and
- ----------------------------------------------------- Director
C. R. Devine
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 121
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Edison and the State of
New Jersey, on the 29th day of December, 1997.
KCS ENERGY MARKETING, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman, CEO and Director
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, CFO, December 29, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer and Principal
Accounting Officer)
* President, COO and
- ----------------------------------------------------- Director
Harry Lee Stout
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Edison and the State of
New Jersey, on the 29th day of December, 1997.
ENERCORP GAS MARKETING, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman, CEO and Director
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
* President, COO and
- ----------------------------------------------------- Director
Harry Lee Stout
/s/ HENRY A. JURAND Vice President, CFO, December 29, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer and Principal
Accounting Officer)
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-9
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Edison and the State of
New Jersey, on the 29th day of December, 1997.
KCS ENERGY SERVICES, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer
and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman, CEO and Director
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, CFO, December 29, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer and Principal
Accounting Officer)
* President, COO and
- ----------------------------------------------------- Director
Harry Lee Stout
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-10
<PAGE> 124
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Edison and the State of
New Jersey, on the 29th day of December, 1997.
KCS MEDALLION RESOURCES, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman and Director
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, Secretary December 29, 1997
- ----------------------------------------------------- and Director (Principal
Henry A. Jurand Financial Officer and
Principal Accounting
Officer)
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-11
<PAGE> 125
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Edison and the State of
New Jersey, on the 29th day of December, 1997.
NATIONAL ENERDRILL CORPORATION
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer
and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, CEO and
- ----------------------------------------------------- Director (Principal
James W. Christmas Executive Officer)
/s/ HENRY A. JURAND Vice President, CFO, December 29, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer and Principal
Accounting Officer)
* Director
- -----------------------------------------------------
C. R. Devine
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-12
<PAGE> 126
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Edison and the State of
New Jersey, on the 29th day of December, 1997.
PROLIQ, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President and Director
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, CFO, December 29, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer and Principal
Accounting Officer)
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-13
<PAGE> 127
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Edison and the State of
New Jersey, on the 29th day of December, 1997.
MEDALLION CALIFORNIA
PROPERTIES CO.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman and Director
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, Secretary December 29, 1997
- ----------------------------------------------------- and Director (Principal
Henry A. Jurand Financial Officer and
Principal Accounting
Officer)
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-14
<PAGE> 128
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Edison and the State of
New Jersey, on the 29th day of December, 1997.
MEDALLION GAS SERVICES, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President and Secretary
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President and Director
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, Secretary December 29, 1997
- ----------------------------------------------------- and Director (Principal
Henry A. Jurand Financial Officer and
Principal Accounting
Officer)
* /s/ HENRY A. JURAND December 29, 1997
- -----------------------------------------------------
Henry A. Jurand
Attorney-in-Fact
</TABLE>
II-15
<PAGE> 129
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement
4.3* -- Form of Indenture
5* -- Opinion of Mayor, Day, Caldwell & Keeton, L.L.P.
23.1* -- Consent of Arthur Andersen LLP
23.2* -- Consent of Mayor, Day, Caldwell & Keeton, L.L.P.
(included in Exhibit 5)
23.3* -- Consent of Ryder Scott Company
23.4* -- Consent of R.A. Lenser and Associates, Inc.
23.5* -- Consent of H.J. Gruy and Associates, Inc.
23.6* -- Consent of Netherland, Sewell and Associates, Inc.
25.1* -- Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 on Form T-1 of State Street
Bank and Trust Company
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 1.1
$125,000,000
KCS ENERGY, INC.
% Senior Subordinated Notes due 2008
UNDERWRITING AGREEMENT
________, 1998
SALOMON BROTHERS INC
PRUDENTIAL SECURITIES INC.
CIBC OPPENHEIMER CORP.
JEFFERIES AND COMPANY, INC.
MORGAN KEEGAN & COMPANY, INC.
As Representatives of the Several Underwriters
c/o SALOMON BROTHERS INC
388 Greenwich Street
New York, New York 10013
Dear Sirs:
KCS Energy, Inc., a Delaware corporation (the "Company"), proposes,
upon the terms and conditions set forth herein, to issue and sell $125,000,000
aggregate principal amount of its % Senior Subordinated Notes due 2008 (the
"Notes") to the several Underwriters named in Schedule I hereto (the
"Underwriters"). The Notes will be issued pursuant to the provisions of an
Indenture to be dated as of , 1998 (the "Indenture"),
between the Company, the Guarantors (as defined herein) and State Street Bank
and Trust Company, as Trustee (the "Trustee").
Initially, the Notes will be guaranteed (the "Guarantees" and,
together with the Notes, the "Securities") on a senior unsecured basis by
Enercorp Gas Marketing, Inc., KCS Resources, Inc., KCS Michigan Resources,
Inc., KCS Pipeline Systems, Inc., KCS Energy Marketing, Inc., KCS Energy
Services, Inc., KCS Medallion Resources Inc., National Enerdrill Corporation,
Proliq, Inc. Medallion California Properties Co. and Medallion Gas Services,
Inc. (collectively, the "Guarantors" and, together with the Company, the
"Issuers").
The Issuers wish to confirm as follows their agreement with you (the
"Representatives") and the other several Underwriters on whose behalf you are
acting, in connection with the several purchases of the Notes by the
Underwriters.
<PAGE> 2
1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-3 under the Act
(the "registration statement"), including a prospectus subject to completion
relating to the Notes. The term "Registration Statement" as used in this
Agreement means the registration statement (including all financial schedules
and exhibits), as amended at the time it becomes effective, or, if the
registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed and must
be declared effective before the offering of the Notes may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. The term "Prospectus"
as used in this Agreement means the prospectus in the form included in the
Registration Statement, or, if the prospectus included in the Registration
Statement omits information in reliance on Rule 430A under the Act and such
information is included in a prospectus filed with the Commission pursuant to
Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement
means the prospectus in the form included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in the
prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, and as
such prospectus shall have been amended from time to time prior to the date of
the Prospectus. Any reference in this Agreement to the registration statement,
the Registration Statement, any Prepricing Prospectus or the Prospectus shall
be deemed to refer to and include the documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the Act, as of the date of the
registration statement, the Registration Statement, such Prepricing Prospectus
or the Prospectus, as the case may be, and any reference to any amendment or
supplement to the registration statement, the Registration Statement, any
Prepricing Prospectus or the Prospectus shall be deemed to refer to and include
any documents filed after such date under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") which, upon filing, are incorporated by
reference therein, as required by paragraph (b) of Item 12 of Form S-3. As
used herein, the term "Incorporated Documents" means the documents which at the
time are incorporated by reference in the registration statement, the
Registration Statement, any Prepricing Prospectus, the Prospectus, or any
amendment or supplement thereto.
2. Agreements to Sell and Purchase. The Issuers hereby agree,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Issuers herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not
jointly, to purchase from the Issuers, at a purchase price of % of the
principal amount thereof, the principal amount of Notes (together with the
Guarantees) set forth opposite the name of such Underwriter in Schedule I
hereto (or such principal amount of Notes increased as set forth in Section 10
hereof).
-2-
<PAGE> 3
3. Terms of Public Offering. The Issuers have been advised by
you that the Underwriters propose to make a public offering of their respective
portions of the Notes as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Notes upon the terms set forth in the Prospectus.
4. Delivery of the Notes and Payment Therefor. Delivery to the
Underwriters of and payment for the Notes shall be made at the office of Smith
Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New York
City time, on , 1997 (the "Closing Date"). The place of closing for
the Notes and the Closing Date may be varied by agreement between you and the
Issuers.
The Notes will be delivered to you for the accounts of the several
Underwriters against payment of the purchase price therefor by wire transfer in
same-day funds. The Notes will be evidenced by a single global security in
definitive form (the "Global Security") and/or by additional certificated
securities, and will be registered, in the case of a Global Security, in the
name of Cede & Co. as nominee of The Depository Trust Company ("DTC"), and in
the other cases, in such names and in such denominations as you shall request
prior to 9:30 A.M., New York City time, on the second business day preceding
the Closing Date. The Notes to be delivered to the Underwriters shall be made
available to you in New York City for inspection and packaging not later than
9:30 A.M., New York City time, on the business day next preceding the Closing
Date.
5. Agreements of the Issuers. The Issuers agree with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and
delivered, it is necessary for the Registration Statement or a post-effective
amendment thereto to be declared effective before the offering of the Notes may
commence, the Issuers will endeavor to cause the Registration Statement or such
post-effective amendment to become effective as soon as possible and will
advise you promptly and, if requested by you, will confirm such advice in
writing, when the Registration Statement or such post-effective amendment has
become effective.
(b) The Issuers will advise you promptly and, if
requested by you, will confirm such advice in writing: (i) of any request by
the Commission for amendment of or a supplement to the Registration Statement,
any Prepricing Prospectus or the Prospectus or for additional information; (ii)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the suspension of
qualification of the Notes for offering or sale in any jurisdiction or the
initiation of any proceeding for such purpose; and (iii) within the period of
time referred to in paragraph (f) below, of any change in the Company's
condition (financial or other), business, prospects, properties, net worth or
results of operations, or of the happening of any event, which makes any
statement of a material fact made in the Registration Statement or the
Prospectus (as then amended or supplemented) untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectus (as then amended or supplemented) in order to state a material fact
required by the Act or the regulations thereunder to be stated therein or
necessary in order to make the statements therein not misleading, or of the
necessity to amend or
-3-
<PAGE> 4
supplement the Prospectus (as then amended or supplemented) to comply with the
Act or any other law. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Issuers will
make every reasonable effort to obtain the withdrawal of such order at the
earliest possible time.
(c) The Issuers will furnish to you, without charge (i)
six signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements and
all exhibits to the registration statement, (ii) such number of conformed
copies of the registration statement as originally filed and of each amendment
thereto, but without exhibits, as you may request, (iii) such number of copies
of the Indenture and of the Incorporated Documents, without exhibits, as you
may request, and (iv) six copies of the exhibits to the Incorporated Documents.
(d) The Issuers will not file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus
or, prior to the end of the period of time referred to in the first sentence in
subsection (f) below, file any document which, upon filing becomes an
Incorporated Document, of which you shall not previously have been advised or
to which, after you shall have received a copy of the document proposed to be
filed, you shall reasonably object.
(e) Prior to the execution and delivery of this
Agreement, the Issuers have delivered to you, without charge, in such
quantities as you have requested, copies of each form of the Prepricing
Prospectus. The Issuers consent to the use, in accordance with the provisions
of the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Notes are offered by the several Underwriters and by dealers, prior
to the date of the Prospectus, of each Prepricing Prospectus so furnished by
the Issuers.
(f) As soon after the execution and delivery of this
Agreement as possible and thereafter from time to time for such period as in
the opinion of counsel for the Underwriters a prospectus is required by the Act
to be delivered in connection with sales by any Underwriter or dealer, the
Issuers will expeditiously deliver to each Underwriter and each dealer, without
charge, as many copies of the Prospectus (and of any amendment or supplement
thereto) as you may request. The Issuers consent to the use of the Prospectus
(and of any amendment or supplement thereto) in accordance with the provisions
of the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Notes are offered by the several Underwriters and by all dealers to
whom Notes may be sold, both in connection with the offering and sale of the
Notes and for such period of time thereafter as the Prospectus is required by
the Act to be delivered in connection with sales by any Underwriter or dealer.
If during such period of time any event shall occur that in the judgment of the
Issuers or in the opinion of counsel for the Underwriters is required to be set
forth in the Prospectus (as then amended or supplemented) or should be set
forth therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
to supplement or amend the Prospectus (or to file under the Exchange Act any
document which, upon filing, becomes an Incorporated Document) in order to
comply with the Act or any other law, the Issuers will forthwith prepare and,
subject to the provisions of paragraph (d) above, file with the Commission an
appropriate supplement or amendment thereto (or to such
-4-
<PAGE> 5
document), and will expeditiously furnish to the Underwriters and dealers a
reasonable number of copies thereof. In the event that the Issuers and you, as
Representatives of the several Underwriters, agree that the Prospectus should
be amended or supplemented, the Issuers, if requested by you, will promptly
issue a press release announcing or disclosing the matters to be covered by the
proposed amendment or supplement.
(g) The Issuers will cooperate with you and with counsel
for the Underwriters in connection with the registration or qualification of
the Notes for offering and sale by the several Underwriters and by dealers
under the securities or Blue Sky laws of such jurisdictions as you may
designate and will file such consents to service of process or other documents
necessary or appropriate in order to effect such registration or qualification;
provided that in no event shall the Issuers be obligated to qualify to do
business in any jurisdiction where they are not now so qualified or to take any
action which would subject them to service of process in suits, other than
those arising out of the offering or sale of the Notes, in any jurisdiction
where they are not now so subject.
(h) The Company will make generally available to its
security holders a consolidated earnings statement, which need not be audited,
covering a twelve-month period commencing after the effective date of the
Registration Statement and ending not later than 15 months thereafter, as soon
as practicable after the end of such period, which consolidated earnings
statement shall satisfy the provisions of Section ll(a) of the Act.
(i) So long as any of the Notes are outstanding, the
Issuers will furnish to you (i) as soon as available, a copy of each report of
the Company mailed to stockholders or filed with the Commission, and (ii) from
time to time such other information concerning the Company as you may request.
(j) If this Agreement shall terminate or shall be
terminated after execution pursuant to any provision hereof (otherwise than
pursuant to the second paragraph of Section 10 hereof or by notice given by you
terminating this Agreement pursuant to Section 10 or Section 11 hereof) or if
this Agreement shall be terminated by the Underwriters because of any failure
or refusal on the part of the Issuers to comply with the terms or fulfill any
of the conditions of this Agreement, the Issuers agree to reimburse the
Representatives for all out-of-pocket expenses (including fees and expenses of
counsel for the Underwriters) incurred by you in connection herewith.
(k) The Issuers will apply the net proceeds from the sale
of the Notes substantially in accordance with the description set forth in the
Prospectus.
(l) If Rule 430A of the Act is employed, the Issuers will
timely file the Prospectus pursuant to Rule 424(b) under the Act and will
advise you of the time and manner of such filing.
(m) Except as provided in this Agreement, the Company
will not sell, contract to sell or otherwise dispose of any Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
grant any options or warrants to purchase Common Stock, for
-5-
<PAGE> 6
a period of 90 days after the date of the Prospectus, without the prior written
consent of Smith Barney Inc.; provided, however, that the Company may issue and
sell common stock pursuant to any employee stock option or other benefit or
incentive plans maintained for the Company's officers, directors or employees
in effect as of the date of this Agreement, and the Company may issue up to
870,000 shares of Common Stock upon exercise of warrants issued in the
Medallion Acquisition (as defined in the Registration Statement).
(n) The Company has furnished or will furnish to you
"lock-up" letters, in form and substance satisfactory to you, signed by each of
its current officers and directors and each of its stockholders designated by
you.
(o) Except as stated in this Agreement and in the
Prepricing Prospectus and Prospectus, the Issuers have not taken, nor will they
take, directly or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation of the price of
the Notes to facilitate the sale or resale of the Notes.
(p) The Company will use its best efforts: to have the
Notes listed on the New York Stock Exchange concurrently with the effectiveness
of the registration statement.
6. Representations and Warranties of the Issuers. The Issuers,
jointly and severally, represent and warrant to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act. The
Commission has not issued any order preventing or suspending the use of any
Prepricing Prospectus.
(b) The Company and the transactions contemplated by this
Agreement meet the requirements for using Form S-3 under the Act. The
registration statement in the form in which it became or becomes effective and
also in such form as it may be when any post-effective amendment thereto shall
become effective and the prospectus and any supplement or amendment thereto
when filed with the Commission under Rule 424(b) under the Act, complied or
will comply in all material respects with the provisions of the Act and will
not at any such times contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, except that this representation and warranty
does not apply to statements in or omissions from the registration statement or
the prospectus made in reliance upon and in conformity with (i) information
relating to any Underwriter furnished to the Company in writing by or on behalf
of any Underwriter through you expressly for use therein, or (ii) the Trustee's
Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture
Act of 1939, as amended (the "1939 Act").
(c) The Incorporated Documents heretofore filed, when
they were filed (or, if any amendment with respect to any such document was
filed, when such amendment was filed), conformed in all material respects with
the requirements of the Exchange Act and the rules and
-6-
<PAGE> 7
regulations thereunder, any further Incorporated Documents so filed will, when
they are filed, conform in all material respects with the requirements of the
Exchange Act and the rules and regulations thereunder; no such document when it
was filed (or, if an amendment with respect to any such document was filed,
when such amendment was filed), contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and no such
further document, when it is filed, will contain an untrue statement of a
material fact or will omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
(d) The Indenture has been duly and validly authorized
and, upon its execution and delivery by each of the Issuers and assuming due
execution and delivery by the Trustee, will be a valid and binding agreement of
each of the Issuers, enforceable in accordance with its terms, except as
enforcement thereof may be limited by bankruptcy, insolvency or other similar
laws affecting creditors' rights generally, and has been (or will have been)
duly qualified under the 1939 Act and conforms to the description thereof in
the Registration Statement and the Prospectus.
(e) The Notes and Guarantees have been duly authorized by
the Company and each of the Guarantors, respectively, and, when executed by the
Company and each of the Guarantors, respectively, and, in the case of the
Notes, authenticated by the Trustee in accordance with the Indenture and
delivered to you against payment therefor in accordance with the terms hereof,
will have been validly issued and delivered, and will constitute valid and
binding obligations of the Company and each of the Guarantors, respectively,
entitled to the benefits of the Indenture and enforceable in accordance with
their terms, except as enforcement thereof may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally, and the Notes will conform to the description thereof in the
Registration Statement and the Prospectus.
(f) All the outstanding shares of capital stock of the
Company have been duly authorized and validly issued, are fully paid and
nonassessable and are free of any preemptive or similar rights.
(g) The Company is a corporation duly organized and
validly existing in good standing under the laws of the State of Delaware with
full corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business and is
in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse
Effect").
(h) All the Company's subsidiaries (collectively, the
"Subsidiaries") are listed in an exhibit to the Company's Annual Report on Form
10-K which is incorporated by reference into the Registration Statement. Each
Subsidiary is a corporation duly organized, validly existing and
-7-
<PAGE> 8
in good standing in the jurisdiction of its incorporation, with full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus, and is
duly registered and qualified to conduct its business and is in good standing
in each jurisdiction or place where the nature of its properties or the conduct
of its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on
the condition (financial or other), business, properties, net worth or results
of operations of such Subsidiary; all the outstanding shares of capital stock
of each of the Subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable, and are owned by the Company directly, or
indirectly through one of the other Subsidiaries, free and clear of any lien,
adverse claim, security interest, equity or other encumbrance, except as
described in the Registration Statement and except for restrictions on
transferability imposed by the Act or applicable state securities or Blue Sky
laws.
(i) There are no legal or governmental proceedings
pending or, to the knowledge of the Company, threatened, against the Company or
any of the Subsidiaries, or to which the Company or any of the Subsidiaries, or
to which any of their respective properties is subject, that are required to be
described in the Registration Statement or the Prospectus but are not described
as required, and there are no agreements, contracts, indentures, leases or
other instruments that are required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement or any Incorporated Document that are not described or filed as
required by the Act or the Exchange Act.
(j) Neither the Company nor any of the Subsidiaries is in
violation of its certificate or articles of incorporation or by-laws, or other
organizational documents, or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries or of any decree of any court or governmental agency or body
having jurisdiction over the Company or any of the Subsidiaries, except where
any such violation or violations in the aggregate would not have a Material
Adverse Effect, or in default in any material respect in the performance of any
obligation, agreement or condition contained in any bond, debenture, note or
any other evidence of indebtedness or in any material agreement, indenture,
lease or other instrument to which the Company or any of the Subsidiaries is a
party or by which any of them or any of their respective properties may be
bound, except where such default would not have a Material Adverse Effect.
(k) Neither the issuance and sale of the Notes, the
execution, delivery or performance of this Agreement or the Indenture by the
Issuers, nor the consummation by the Issuers of the transactions contemplated
hereby and thereby (i) requires any consent, approval, authorization or other
order of or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
such as may be required for the registration of the Notes under the Act and the
Exchange Act, qualification of the Indenture under the 1939 Act, and compliance
with the securities or Blue Sky laws of various jurisdictions, all of which
have been or will be effected in accordance with this Agreement) or conflicts
or will
-8-
<PAGE> 9
conflict with or constitutes or will constitute a breach of, or a default
under, the certificate or articles of incorporation or bylaws, or other
organizational documents, of the Company or any of the Subsidiaries or (ii)
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, any material agreement, indenture, lease or other
instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or any of their respective properties may be bound, or (iii)
violates or will violate in any material respect any statute, law, regulation
or filing or judgment, injunction, order or decree applicable to the Company or
any of the Subsidiaries or any of their respective properties, or (iv) will
result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of the Subsidiaries pursuant to
the terms of any agreement or instrument to which any of them is a party or by
which any of them may be bound or to which any of the property or assets of any
of them is subject.
(l) The accountants, Arthur Andersen LLP, who have
certified or shall certify the financial statements included or incorporated by
reference in the Registration Statement and the Prospectus (or any amendment or
supplement thereto) are independent public accountants as required by the Act.
(m) The consolidated financial statements, together with
related schedules and notes, included or incorporated by reference in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), present fairly the consolidated financial position, results of
operations and changes in financial position of the Company and the
Subsidiaries on the basis stated in the Registration Statement at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods involved, except as disclosed therein; and the other financial and
statistical information and data included or incorporated by reference in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented and, to the extent such information is
derived from the financial books and records of the Company, are prepared on a
basis consistent with such financial statements and the books and records of
the Company and the Subsidiaries.
(n) The execution and delivery of, and the performance by
each of the Company and the Guarantors of its obligations under, this Agreement
have been duly and validly authorized by each of the Company and the
Guarantors, and this Agreement has been duly executed and delivered by the
Company and the Guarantors and constitutes the valid and legally binding
agreement of the Company and the Guarantors, enforceable against each of the
Company and the Guarantors in accordance with its terms, except as rights to
indemnity and contribution hereunder may be limited by federal or state
securities laws and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally and subject to the applicability of
general principles of equity.
(o) Except as disclosed in the Registration Statement and
the Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the
-9-
<PAGE> 10
capital stock, or material increase in the short-term debt or long-term debt,
of the Company or any of the Subsidiaries, or any material adverse change, or
any development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the condition (financial or other),
business, net worth or results of operations of the Company and the
Subsidiaries taken as a whole.
(p) Each of the Company and the Subsidiaries has good and
indefeasible title to all of its real property (and good and marketable title
to all personal property) described in the Prospectus as being owned by it,
free and clear of all liens, claims, security interests or other encumbrances
except such as are described in the Registration Statement and the Prospectus
or in a document filed as an exhibit to the Registration Statement or except
such as would not have a Material Adverse Effect and all the property described
in the Prospectus as being held under lease by each of the Company and the
Subsidiaries is held by it under valid, subsisting and enforceable leases,
except such as would not have a Material Adverse Effect.
(q) The Company has not distributed and, prior to the
later to occur of (i) the Closing Date and (ii) completion of the distribution
of the Notes, will not distribute any offering material in connection with the
offering and sale of the Notes other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the Act.
(r) The Company and each of the Subsidiaries has such
permits, licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties and
to conduct its business in the manner described in the Prospectus, subject to
such qualifications as may be set forth in the Prospectus except to the extent
the failure to have any such permits would not have a Material Adverse Effect;
the Company and each of the Subsidiaries has fulfilled and performed all its
material obligations with respect to such permits and no event has occurred
which allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the rights
of the holder of any such permit, except to the extent that any such revocation
or termination would not have a Material Adverse Effect, and subject in each
case to such qualification as may be set forth in the Prospectus; and, except
as described in the Prospectus, none of such permits contains any restriction
that is materially burdensome to the Company and its Subsidiaries taken as a
whole.
(s) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(t) To the Company's knowledge, neither the Company nor
any of its Subsidiaries nor any employee or agent of the Company or any
Subsidiary has made any payment of funds of the Company or any Subsidiary or
received or retained any funds in violation of any law, rule or
-10-
<PAGE> 11
regulation, which payment, receipt or retention of funds is of a character
required to be disclosed in the Prospectus.
(u) The Company and each of the Subsidiaries have filed
all tax returns required to be filed, which returns are complete and correct,
and neither the Company nor any Subsidiary is in default in the payment of any
taxes which were payable pursuant to said returns or any assessments with
respect thereto except where the failure to file such returns and make such
payments would not have a Material Adverse Effect.
(v) Except for any rights described in the Prospectus
which have been waived, no holder of any security of the Company has any right
to require registration of shares of Common Stock or any other security of the
Company because of the filing of the registration statement or consummation of
the transactions contemplated by this Agreement.
(w) The Company and the Subsidiaries own all patents,
trademarks, trademark registrations, service marks, service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by them or any of them or necessary
for the conduct of their respective businesses, and the Company is not aware of
any claim to the contrary or any challenge by any other person to the rights of
the Company and the Subsidiaries with respect to the foregoing.
(x) The Company is not and, upon sale of the Notes to be
issued and sold thereby in accordance herewith and the application of the net
proceeds to the Company of such sale as described in the Prospectus under the
caption "Use of Proceeds," will not be an "investment company" within the
meaning of the Investment Company Act of 1940, as amended (the "1940 Act").
(y) The Company and the Subsidiaries are in compliance
with, and not subject to any liability under, the common law and all applicable
federal, state, local and foreign laws, regulations, rules, codes, ordinances,
directives, and orders relating to pollution or to protection of public or
employee health or safety or to the environment, including, without limitation,
those that relate to any Hazardous Material (as defined herein) ("Environmental
Laws"), except, in each case, where noncompliance or liability, individually or
in the aggregate, would not have a Material Adverse Effect. The term
"Hazardous Material" means any pollutant, contaminant or waste, or any
hazardous, dangerous, or toxic chemical, material, waste, substance or
constituent subject to regulation under any Environmental Law.
(z) Neither the Company nor any of its Subsidiaries is a
"holding company" or a "subsidiary company" of a "holding company" or an
"affiliate" of a "holding company," within the meaning of the Public Utility
Holding Company Act of 1935, as amended ("PUHCA").
7. Indemnification and Contribution. (a) Each of the Issuers,
jointly and severally, agrees to indemnify and hold harmless each of you and
each other Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the
-11-
<PAGE> 12
Exchange Act from and against any and all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation) arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
such Underwriter furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith; provided,
however, that the indemnification contained in this paragraph (a) with respect
to any Prepricing Prospectus shall not inure to the benefit of any Underwriter
(or to the benefit of any person controlling such Underwriter) on account of
any such loss, claim, damage, liability or expense arising from the sale of the
Notes by such Underwriter to any person if a copy of the Prospectus shall not
have been delivered or sent to such person within the time required by the Act
and the regulations thereunder, and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
Prepricing Prospectus was corrected in the Prospectus, unless such failure is
the result of the failure by the Company to comply with Section 5(f) hereof.
The foregoing indemnity agreement shall be in addition to any liability which
the Company may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Issuers, such Underwriter or such
controlling person shall promptly notify the Issuers and the Issuers shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. Such Underwriter or any such controlling person shall
have the right to employ separate counsel in any such action, suit or
proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Underwriter or such controlling
person unless (i) the Issuers have agreed in writing to pay such fees and
expenses, (ii) the Issuers have failed to assume the defense and employ
counsel, or (iii) the named parties to any such action, suit or proceeding
(including any impleaded parties) include both such Underwriter or such
controlling person and the Issuers and such Underwriter or such controlling
person shall have been advised by its counsel that representation of such
indemnified party and the Issuers by the same counsel would be inappropriate
under applicable standards of professional conduct (whether or not such
representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the Issuers shall not
have the right to assume the defense of such action, suit or proceeding on
behalf of such Underwriter or such controlling person). It is understood,
however, that the Issuers shall, in connection with any one such action, suit
or proceeding or separate but substantially similar or related actions, suits
or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
only one separate firm of attorneys (in addition to any local counsel) at any
time for all such Underwriters and controlling persons not having actual or
potential differing interests with you or among themselves, which firm shall be
designated in writing by Smith Barney Inc., and that all such fees and expenses
shall be reimbursed as they are incurred. The Issuers shall
-12-
<PAGE> 13
not be liable for any settlement of any such action, suit or proceeding
effected without its written consent, but if settled with such written consent,
or if there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Issuers agree to indemnify and hold harmless any Underwriter,
to the extent provided in the preceding paragraph, and any such controlling
person from and against any loss, claim, damage, liability or expense by reason
of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Issuers, their directors, their officers who
sign the Registration Statement, and any person who controls an Issuer within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the
same extent as the foregoing indemnity from the Issuers to each Underwriter,
but only with respect to information relating to such Underwriter furnished in
writing by or on behalf of such Underwriter through you expressly for use in
the Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against the Issuers, any of their directors, any such officer, or any
such controlling person, based on the Registration Statement, the Prospectus or
any Prepricing Prospectus, or any amendment or supplement thereto, and in
respect of which indemnity may be sought against any Underwriter pursuant to
this paragraph (c), such Underwriter shall have the rights and duties given to
the Issuers by paragraph (b) above (except that if the Issuers shall have
assumed the defense thereof such Underwriter shall not be required to do so,
but may employ separate counsel therein and participate in the defense thereof,
but the fees and expenses of such counsel shall be at such Underwriter's
expense), and the Issuers, their directors, any such officer, and any such
controlling person, shall have the rights and duties given to the Underwriters
by paragraph (b) above. The foregoing indemnity agreement shall be in addition
to any liability which the Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Issuers on the one hand and the Underwriters on the other hand from the
offering of the Notes, or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Issuers on the one hand and the Underwriters on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Issuers on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Issuers bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Issuers
on the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the
-13-
<PAGE> 14
Issuers on the one hand or by the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(e) The Issuers and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined
by a pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (d) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price of the Notes underwritten by it and distributed to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to
this Section 7 are several in proportion to the respective principal amounts of
Notes set forth opposite their names in Schedule I hereto (or such principal
amounts of Notes increased as set forth in Section 10 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Issuers set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Issuers, their respective directors or officers or any
person controlling the Issuers, (ii) acceptance of any Notes and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor
to any Underwriter or any person controlling any Underwriter, or to an Issuer,
their respective directors or officers, or any person controlling an Issuer,
shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 7.
8. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Notes hereunder are subject to
the following conditions:
-14-
<PAGE> 15
(a) If, at the time this Agreement is executed and
delivered, it is necessary for the registration statement or a post-effective
amendment thereto to be declared effective before the offering of the Notes may
commence, the registration statement or such post-effective amendment shall
have become effective not later than 5:30 P.M., New York City time, on the date
hereof, or at such later date and time as shall be consented to in writing by
you, and all filings, if any, required by Rules 424 and 430A under the Act
shall be timely made; no stop order suspending the effectiveness of the
registration statement shall have been issued and no proceeding for that
purpose shall have been instituted or, to the knowledge of the Issuers or any
Underwriter, threatened by the Commission, and any request of the Commission
for additional information (to be included in the registration statement or the
prospectus or otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement,
there shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, properties, net worth, or results of operations of the Company or the
Subsidiaries not contemplated by the Prospectus, which in your opinion, as
Representatives of the several Underwriters, would materially adversely affect
the market for the Notes, or (ii) any event or development relating to or
involving the Company or any officer or director of the Company which makes any
statement made in the Prospectus materially untrue or which, in the opinion of
the Company and its counsel or the Underwriters and their counsel, requires the
making of any addition to or change in the Prospectus in order to state a
material fact required by the Act or any other law to be stated therein or
necessary in order to make the statements therein not misleading, if amending
or supplementing the Prospectus to reflect such event or development would, in
your opinion, as Representatives of the several Underwriters, materially
adversely affect the market for the Notes.
(c) You shall have received on the Closing Date, an
opinion of Mayor, Day, Caldwell & Keeton, L.L.P., counsel for the Company,
dated the Closing Date and addressed to you, as Representatives of the several
Underwriters, to the effect that:
(i) The Company is a corporation duly
incorporated and validly existing in good standing under the laws of the State
of Delaware with full corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), and is
duly registered and qualified to conduct its business and is in good standing
in each jurisdiction or place where the nature of its properties or the conduct
of its business requires such registration or qualification, except where the
failure so to register or qualify does not have a Material Adverse Effect;
(ii) Each Guarantor is a corporation duly
organized and validly existing in good standing under the laws of the
jurisdiction of its organization, with full corporate power and authority to
own, lease, and operate its properties and to conduct its business as described
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto); and all the outstanding shares of capital stock of each of
the Guarantors have been duly authorized and validly issued, are fully paid and
nonassessable, and are owned by the Company directly, or indirectly
-15-
<PAGE> 16
through one of the other Subsidiaries, free and clear of any perfected security
interest, or, to the best knowledge of such counsel after reasonable inquiry,
any other security interest, lien, adverse claim, equity or other encumbrance;
(iii) The authorized and outstanding capital stock
of the Company is as set forth under the caption "Capitalization" in the
Prospectus;
(iv) All the shares of capital stock of the
Company outstanding prior to the issuance of the Notes have been duly
authorized and validly issued, and are fully paid and nonassessable;
(v) The Company and the Guarantors each have
corporate power and authority to enter into this Agreement and to issue, sell
and deliver the Notes and the Guaranties, as the case may be, to the
Underwriters as provided herein, and this Agreement has been duly authorized,
executed and delivered by the Company and each of the Guarantors, and is a
valid, legal and binding agreement of the Company and the Guarantors,
enforceable against the Company and the Guarantors in accordance with its
terms, except as enforcement of rights to indemnity and contribution hereunder
may be limited by Federal or state securities laws or principles of public
policy and except as the enforcement hereof may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting the enforcement of
creditors' rights generally and subject to the applicability of general
principles of equity;
(vi) The Indenture has been duly and validly
authorized, executed and delivered by the Issuers and, assuming due execution
and delivery by the Trustee, is a valid and binding agreement of the Issuers,
enforceable in accordance with its terms, except as enforcement thereof may be
limited by bankruptcy, insolvency or other similar laws affecting creditors'
rights generally, and has been duly qualified under the 1939 Act;
(vii) The Notes have been duly and validly
authorized and executed by the Company and, assuming due authentication of the
Notes by the Trustee, upon delivery to the Underwriters against payment
therefor in accordance with the terms hereof, will have been validly issued and
delivered, and will constitute valid and binding obligations of the Company
entitled to the benefits of the Indenture;
(viii) The Guaranties have been duly and validly
authorized by each of the Guarantors and upon delivery to the Underwriters
against payment therefor in accordance with the terms hereof, will have been
validly issued and delivered, and will constitute valid and binding obligations
of each of the Guarantors entitled to the benefits of the Indenture;
(ix) The Registration Statement and all
post-effective amendments, if any, have become effective under the Act and, to
the best knowledge of such counsel after reasonable inquiry, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose are pending before or contemplated by the
Commission; and any
-16-
<PAGE> 17
required filing of the Prospectus pursuant to Rule 424(b) has been made in
accordance with Rule 424(b);
(x) Neither the Company nor any of the
Subsidiaries is in violation of its respective certificate or articles of
incorporation or bylaws, or other organizational documents, or to the knowledge
of such counsel, is in default in the performance of any material obligation,
agreement or condition contained in any bond, debenture, note or other evidence
of indebtedness, except as may be disclosed in the Prospectus;
(xi) Neither the offer, sale or delivery of the
Notes, the execution, delivery or performance of this Agreement and the
Indenture, compliance by the Issuers with the provisions hereof and thereof,
nor consummation by the Issuers of the transactions contemplated hereby and
thereby, conflicts or will conflict with or constitutes or will constitute a
breach of, or a default under, the certificate or articles of incorporation or
bylaws, or other organizational documents, of the Company or any of the
Subsidiaries or to such counsel's knowledge any material agreement, indenture,
lease or other instrument to which the Company or any of the Subsidiaries is a
party or by which any of them or any of their respective properties is bound,
or will result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of the Subsidiaries, nor will
any such action result in any violation of any existing law, regulation, ruling
(assuming compliance with all applicable state securities and Blue Sky laws),
judgment, injunction, order or decree known to such counsel after reasonable
inquiry, applicable to the Company, the Subsidiaries or any of their respective
properties;
(xii) No consent, approval, authorization or other
order of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency, or official is
required on the part of the Issuers (except as have been obtained under the
Act, the Exchange Act, the 1939 Act, and such as may be required under state
securities or Blue Sky laws governing the purchase and distribution of the
Notes) for the valid issuance and sale of the Notes to the Underwriters as
contemplated by this Agreement;
(xiii) The Registration Statement and the Prospectus
and any supplements or amendments thereto (except for the financial statements
and the notes thereto and the schedules and other financial and statistical
data or reserve information included therein, as to which such counsel need not
express any opinion) comply as to form in all material respects with the
requirements of the Act; and each of the Incorporated Documents (except for the
financial statements and the notes thereto and the schedules and other
financial and statistical data or reserve information included therein, as to
which counsel need not express any opinion) complies as to form in all material
respects with the Exchange Act and the rules and regulations of the Commission
thereunder;
(xiv) The statements under "Business and
Properties," "Regulation," "Description of the Notes" in the Registration
Statement and Prospectus, insofar as they are descriptions of contracts,
agreements or other legal documents, or refer to statements of law or legal
conclusions, are accurate and present fairly the information required to be
shown;
-17-
<PAGE> 18
(xv) To the knowledge of such counsel, (A) other
than as described or contemplated in the Prospectus (or any supplement
thereto), there are no legal or governmental proceedings pending or threatened
against the Company or any of the Subsidiaries, or to which the Company or any
of the Subsidiaries, or any of their property, is subject, which are required
to be described in the Registration Statement or Prospectus (or any amendment
or supplement thereto) and (B) there are no agreements, contracts, indentures,
leases or other instruments, that are required to be described in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto) or to be filed as an exhibit to the Registration Statement or any
Incorporated Document that are not described or filed as required, as the case
may be;
(xvi) Except as described in the Prospectus, there
is no holder of any security of the Company or any other person who has the
right, contractual or otherwise, to cause the Company to sell or otherwise
issue to them, or to permit them to underwrite the sale of, the Notes or the
right to have any Common Stock or other securities of the Company included in
the registration statement or the right, as a result of the filing of the
registration statement, to require registration under the Act of any shares of
Common Stock or other securities of the Company.
In addition, such counsel shall state that although counsel has not
undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy or
completeness of the statements in the Registration Statement, such counsel has
participated in the preparation of the Registration Statement and the
Prospectus, including review and discussion of the contents thereof (including
review and discussion of the contents of all Incorporated Documents) and
relying as to materiality to a large extent upon the analyses, judgments and
opinions of officers and other representatives of the Company, and nothing has
come to the attention of such counsel that has caused them to believe that the
Registration Statement (including the Incorporated Documents) at the time the
Registration Statement became effective, or the Prospectus, as of its date and
as of the Closing Date or the Option Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made, not misleading or
that any amendment or supplement to the Prospectus, as of its respective date,
and as of the Closing Date or the Option Closing Date, as the case may be,
contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements and the notes thereto and the schedules and other
financial and statistical data or reserve information included in the
Registration Statement or the Prospectus or any Incorporated Document).
In rendering their opinion as aforesaid, counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained by
them or the Company as to laws of any jurisdiction other than the United States
or the States of Texas and Delaware, provided that (1) each such local counsel
is acceptable to the Representatives, (2) such reliance is expressly authorized
by each opinion so relied upon and a copy of each such opinion is delivered to
the Representatives and
-18-
<PAGE> 19
is, in form and substance satisfactory to them and their counsel, and (3)
counsel shall state in their opinion that they believe that they and the
Underwriters are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of
Vinson & Elkins L.L.P., counsel for the Underwriters, dated the Closing Date
and addressed to you, as Representatives of the several Underwriters, with
respect to such matters as the Underwriters may request.
(e) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and the
Closing Date from Arthur Andersen L.L.P., independent certified public
accountants, substantially in the forms heretofore approved by you.
(f) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there
shall not have been any change in the capital stock of the Company nor any
material increase in the short-term or long-term debt of the Company (other
than in the ordinary course of business) from that set forth or contemplated in
the Registration Statement or the Prospectus (or any amendment or Supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus (or
any amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectus (or any amendment or supplement thereto),
any material adverse change in the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Company and
the Subsidiaries taken as a whole; (iv) the Company and the Subsidiaries shall
not have any liabilities or obligations, direct or contingent (whether or not
in the ordinary course of business), that are material to the Company and the
Subsidiaries, taken as a whole, other than those reflected in the Registration
Statement or the Prospectus (or any amendment or supplement thereto); and (v)
all the representations and warranties of the Company contained in this
Agreement shall be true and correct on and as of the date hereof and on and as
of the Closing Date as if made on and as of the Closing Date, and you shall
have received a certificate, dated the Closing Date and signed by the chief
executive officer and the chief financial officer of the Company (or such other
officers as are acceptable to you), to the effect set forth in this Section
8(g) and in Section 8(h) hereof.
(g) The Company shall not have failed at or prior to the Closing
Date to have performed or complied with any of its agreements herein contained
and required to be performed or complied with by it hereunder at or prior to
the Closing Date.
(h) There shall not have been any announcement by any "nationally
recognized statistical rating organization", as defined for purposes of Rule
436(g) under the Act, that (i) it is downgrading its rating assigned to any
class of securities of the Company, or (ii) it is reviewing its rating assigned
to any class of securities of the Company with a view to possible downgrading,
or with negative implications, or direction not determined.
(i) The Notes shall have been listed, subject to notice of
issuance, on the New York Stock Exchange.
-19-
<PAGE> 20
(j) The Company shall have furnished or caused to be furnished to
you such further certificates and documents as you shall have reasonably
requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are satisfactory in form
and substance to you and your counsel.
Any certificate or document signed by any officer of an Issuer and
delivered to you, as Representatives of the Underwriters, or to counsel for the
Underwriters, shall be deemed a representation and warranty by the Issuers to
each Underwriter as to the statements made therein.
9. Expenses. Whether or not the purchase and sale of the Notes
hereunder is consummated or this Agreement is terminated pursuant to Section 11
hereof, the Issuers agree, jointly and severally, to pay the following costs
and expenses and all other costs and expenses incident to the performance by it
of its obligations hereunder: (i) the preparation, printing (or reproduction),
and filing with the Commission of the registration statement (including
financial statements and exhibits thereto), each Prepricing Prospectus, the
Prospectus, each amendment or supplement to any of them, this Agreement, the
Indenture and the Statement of Eligibility and Qualification of the Trustee;
(ii) the printing (or reproduction) and delivery (including postage, air
freight charges and charges for counting and packaging) of such copies of the
registration statement, each Prepricing Prospectus, the Prospectus, the
Incorporated Documents, and all amendments or supplements to any of them, as
may be reasonably requested for use in connection with the offering and sale of
the Notes; (iii) the preparation, printing (or reproduction), execution and
delivery of the Indenture and the preparation, printing, authentication,
issuance and delivery of the Notes, including any stamp taxes in connection
with the original issuance of the Notes; (iv) the printing (or reproduction)
and delivery of this Agreement, the preliminary and supplemental Blue Sky
Memoranda and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Notes; (v) the registration of
the Notes under the Exchange Act and the listing of the Notes on the New York
Stock Exchange; (vi) the registration or qualification of the Notes for offer
and sale under the securities or Blue Sky laws of the several states as
provided in Section 5(g) hereof (including the reasonable fees, expenses and
disbursements of counsel for the Underwriters relating to the preparation,
printing (or reproduction), and delivery of the preliminary and supplemental
Blue Sky Memoranda and such registration and qualification); (vii) the filing
fees and the fees and expenses of counsel for the Underwriters in connection
with any filings required to be made with the National Association of
Securities Dealers, Inc.; (viii) the fees and expenses of the Trustee; (ix)
the fees and expenses associated with obtaining ratings for the Notes from
nationally recognized statistical rating organizations; (x) the transportation
and other expenses incurred by or on behalf of Company representatives in
connection with presentations to prospective purchasers of the Notes; and (xi)
the fees and expenses of the Company's accountants and the fees and expenses of
counsel (including local and special counsel) for the Company.
10. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Notes may commence, when
notification
-20-
<PAGE> 21
of the effectiveness of the registration statement or such post-effective
amendment has been released by the Commission. Until such time as this
Agreement shall have become effective, it may be terminated by the Company, by
notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company.
If any one or more of the Underwriters shall fail or refuse to
purchase Notes which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate principal amount of Notes which such defaulting
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate principal amount of Notes which the
Underwriters are obligated to purchase on the Closing Date, each non-defaulting
Underwriter shall be obligated, severally, in the proportion which the
principal amount of Notes set forth opposite its name in Schedule I hereto
bears to the aggregate principal amount of Notes set forth opposite the names
of all non-defaulting Underwriters or in such other proportion as you may
specify in accordance with Section 20 of the Master Agreement Among
Underwriters of Smith Barney Inc., to purchase the Notes which such defaulting
Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If
any one or more of the Underwriters shall fail or refuse to purchase Notes
which it or they are obligated to purchase on the Closing Date and the
aggregate principal amount of Notes with respect to which such default occurs
is more than one-tenth of the aggregate principal amount of Notes which the
Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Issuers for the purchase of such Notes by one or
more non-defaulting Underwriters or other party or parties approved by you and
the Issuers are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Underwriter
or the Issuers. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any such default of any such Underwriter under this Agreement. The
term "Underwriter" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule I hereto who, with your approval
and the approval of the Issuers, purchases Notes which a defaulting Underwriter
is obligated, but fails or refuses, to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. Termination of Agreement. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Issuers by notice to the Issuers, if prior to the Closing
Date, as the case may be, (i) trading in the Common Stock of the Company shall
be suspended or subject to any restriction or limitation not in effect on the
date of this Agreement; (ii) trading in securities generally on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall
have been suspended or materially limited, (iii) a general moratorium on
commercial banking activities in New York or New Jersey shall have been
declared by either federal or state authorities, or (iv) there shall have
occurred any outbreak or escalation of hostilities or other international or
domestic calamity, crisis or change in political,
-21-
<PAGE> 22
financial or economic conditions, the effect of which on the financial markets
of the United States is such as to make it, in your judgment, impracticable or
inadvisable to commence or continue the offering of the Notes on the terms set
forth on the cover page of the Prospectus or to enforce contracts for the
resale of the Notes by the Underwriters.
Notice of such termination may be given by telegram, telecopy or
telephone and shall be subsequently confirmed by letter.
12. Information Furnished by the Underwriters. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside cover page, and the statements in the first, third and fourth paragraphs
under the caption "Underwriting" in any Prepricing Prospectus and in the
Prospectus, constitute the only information furnished by or on behalf of the
Underwriters through you as such information is referred to in Sections 6(b)
and 7 hereof.
13. Miscellaneous. Except as otherwise provided in Sections 5, 10
and 11 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Issuers, at the office of
the Company at 379 Thornall Street, Edison, New Jersey 08837, Attention: James
W. Christmas, Chief Executive Officer; or (ii) if to you, as Representatives of
the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New
York, New York 10013, Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Issuers, their respective directors and officers, and
the other controlling persons referred to in Section 7 hereof and their
respective successors and assigns, to the extent provided herein, and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Underwriter of any of the
Notes in his status as such purchaser.
14. Applicable Law; Counterparts. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
-22-
<PAGE> 23
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
KCS ENERGY, INC.
ENERCORP GAS MARKETING, INC.
KCS RESOURCES, INC.
KCS MICHIGAN RESOURCES, INC.
KCS PIPELINE SYSTEMS, INC.
KCS ENERGY MARKETING, INC.
KCS ENERGY SERVICES, INC.
KCS MEDALLION RESOURCES, INC.
NATIONAL ENERDRILL CORPORATION
PROLIQ, INC.
MEDALLION CALIFORNIA PROPERTIES CO.
MEDALLION GAS SERVICES, INC.
By:
----------------------------------
Name: Henry A. Jurand
Title: Vice President
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I hereto.
SALOMON BROTHERS INC
PRUDENTIAL SECURITIES INC.
CIBC OPPENHEIMER SECURITIES CORP.
JEFFERIES AND COMPANY, INC.
MORGAN KEEGAN & COMPANY, INC.
As Representatives of the Several Underwriters
By: SALOMON BROTHERS INC
By:
---------------------------
Managing Director
-23-
<PAGE> 24
SCHEDULE I
KCS ENERGY, INC.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF
UNDERWRITER NOTES
- ----------------------------------------------------------------------------- -------------------
<S> <C>
Salomon Brothers Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prudential Securities Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
CIBC Oppenheimer Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jefferies and Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . .
Morgan Keegan & Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,000,000
============
</TABLE>
-24-
<PAGE> 1
EXHIBIT 4.3
- --------------------------------------------------------------------------------
KCS ENERGY, INC.,
SUBSIDIARY GUARANTORS
NAMED HEREIN
and
STATE STREET BANK AND TRUST COMPANY
Trustee
_________________________
INDENTURE
Dated as of January 15, 1998
_________________________
$125,000,000
____% Senior Subordinated Notes due 2008
- --------------------------------------------------------------------------------
<PAGE> 2
Reconciliation and Tie between Trust Indenture Act
of 1939 and Indenture, dated as of January 15, 1998
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
<S> <C> <C>
Section 310 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7,6.8, 6.9
Section 311 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12
Section 312 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
Section 313 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2
Section 314 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8(a)
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1
Section 315 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1
Section 316 (a) (last
sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1("Outstanding")
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2,5.12
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.13
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.3(d)
Section 317 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3
Section 318 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10(b)
</TABLE>
Note: This reconciliation and tie shall not, for any purpose,
be deemed to be a part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
<S> <C> <C>
Section 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.2 Other Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 1.3 Incorporation by Reference of Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . 23
Section 1.4 Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE II
SECURITY FORMS
Section 2.1 Forms Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 2.2 Form of Face of Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 2.3 Form of Reverse of Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 2.4 Form of Notation Relating to Subsidiary Guarantee . . . . . . . . . . . . . . . . . . . . . 30
Section 2.5 Form of Trustee's Certificate of Authentication . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE III
THE SECURITIES
Section 3.1 Title and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 3.2 Denominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 3.3 Execution, Authentication, Delivery and Dating . . . . . . . . . . . . . . . . . . . . . . 34
Section 3.4 Temporary Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 3.5 Registration of Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 3.6 Book-Entry Provisions for Global Securities . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 3.7 Mutilated, Destroyed, Lost and Stolen Securities . . . . . . . . . . . . . . . . . . . . . 37
Section 3.8 Payment of Interest; Interest Rights Preserved . . . . . . . . . . . . . . . . . . . . . . 38
Section 3.9 Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 3.10 Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 3.11 Computation of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE IV
SATISFACTION AND DISCHARGE
Section 4.1 Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 4.2 Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
</TABLE>
i
<PAGE> 4
<TABLE>
ARTICLE V
REMEDIES
<S> <C> <C>
Section 5.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 5.2 Acceleration of Maturity; Rescission and Annulment . . . . . . . . . . . . . . . . . . . . 43
Section 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee . . . . . . . . . . . . . . 45
Section 5.4 Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 5.5 Trustee May Enforce Claims Without Possession of Securities . . . . . . . . . . . . . . . . 46
Section 5.6 Application of Money Collected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 5.7 Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 5.8 Unconditional Right of Holders to Receive Principal,
Premium and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 5.9 Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 5.10 Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 5.11 Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 5.12 Control by Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 5.13 Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 5.14 Waiver of Stay, Extension or Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 49
ARTICLE VI
THE TRUSTEE
Section 6.1 Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 6.2 Certain Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 6.3 Trustee Not Responsible for Recitals or Issuance of Securities . . . . . . . . . . . . . . 51
Section 6.4 May Hold Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 6.5 Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 6.6 Compensation and Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 6.7 Corporate Trustee Required; Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 6.8 Conflicting Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 6.9 Resignation and Removal; Appointment of Successor . . . . . . . . . . . . . . . . . . . . . 53
Section 6.10 Acceptance of Appointment by Successor . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 6.11 Merger, Conversion, Consolidation or Succession to Business . . . . . . . . . . . . . . . . 55
Section 6.12 Preferential Collection of Claims Against Company . . . . . . . . . . . . . . . . . . . . . 55
Section 6.13 Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ARTICLE VII
</TABLE>
ii
<PAGE> 5
<TABLE>
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
<S> <C> <C>
Section 7.1 Holders' Lists; Holder Communications;
Disclosures Respecting Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 7.2 Reports By Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 7.3 Reports by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ARTICLE VIII
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
Section 8.1 Company May Consolidate, etc., Only on Certain Terms . . . . . . . . . . . . . . . . . . . 57
Section 8.2 Successor Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
ARTICLE IX
SUPPLEMENTAL INDENTURES
Section 9.1 Supplemental Indentures Without Consent of Holders . . . . . . . . . . . . . . . . . . . . 59
Section 9.2 Supplemental Indentures with Consent of Holders . . . . . . . . . . . . . . . . . . . . . . 60
Section 9.3 Execution of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 9.4 Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 9.5 Conformity with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 9.6 Reference in Securities to Supplemental Indentures . . . . . . . . . . . . . . . . . . . . 61
Section 9.7 Notice of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
ARTICLE X
COVENANTS
Section 10.1 Payment of Principal, Premium, if any, and Interest . . . . . . . . . . . . . . . . . . . . 62
Section 10.2 Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 10.3 Money for Security Payments to Be Held in Trust . . . . . . . . . . . . . . . . . . . . . . 63
Section 10.4 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 10.5 Payment of Taxes; Maintenance of Properties; Insurance . . . . . . . . . . . . . . . . . . 64
Section 10.6 Limitation on Other Senior Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . 65
Section 10.7 Limitation on Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 10.8 Statement by Officers as to Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 10.9 Provision of Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 10.10 Limitation on Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 10.11 Limitation on Guarantees by Subsidiary Guarantors . . . . . . . . . . . . . . . . . . . . . 69
Section 10.12 Limitation on Indebtedness and Disqualified Capital Stock . . . . . . . . . . . . . . . . . 69
Section 10.13 Additional Subsidiary Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 10.14 Limitation on Issuances and Sales of Capital Stock
by Restricted Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 10.15 Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
</TABLE>
iii
<PAGE> 6
<TABLE>
<S> <C> <C>
Section 10.16 Purchase of Securities Upon Change of Control . . . . . . . . . . . . . . . . . . . . . . . 70
Section 10.17 Limitation on Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Section 10.18 Limitation on Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 10.19 Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries . . . . . . . . . . . . . . . . . . . . . . 75
Section 10.20 Waiver of Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
ARTICLE XI
REDEMPTION OF SECURITIES
Section 11.1 Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 11.2 Applicability of Article . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Section 11.3 Election to Redeem; Notice to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Section 11.4 Selection by Trustee of Securities to Be Redeemed . . . . . . . . . . . . . . . . . . . . . 77
Section 11.5 Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 11.6 Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 11.7 Securities Payable on Redemption Date. . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 11.8 Securities Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
ARTICLE XII
DEFEASANCE AND COVENANT DEFEASANCE
Section 12.1 Company's Option to Effect Defeasance or Covenant Defeasance . . . . . . . . . . . . . . . 79
Section 12.2 Defeasance and Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 12.3 Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Section 12.4 Conditions to Defeasance or Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . 80
Section 12.5 Deposited Money and U.S. Government Obligations to Be Held
in Trust; Other Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . 82
Section 12.6 Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
ARTICLE XIII
SUBSIDIARY GUARANTEES
Section 13.1 Unconditional Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Section 13.2 Subsidiary Guarantors May Consolidate, etc., on Certain Terms . . . . . . . . . . . . . . . 84
Section 13.3 Release of Subsidiary Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Section 13.4 Limitation of Subsidiary Guarantors' Liability . . . . . . . . . . . . . . . . . . . . . . 86
Section 13.5 Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Section 13.6 Execution and Delivery of Notations of Subsidiary Guarantees . . . . . . . . . . . . . . . 86
Section 13.7 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Section 13.8 Subordination of Subsidiary Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . 87
</TABLE>
iv
<PAGE> 7
ARTICLE XIV
<TABLE>
SUBORDINATION
<S> <C> <C>
Section 14.1 Agreement to Subordinate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Section 14.2 Certain Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Section 14.3 Liquidation; Dissolution; Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Section 14.4 Default on Designated Senior Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . 89
Section 14.5 Acceleration of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Section 14.6 When Distribution Must Be Paid Over. . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Section 14.7 Notice by Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Section 14.8 Subrogation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Section 14.9 Relative Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Section 14.10 Subordination May Not Be Impaired by Company. . . . . . . . . . . . . . . . . . . . . . . . 92
Section 14.11 Distribution or Notice to Representative . . . . . . . . . . . . . . . . . . . . . . . . . 92
Section 14.12 Rights of Trustee and Paying Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Section 14.13 Authorization to Effect Subordination. . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Section 14.14 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Section 14.15 No Waiver of Subordination Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . 93
ARTICLE XV
MISCELLANEOUS
Section 15.1 Compliance Certificates and Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Section 15.2 Form of Documents Delivered to Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Section 15.3 Acts of Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Section 15.4 Notices, etc. to Trustee, Company and Subsidiary Guarantors. . . . . . . . . . . . . . . . 96
Section 15.5 Notice to Holders; Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Section 15.6 Effect of Headings and Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . 97
Section 15.7 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Section 15.8 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Section 15.9 Benefits of Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Section 15.10 Governing Law; Trust Indenture Act Controls. . . . . . . . . . . . . . . . . . . . . . . . 98
Section 15.11 Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Section 15.12 No Recourse Against Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Section 15.13 Duplicate Originals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Section 15.14 No Adverse Interpretation of Other Agreements. . . . . . . . . . . . . . . . . . . . . . . 99
</TABLE>
Exhibit A - Form of Legend for Global Securities
v
<PAGE> 8
THIS INDENTURE, dated as of January 15, 1998, is between KCS ENERGY,
INC., a Delaware corporation (hereinafter called the "Company"), the SUBSIDIARY
GUARANTORS (as defined hereinafter) and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company, as Trustee (hereinafter called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of ____%
Senior Subordinated Notes due 2008 (herein called the "Securities"), of
substantially the tenor and in the aggregate principal amount hereinafter set
forth, and to provide therefor the Company has duly authorized the execution
and delivery of this Indenture.
The Company owns, directly or indirectly, all of the equity ownership
of the outstanding Voting Stock of each initial Subsidiary Guarantor, and each
initial Subsidiary Guarantor is a member of the Company's consolidated group of
companies that are engaged in related businesses. Each initial Subsidiary
Guarantor will derive direct and indirect benefit from the issuance of the
Securities; accordingly, each initial Subsidiary Guarantor has authorized its
guarantee of the Company's obligations under this Indenture and the Securities,
and to provide therefor the initial Subsidiary Guarantors have duly authorized
the execution and delivery of this Indenture.
This Indenture is subject to the provisions of the Trust Indenture Act
of 1939, as amended, that are required to be part of this Indenture and shall,
to the extent applicable, be governed by such provisions.
All things necessary have been done on the part of the Company and the
initial Subsidiary Guarantors to make the Securities, when issued and executed
by the Company and authenticated and delivered by the Trustee as herein
provided, the valid obligations of the Company, to make the Subsidiary
Guarantees, when the notations thereof on the Securities are executed by the
initial Subsidiary Guarantors, the valid obligation of the initial Subsidiary
Guarantors and to make this Indenture a valid agreement of the Company, the
initial Subsidiary Guarantors and the Trustee, in accordance with their
respective terms.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities (together with the related Subsidiary Guarantees) by the Holders
thereof, it is mutually covenanted and agreed, for the equal and proportionate
benefit of all Holders of the Securities (together with the related Subsidiary
Guarantees), as follows:
1
<PAGE> 9
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.1 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 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 from
such Person.
"Act," when used with respect to any Holder, has the meaning specified
in Section 15.3.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean
the amount by which the fair value of the Properties 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 way of 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 of any division or
line of business of the Company or any of its Restricted Subsidiaries or (c)
any other Properties 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 Property 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 (including
Capital Stock) which is governed by, and made in accordance with, the
provisions of Article VIII hereof; (ii) any transfer of Properties to an
Unrestricted Subsidiary, if
2
<PAGE> 10
permitted under Section 10.10 hereof; or (iii) any transfer of Properties
(including Capital Stock) having a Fair Market Value of less than $2,000,000.
"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 Credit Agreement dated
effective as of September 25, 1996, as amended, among KCS Resources, Inc., KCS
Pipeline Systems, Inc., KCS Michigan Resources, Inc., and KCS Energy Marketing,
Inc., as Borrowers, KCS Energy, Inc., as Guarantor, and Canadian Imperial Bank
of Commerce, New York Agency, as Agent, CIBC, Inc., as Collateral Agent, Bank
One, Texas, N.A., as Co-Agent, and NationsBank of Texas, N.A., as Co-Agent, and
(ii) that certain Credit Agreement dated as of January 2, 1997, as amended,
among KCS Medallion Resources, Inc., KCS Energy, Inc., KCS Energy Services,
Inc. and Medallion Gas Services, Inc., as Borrowers, and Canadian Imperial Bank
of Commerce, New York Agency, as Agent, and CIBC, Inc., as Collateral Agent, 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.
"Board of Directors" means, with respect to the Company, either the
board of directors of the Company or any duly authorized committee of such
board of directors, and, with respect to any Subsidiary, either the board of
directors of such Subsidiary or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
its Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee, and with respect to a Subsidiary,
a copy of a resolution certified by the Secretary or an Assistant Secretary of
such Subsidiary to have been duly adopted by its Board of Directors and to be
in full force and effect on the date of such certification, and delivered to
the Trustee.
"Borrowing Base" means, as of any date, the aggregate amount of
borrowing availability as of such date under all Bank Credit Facilities that
determine availability on the basis of a borrowing base or other asset-based
calculation.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York
or Hartford, Connecticut are authorized or obligated by law or executive order
to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents in the equity
interests (however designated) in such
3
<PAGE> 11
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 that is required to be classified and accounted for as a capital
lease obligation under GAAP, and, for the purpose of this 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 $500,000,000; (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 $5,000,000 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 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,
4
<PAGE> 12
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 of the Company and the 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 a
two-thirds 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.
"Code" shall mean the Internal Revenue Code of 1986, as amended, as
now or hereafter in effect, together with all regulations thereunder issued by
the Internal Revenue Service.
"Commission" or "SEC" means the Securities and Exchange Commission, as
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this Indenture such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties at such time.
"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.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture, until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman, its President, any Vice
President, its Treasurer or an Assistant Treasurer, and delivered to the
Trustee.
"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 on the
assumptions that (A) the Indebtedness to be incurred (and all other
Indebtedness incurred after the first day of such period
5
<PAGE> 13
of four full fiscal quarters referred to in Section 10.12(a) hereof 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 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 Section 10.12(a) hereof 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 Section 10.12(a) hereof 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 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.
"Consolidated Interest Expense" means, for any period, without
duplication, (i) the sum of (a) 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
6
<PAGE> 14
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, (b) 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, (c) 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 (d) the aggregate amount of dividends paid
(to the extent not accrued in a prior period) or accrued on Disqualified
Capital Stock or Preferred Stock of the Company and its Restricted
Subsidiaries, to the extent such Disqualified Capital Stock or Preferred Stock
is owned by Persons other than the Company or its Restricted Subsidiaries, less
(ii) to the extent included in clause (i), 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 Unrestricted Subsidiary and (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.
"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.
7
<PAGE> 15
"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).
"Corporate Trust Office" means the office of the Trustee at which at
any particular time the trust created by this Indenture is administered, which
office at the date of execution of this Indenture is located at Goodwin Square,
225 Asylum Street, Hartford, Connecticut 06103.
"Default" means any event, act or condition that is, or after notice
or passage of time or both would become, an Event of Default.
"Defaulted Interest" has the meaning specified in Section 3.8 hereof.
"Depository" means The Depository Trust Company, its nominees and
their respective successors.
"Designated Senior Indebtedness" means (i) any Senior Indebtedness
under or in respect of any of the Bank Credit Facilities and the Senior Notes
and (ii) any other Senior Indebtedness permitted under Section 10.12(a) hereof
the principal amount of which is $5,000,000 or more and, in the case of this
clause (ii), that has been designated by the Company in an Officers'
Certificate delivered to the Trustee as "Designated Senior Indebtedness."
"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 Board Resolution hereunder, 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 Securities 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 Section 10.12(a) hereof, 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
8
<PAGE> 16
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 any Restricted Subsidiary recorded as liabilities
in accordance with GAAP, together with all undertakings and obligations in
connection therewith.
"Event of Default" has the meaning specified in Section 5.1 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor act thereto.
"Fair Market Value" means the fair market value of a Property
(including shares of Capital Stock) as determined in good faith by the Board of
Directors of the Company and evidenced by a Board Resolution, which
determination shall be conclusive for purposes of this Indenture; provided,
however, that unless otherwise specified herein, the Board of Directors shall
be under no obligation to obtain any valuation or assessment from any
investment banker, appraiser or other third party.
"Federal Bankruptcy Code" means the United States Bankruptcy Code of
Title 11 of the United States Code, as amended from time to time.
"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 this Indenture.
The term "guarantee" means, as applied to any obligation, (i) a
guarantee (other than by endorsement of negotiable instruments or documents 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 Security is registered in a
Security 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
9
<PAGE> 17
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 this
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.
"Indenture" means this instrument as originally executed and as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Insolvency or Liquidation Proceeding" means, with respect to any
Person, (a) an insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or similar case or proceeding in
connection therewith, relative to such Person or its creditors, as such, or its
assets or (b) any liquidation, dissolution or other winding-up proceeding of
such Person, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy or (c) any assignment for the benefit of creditors or
any other marshaling of assets and liabilities of such Person.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Securities.
"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
10
<PAGE> 18
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 to
others or any payment for Property 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 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 other
Indebtedness incurred in compliance with Section 10.12 hereof, but only to the
extent that the stated aggregate 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.
"Maturity" means, with respect to any Security, the date on which any
principal of such Security becomes due and payable as therein or herein
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
11
<PAGE> 19
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 Property 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.
"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 Subsidiary of any
Property and as to which (a) the holders of such Indebtedness agree that they
will look solely to the Property 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.
"Officers" means, with respect to any Person, the Chief Executive
Officer, the President, any Vice President, the Chief Financial Officer and the
Treasurer of such Person.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, the President or a Vice President, and by the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary of the Company,
and delivered to the Trustee.
"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
12
<PAGE> 20
necessary, appropriate or incidental to the activities described in the
foregoing clauses (i) through (iii) of this definition.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company (or any Subsidiary Guarantor), including an employee of
the Company (or any Subsidiary Guarantor), and who shall be reasonably
acceptable to the Trustee.
"Outstanding," when used with respect to Securities, means, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or
delivered to the Trustee for cancellation;
(ii) Securities, or portions thereof, for whose payment or
redemption money in the necessary amount has been theretofore
deposited with the Trustee or any Paying Agent (other than the
Company) in trust or set aside and segregated in trust by the Company
(if the Company shall act as its own Paying Agent) for the Holders of
such Securities, provided that, if such Securities are to be redeemed,
notice of such redemption has been duly given pursuant to this
Indenture or provision therefor satisfactory to the Trustee has been
made;
(iii) Securities, except to the extent provided in Sections
12.2 and 12.3 hereof, with respect to which the Company has effected
legal defeasance or covenant defeasance as provided in Article XII
hereof; and
(iv) Securities which have been paid pursuant to Section
3.7 hereof or in exchange for or in lieu of which other Securities
have been authenticated and delivered pursuant to this Indenture,
other than any such Securities in respect of which there shall have
been presented to the Trustee proof satisfactory to it that such
securities are held by a bona fide purchaser in whose hands the
Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities have given any request, demand,
authorization, direction, consent, notice or waiver hereunder, and for the
purpose of making the calculations required by TIA Section 313, Securities
owned by the Company, any Subsidiary Guarantor or any other obligor upon the
Securities or any Affiliate of the Company, any Subsidiary Guarantor or such
other obligor shall be disregarded and deemed not to be Outstanding, except
that, in determining whether the Trustee shall be protected in making such
calculation or in relying upon any such request, demand, authorization,
direction, consent, notice or waiver, only Securities which the Trustee knows
to be so owned shall be so disregarded. Securities so owned which have been
pledged in good faith may be regarded as Outstanding if the pledgee establishes
to the satisfaction of the Trustee the pledgee's right so to act with respect
to such Securities and that the pledgee is not the Company, any Subsidiary
Guarantor or any other obligor upon the Securities or any Affiliate of the
Company, any Subsidiary Guarantor or such other obligor.
13
<PAGE> 21
"Pari Passu Indebtedness" means (i) Indebtedness of the Company that
ranks pari passu in right of payment to the Securities and (ii) Indebtedness of
any Restricted Subsidiary that ranks pari passu in right of payment to the
Subsidiary Guarantees.
"Paying Agent" means any Person (including the Company acting as
Paying Agent) authorized by the Company to pay the principal of (and premium,
if any, on) or interest on any Securities on behalf of the Company.
"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 $165,000,000 million or the Borrowing Base (the
"Maximum Credit Amount"), plus all interest and fees under such
facilities and any guarantee of any such Indebtedness;
(ii) Indebtedness under the Securities;
(iii) Indebtedness outstanding or in effect on the date of
this Indenture (and not repaid or defeased with the proceeds of the
offering of the Securities);
(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 Securities (and any
assumption of the obligations guarantees 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 $25,000,000 at any one time outstanding and
any guarantee thereof.
14
<PAGE> 22
"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 exceed $10,000,000 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 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 Section 10.17
or 10.18 hereof; (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 a Restricted Subsidiary, in each case as to debt owing to the
Company or a 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 this Indenture
(except to the extent such Liens secure Indebtedness that is repaid or
defeased with proceeds of the offering of the Securities);
(b) Liens securing the Securities or the Subsidiary
Guarantees;
(c) Liens in favor of the Company or any Restricted
Subsidiary;
(d) Liens securing Senior Indebtedness permitted under
Section 10.12(a) hereof;
(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
15
<PAGE> 23
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 and attachment 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;
(k) purchase money Liens; provided, however, that (i) the
related purchase money Indebtedness shall not be secured by any
Property of the Company or any Restricted Subsidiary other than the
Property so acquired (including, without limitation, those acquired
indirectly through the acquisition of stock or other ownership
interests) and the proceeds thereof 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
and proceeds 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 relating to such letters of credit and products and proceeds
thereof;
16
<PAGE> 24
(o) Liens encumbering Property under construction arising
from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such Property;
(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 this Indenture;
(r) Liens on, or related to, Properties 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 or services, and in the
aggregate do not materially adversely affect the value of the
Properties of the Company and the Restricted Subsidiaries, taken as a
whole, or materially impair the use of such Properties for the
purposes of which such Properties are held by the Company or any
Restricted Subsidiaries;
(w) Liens securing Non-Recourse Indebtedness; provided,
however, that the related Non-Recourse Indebtedness shall not be
secured by any Property of the Company or any Restricted Subsidiary
other than the Property acquired (including, without limitation, those
acquired indirectly through the acquisition of stock or other
ownership interests) by the Company or any Restricted Subsidiary with
the proceeds of such Non-Recourse Indebtedness; and
17
<PAGE> 25
(x) Liens resulting from the deposit of funds or
evidences of Indebtedness in trust for the purpose of defeasing
Indebtedness of the Company or any of its Restricted Subsidiaries.
Notwithstanding anything in clauses (a) through (x) of this definition, the
term "Permitted Liens" shall 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 that are subject thereto.
"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 Securities) being renewed, extended,
refinanced, refunded or repurchased is pari passu with or subordinated in right
of payment to either the Securities or the Subsidiary Guarantees, then such
Indebtedness is pari passu with or subordinated in right of payment to the
Securities 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 any premium required to
be paid in connection with such renewal, extension, refinancing, refunding or
repurchase pursuant to the terms of the Indebtedness being renewed, extended,
refinanced, refunded or repurchased or the amount of any premium reasonably
determined by the Company as necessary to accomplish such renewal, extension,
refinancing, refunding or repurchase, 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.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 3.7 hereof
18
<PAGE> 26
in exchange for a mutilated security or in lieu of a lost, destroyed or stolen
Security shall be deemed to evidence the same debt as the mutilated, lost,
destroyed or stolen Security.
"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 this 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.
"Property" means, with respect to any Person, any interest of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, including, without limitation, Capital Stock in any
other Person.
"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.
"Record Date" means a Regular Record Date or a Special Record Date.
"Redemption Date," when used with respect to any Security to be
redeemed, in whole or in part, means the date fixed for such redemption by or
pursuant to this Indenture.
"Redemption Price," when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the January 1 or July 1 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date.
"Responsible Officer," when used with respect to the Trustee, means
any officer in the Corporate Trust Office, and also means, with respect to a
particular corporate trust matter, any other officer of the Trustee to whom
such matter is referred because of his knowledge of and familiarity with the
particular subject.
"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.
19
<PAGE> 27
"Restricted Subsidiary" means any Subsidiary of the Company, whether
existing on or after the date of this Indenture, unless such Subsidiary of the
Company is an Unrestricted Subsidiary or is designated as an Unrestricted
Subsidiary pursuant to the terms of this Indenture.
"S&P" means Standard and Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
"Securities" has the meaning stated in the first recital of this
Indenture and more particularly means any Securities authenticated and
delivered under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended from
time to time, and any successor act thereto.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 3.5 hereof.
"Senior Indebtedness" means (i) Indebtedness or other obligations
under or in respect of any of the Bank Credit Facilities, (ii) Indebtedness
under or in respect of the Senior Notes, (iii) any other Indebtedness permitted
to be incurred by the Company or any Restricted Subsidiary under the terms of
Section 10.12(a) hereof, unless the instrument under which such Indebtedness is
incurred expressly provides that it is on a parity with or subordinated in
right of payment to the Securities or the Subsidiary Guarantees, as the case
may be, (iv) all interest, fees and other obligations in respect of any
Indebtedness referred to in the foregoing clauses (i) through (iii) and (v) any
amounts due to the Trustee under the Indenture as fees or indemnities.
"Senior Notes" means the 11% Senior Notes due 2003, Series B of the
Company issued in an original aggregate principal amount of $150,000,000
pursuant to the Indenture dated as of January 15, 1996 between the Company and
State Street Bank and Trust Company, as successor Trustee.
"Special Record Date" for the payment of any Defaulted Interest means
a date fixed by the Trustee pursuant to Section 3.8 hereof.
"Stated Maturity" means, when used with respect to any Indebtedness or
any installment of interest thereon, means the date specified in the instrument
evidencing or governing such Indebtedness as the fixed date an which the
principal of such Indebtedness or such installment of interest is due and
payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Subsidiary Guarantor which is expressly subordinated in right of payment to the
Securities 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
20
<PAGE> 28
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
Persons performing similar functions).
"Subsidiary Guarantee" has the meaning specified in Section 13.1
hereof.
"Subsidiary Guarantor" means (i) Enercorp Gas Marketing, Inc., a
Delaware corporation, (ii) KCS Resources, Inc., a Delaware corporation, (iii)
KCS Michigan Resources, Inc., a Delaware corporation, (iv) KCS Pipeline
Systems, Inc., a Delaware corporation, (v) KCS Energy Marketing, Inc., a New
Jersey corporation, (vi) KCS Medallion Resources, Inc., a Delaware corporation,
(vii) KCS Energy Services, Inc., a Delaware corporation, (viii) Medallion
California Properties Co., a Texas corporation, (ix) Medallion Gas Services,
Inc., an Oklahoma corporation, (x) National Enerdrill Corporation, a New Jersey
corporation, (xi) Proliq, Inc., a New Jersey corporation, (xii) each of the
Company's other Restricted Subsidiaries, if any, executing a supplemental
indenture in compliance with the provisions of Section 10.13(a) hereof and
(xiii) any Person that becomes a successor guarantor of the Securities in
compliance with the provisions of Section 13.2 hereof.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939,
as amended and in force at the date as of which this Indenture was executed,
except as provided in Section 9.5 hereof.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"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 Section 10.10 hereof; and (d) such designation shall not
result in the creation or imposition of any Lien on any of the Properties 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
Section 10.15 hereof); 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 Section 10.10 hereof, in each
case at the time of incurrence, or (y) the liability would be a
21
<PAGE> 29
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 Section 10.12(a) hereof and (iii)
if any of the Properties 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 Section 10.15 hereof.
"Vice President," when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president."
"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).
Section 1.2 Other Definitions.
<TABLE>
<CAPTION>
Defined
in Section
Term ----------
<S> ---- <C>
"Agent Members" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6
"Bankruptcy Law" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2
"Change of Control Notice" . . . . . . . . . . . . . . . . . . . . . . . . . 10.16(c)
"Change of Control Offer" . . . . . . . . . . . . . . . . . . . . . . . . . . 10.16(a)
"Change of Control Purchase Date" . . . . . . . . . . . . . . . . . . . . . . 10.16(c)
"Change of Control Purchase Price" . . . . . . . . . . . . . . . . . . . . . 10.16(a)
"Defaulted Interest" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8
"Excess Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.17(b)
"Funding Guarantor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.5
"Global Security" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1
"Net Proceeds Deficiency" . . . . . . . . . . . . . . . . . . . . . . . . . . 10.17(c)
"Net Proceeds Offer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.17(c)
"Net Proceeds Payment Date" . . . . . . . . . . . . . . . . . . . . . . . . . 10.17(c)
"Obligations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2
"Offered Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.17(c)
"Payment Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.17(c)
"Payment Blockage Notice" . . . . . . . . . . . . . . . . . . . . . . . . . . 14.4
"Payment Restriction" . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.19
"Physical Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1
"Purchase Notice" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.17(c)
"Representative" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2
"Restricted Payment" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.10(a)
"Surviving Entity" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1(a)
"Trigger Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.17(c)
"U.S. Government Obligations" . . . . . . . . . . . . . . . . . . . . . . . . 12.4(a)
</TABLE>
22
<PAGE> 30
Section 1.3 Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Securities,
"indenture security holder" means a Holder,
"indenture to be qualified" means this Indenture,
"indenture trustee" or "institutional trustee" means the
Trustee, and
"obligor" on the indenture securities means the Company or any
other obligor on the Securities.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by Commission rule
and not otherwise defined herein have the meanings assigned to them therein.
Section 1.4 Rules of Construction.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned
to them in this Article, and include the plural as well as the singular;
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP and all accounting
calculations will be determined in accordance with GAAP;
(c) the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
(d) the masculine gender includes the feminine and the neuter;
(e) a "day" means a calendar day;
23
<PAGE> 31
(f) the term "merger" includes a statutory share exchange and the
term "merged" has a correlative meaning;
(g) provisions apply to successive events and transactions; and
(h) references to agreements and other instruments include
subsequent amendments and waivers but only to the extent not prohibited by this
Indenture.
ARTICLE II
SECURITY FORMS
Section 2.1 Forms Generally.
The definitive Securities shall be printed, lithographed or engraved
on steel-engraved borders or may be produced in any other manner, all as
determined by the officers executing such Securities or notations of Subsidiary
Guarantees, as the case may be, as evidenced by their execution of such
Securities or notations of Subsidiary Guarantees, as the case may be.
Unless issued as Physical Securities, Securities (including the
notations thereon relating to the Subsidiary Guarantees and the Trustee's
certificate of authentication) shall be issued in the form of one or more
permanent global Securities substantially in the form set forth in Sections 2.2
through 2.5 hereof (each being herein called a "Global Security") deposited
with the Trustee, as custodian for the Depository, duly executed by the Company
and authenticated by the Trustee as hereinafter provided, and each shall bear
the legend set forth on Exhibit A hereto. Subject to the limitation set forth
in Section 3.1, the principal amounts of the Global Securities may be increased
or decreased from time to time by adjustments made on the records of the
Trustee, as custodian for the Depository, as hereinafter provided.
Securities (including the notations thereon relating to the Subsidiary
Guarantees and the Trustee's certificate of authentication) also may be issued
in the form of permanent certificated securities in registered form in
substantially the form set forth in Sections 2.2 through 2.5 hereto ("Physical
Securities").
The Securities, the notations thereon relating to the Subsidiary
Guarantees and the Trustee's certificate of authentication shall be in
substantially the form set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, and may have such letters, CUSIP or other numbers
or other marks of identification and such legends or endorsements placed
thereon as may be required by this Section or to comply with the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such Securities or notations of Subsidiary Guarantees, as
the case may be, as evidenced by their execution of the Securities or notations
of Subsidiary Guarantees, as the case may be. Any portion of the text of any
Security may be set forth on the reverse thereof, with an appropriate reference
thereto on the face of the Security. In addition to the requirements of Section
2.3, the Securities may also have set forth on the reverse side thereof
24
<PAGE> 32
a form of assignment and forms to elect purchase by the Company pursuant to
Section 10.16 or 10.17 hereof.
Section 2.2 Form of Face of Security.
KCS ENERGY, INC.
____% Senior Subordinated Note due 2008
No._____ $____________
CUSIP No. ___________
KCS Energy, Inc., a Delaware corporation (herein called the "Company,"
which term includes any successor Person under the Indenture hereinafter
referred to), for value received, hereby promises to pay to _________ or
registered assigns the principal sum of _________ Dollars on January 15, 2008,
at the office or agency of the Company referred to below, and to pay interest
thereon, commencing on July 15, 1998 and continuing semiannually thereafter, on
January 15 and July 15 in each year, from January ___, 1998, or from the most
recent Interest Payment Date to which interest has been paid or duly provided
for, at the rate of ____ % per annum, until the principal hereof is paid or
duly provided for, and (to the extent lawful) to pay on demand interest on any
overdue interest at the rate borne by the Securities from the date on which
such overdue interest becomes payable to the date payment of such interest has
been made or duly provided for. The interest so payable, and punctually paid
or duly provided for, on any Interest Payment Date will, as provided in such
Indenture, be paid to the Person in whose name this Security (or one or more
Predecessor Securities) is registered on the Security Register at the close of
business on the Regular Record Date for such interest, which shall be the
January 1 or July 1 (whether or not a Business Day), as the case may be, next
preceding such Interest Payment Date. Any such interest not so punctually paid
or duly provided for shall forthwith cease to be payable to the Holder on such
Regular Record Date, and such Defaulted Interest, and (to the extent lawful)
interest on such Defaulted Interest at the rate borne by the Securities, may be
paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest to be fixed by the Trustee, notice
whereof shall be given to Holders of Securities not less than 10 days prior to
such Special Record Date, or may be paid at any time in any other lawful manner
not inconsistent with the requirements of any securities exchange on which the
Securities may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in said Indenture.
Payment of the principal of (and premium, if any, on) and interest on
this Security will be made at the office or agency of the Company maintained
for that purpose in The City of New York, in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts; provided, however, that payment of interest may be
made on Physical Securities at the option of the Company on or before the due
date (i) by check mailed to the address of the Person entitled thereto as such
address shall appear on the Security Register or (ii) with respect to any
Holder owning Securities in the principal amount of $500,000
25
<PAGE> 33
or more, by wire transfer to an account maintained by the Holder located in the
United States, as specified in a written notice to the Trustee by any such
Holder requesting payment by wire transfer and specifying the account to which
transfer is requested.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the trustee referred to on the reverse hereof by manual signature, this
Security shall not be entitled to any benefit under the Indenture, or be valid
or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
KCS ENERGY, INC.
By:
------------------------------
President
Attest:
- -------------------------------
Secretary
Section 2.3 Form of Reverse of Security.
This Security is one of a duly authorized issue of securities of the
Company designated as its ____% Senior Subordinated Notes due 2008 (herein
called the "Securities"), limited (except as otherwise provided in the
Indenture referred to below) in aggregate principal amount to $125,000,000,
which may be issued under an indenture (herein called the "Indenture") dated as
of January 15, 1998 between the Company, the initial Subsidiary Guarantors
named therein and State Street Bank and Trust Company (herein called the
"Trustee," which term includes any successor trustee under the Indenture), to
which Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the respective rights, limitations of rights, duties,
obligations and immunities thereunder of the Company, the Subsidiary
Guarantors, the Trustee and the Holders of the Securities, and of the terms
upon which the Securities are, and are to be, authenticated and delivered.
The payment of principal of, premium, if any, and interest on, the
Securities and any other payment obligations of the Company in respect of the
Securities (including any obligation to repurchase the Securities) is
subordinated in certain circumstances in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Indebtedness of the
Company, whether outstanding on the date of the Indenture or thereafter
incurred.
26
<PAGE> 34
The Securities are subject to redemption, at the option of the
Company, in whole or in part, at any time on or after January 15, 2003, upon
not less than 30 or more than 60 days' notice at the following Redemption
Prices (expressed as percentages of principal amount) set forth below if
redeemed during the 12-month period beginning January 15 of the years indicated
below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------------
<S> <C>
2003 . . . . . . . . . . . . . . . . . . . . . . . . _____%
2004 . . . . . . . . . . . . . . . . . . . . . . . . _____%
2005 . . . . . . . . . . . . . . . . . . . . . . . . _____%
2006 and thereafter . . . . . . . . . . . . . . . . . 100.00%
</TABLE>
together in the case of any such redemption with accrued and unpaid interest,
if any, to the Redemption Date (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 Redemption Date), all as provided in the Indenture.
Notwithstanding the foregoing, at any time on or prior to January 15,
2001, up to $35,000,000 in aggregate principal amount of Securities may be
redeemed, at the option of the Company, upon not less than 30 or more than 60
days' notice, from the Net Cash Proceeds of a Public Equity Offering, at a
Redemption Price equal to ____% of the principal amount thereof, together with
accrued and unpaid interest to the Redemption Date, provided that at least
$90,000,000 in aggregate principal amount of Securities remains Outstanding
immediately after such redemption and that such redemption occurs within 60
days following the closing of such Public Equity Offering.
In the case of any redemption of Securities, interest installments
whose Stated Maturity is on or prior to the Redemption Date will be payable to
Holders of such Securities, or one or more Predecessor Securities, of record at
the close of business on the relevant Record Date referred to on the face
hereof. Securities (or portions thereof) for whose redemption and payment
provision is made in accordance with the Indenture shall cease to bear interest
from and after the Redemption Date. In the event of redemption or purchase of
this Security in part only, a new Security or Securities for the unredeemed or
unpurchased portion hereof shall be issued in the name of the Holder hereof
upon the cancellation hereof.
The Securities do not have the benefit of any sinking fund
obligations.
In the event of a Change of Control of the Company, and subject to
certain conditions and limitations provided in the Indenture, the Company will
be obligated to make an offer to purchase, on a Business Day not more than 60
or less than 30 days following the occurrence of a Change of Control of the
Company, all of the then Outstanding Securities at a purchase price equal to
101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the Change of Control Purchase Date, all as provided in
the Indenture.
27
<PAGE> 35
In the event of Asset Sales, under certain circumstances, the Company
will be obligated to make a Net Proceeds Offer to purchase all or a specified
portion of each Holder's Securities at a purchase price equal to 100% of the
principal amount of the Securities, together with accrued and unpaid interest,
if any, to the Net Proceeds Payment Date.
As set forth in the Indenture, an Event of Default is generally (i)
failure to pay principal upon maturity, redemption or otherwise (including
pursuant to a Change of Control Offer or a Net Proceeds Offer); (ii) default
for 30 days in payment of interest on any of the Securities; (iii) default in
the performance of agreements relating to mergers, consolidations and sales of
all or substantially all assets or the failure to make or consummate a Change
of Control Offer or a Net Proceeds Offer; (iv) failure for 60 days after notice
to comply with any other covenants in the Indenture, any Subsidiary Guarantee
or the Securities; (v) certain payment defaults under, and the acceleration
prior to the maturity of, certain Indebtedness of the Company or any Restricted
Subsidiary in an aggregate principal amount in excess of $5,000,000; (vi) the
failure of any Subsidiary Guarantee to be in full force and effect (except as
permitted by the Indenture); (vii) certain final judgments or orders against
the Company or any Restricted Subsidiary in an aggregate amount of more than
$5,000,000 over the coverage under applicable insurance policies which remain
unsatisfied and either become subject to commencement of enforcement
proceedings or remain unstayed for a period of 60 days; and (viii) certain
events of bankruptcy, insolvency or reorganization of the Company or any
Restricted Subsidiary. If any Event of Default occurs and is continuing, the
Trustee or the holders of at least 25% in aggregate principal amount of the
Outstanding Securities may declare the principal amount of all the Securities
to be due and payable immediately, except that (i) in the case of an Event of
Default arising from certain events of bankruptcy, insolvency or reorganization
of the Company or any Restricted Subsidiary, the principal amount of the
Securities will become due and payable immediately without further action or
notice, and (ii) in the case of an Event of Default which relates to certain
payment defaults or the acceleration with respect to certain Indebtedness, any
such Event of Default and any consequential acceleration of the Securities will
be automatically rescinded if any such Indebtedness is repaid or if the default
relating to such Indebtedness is cured or waived and if the holders thereof
have accelerated such Indebtedness then such holders have rescinded their
declaration of acceleration. No Holder may pursue any remedy under the
Indenture unless the Trustee shall have failed to act after notice from such
Holder of an Event of Default and written request by Holders of at least 25% in
aggregate principal amount of the Outstanding Securities, and the offer to the
Trustee of indemnity reasonably satisfactory to it; however, such provision
does not affect the right to sue for enforcement of any overdue payment on a
Security by the Holder thereof. Subject to certain limitations, Holders of a
majority in aggregate principal amount of the Outstanding Securities may direct
the Trustee in its exercise of any trust or power. The Trustee may withhold
from Holders notice of any continuing default (except default in payment of
principal, premium or interest) if it determines in good faith that withholding
the notice is in the interest of the Holders. The Company is required to file
annual and quarterly reports with the Trustee as to the absence or existence of
defaults.
The Indenture contains provisions for (i) defeasance at any time of
the entire indebtedness of the Company on this Security and (ii) discharge from
certain restrictive covenants and the
28
<PAGE> 36
related Defaults and Events of Default, upon compliance by the Company with
certain conditions set forth therein, which provisions apply to this Security.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the Subsidiary Guarantors and the rights of the Holders under the
Indenture at any time by the Company, the Subsidiary Guarantors and the Trustee
with the consent of the Holders of a majority in aggregate principal amount of
the Securities at the time Outstanding. The Indenture also contains provisions
permitting the Holders of specified percentages in aggregate principal amount
of the Securities at the time Outstanding, on behalf of the Holders of all the
Securities, to waive compliance by the Company with certain provisions of the
Indenture and certain past defaults under the Indenture and their consequences.
Any such consent or waiver by or on behalf of the Holder of this Security shall
be conclusive and binding upon such Holder and upon all future Holders of this
Security and of any Security issued upon the registration of transfer hereof or
in exchange herefor or in lieu hereof whether or not notation of such consent
or waiver is made upon this Security. Without the consent of any Holder, the
Company, the Subsidiary Guarantors and the Trustee may amend or supplement the
Indenture or the Securities to cure any ambiguity, defect or inconsistency, to
qualify or maintain the qualification of the Indenture under the Trust
Indenture Act, to add or release any Subsidiary Guarantor pursuant to the
Indenture and to make certain other specified changes and other changes that do
not materially adversely affect the interests of any Holder in any material
respect.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of (and premium, if any,
on) and interest on this Security at the times, place, and rate, and in the
coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Security is registerable on the
Security Register of the Company, upon surrender of this Security for
registration of transfer at the office or agency of the Company maintained for
such purpose duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Company and the Security Registrar duly
executed by, the Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Securities, of authorized denominations and for the
same aggregate principal amount, will be issued to the designated transferee or
transferees.
The Securities are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, the Securities
are exchangeable for a like aggregate principal amount of Securities of a
different authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
29
<PAGE> 37
A director, officer, employee, incorporator, stockholder or Affiliate
of the Company or any Subsidiary Guarantor, as such, past, present or future
shall not have any personal liability under this Security or any other Security
or the Indenture by reason of his or its status as such director, officer,
employee, incorporator, stockholder or Affiliate, or any liability for any
obligations of the Company or any Subsidiary Guarantor under the Securities or
the Indenture or for any claim based on, in respect of, or by reason of such
obligations or their creation. Each Holder, by accepting this Security with
the notation of Subsidiary Guarantee endorsed hereon, waives and releases all
such liability. Such waiver and release are part of the consideration for the
issuance of this Security with the notation of Subsidiary Guarantee endorsed
hereon.
Prior to the time of due presentment of this Security for registration
of transfer, the Company, the Subsidiary Guarantors, the Trustee and any agent
of the Company or the Trustee may treat the Person in whose name this Security
is registered as the owner hereof for all purposes, whether or not this
Security is overdue, and neither the Company, the Subsidiary Guarantors, the
Trustee nor any agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture. The Company will
furnish to any Holder upon written request and without charge a copy of the
Indenture. Requests may be made to the Company at 379 Thornall Street, Edison,
New Jersey 08837, Attention: Treasurer (or such other address as the Company
may have furnished in writing to the Trustee).
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Securities as a convenience to the Holders thereof. No
representation is made as to the accuracy of such numbers as printed on the
Securities and reliance may be placed only on the other identifying information
printed hereon.
Interest on this Security shall be computed on the basis of a 360-day
year comprised of twelve 30-day months.
This Security shall be governed by and construed in accordance with
the laws of the State of New York without regard to conflicts of law
principles.
Section 2.4 Form of Notation Relating to Subsidiary Guarantees.
The form of notation to be set forth on each Security relating to the
Subsidiary Guarantees shall be in substantially the following form:
SUBSIDIARY GUARANTEES
Subject to the limitations set forth in the Indenture, the initial
Subsidiary Guarantors and, if any, all additional Subsidiary Guarantors (as
defined in the Indenture referred to in the Security upon which this notation
is endorsed and each being hereinafter referred to as a "Subsidiary Guarantor,"
which term includes any additional or successor Subsidiary Guarantor under the
30
<PAGE> 38
Indenture) have, jointly and severally, unconditionally guaranteed (a) the due
and punctual payment of the principal (and premium, if any) of and interest on
the Securities, whether at maturity, acceleration, redemption or otherwise, (b)
the due and punctual payment of interest on the overdue principal of and
interest on the Securities, if any, to the extent lawful, (c) the due and
punctual performance of all other obligations of the Company to the Holders or
the Trustee, all in accordance with the terms set forth in the Indenture, and
(d) in case of any extension of time of payment or renewal of any Securities or
any of such other obligations, the same will be promptly paid in full when due
or performed in accordance with the terms of the extension or renewal, whether
at Stated Maturity, by acceleration or otherwise.
The obligations of each Subsidiary Guarantor are 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 the 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.
The obligations of each Subsidiary Guarantor under its Subsidiary
Guarantor are subordinated in right of payment to the Senior Indebtedness of
such Subsidiary Guarantor on the same basis as the Securities are subordinated
in right of payment to Senior Indebtedness of the Company.
No stockholder, officer, director, employee, incorporator or Affiliate
as such, past, present or future, of any Subsidiary Guarantor shall have any
personal liability under its Subsidiary Guarantee by reason of his or its
status as such stockholder, officer, director, employee, incorporator or
Affiliate, or any liability for any obligations of any Subsidiary Guarantor
under the Securities or the Indenture or for any claim based on, in respect of,
or by reason of such obligations or their creation.
Any Subsidiary Guarantor may be released from its Subsidiary Guarantee
upon the terms and subject to the conditions provided in the Indenture.
All terms used in this notation of Subsidiary Guarantee which are
defined in the Indenture referred to in this Security upon which this notation
of Subsidiary Guarantees is endorsed shall have the meanings assigned to them
in such Indenture.
The Subsidiary Guarantees shall be binding upon the Subsidiary
Guarantors and shall inure to the benefit of the Trustee and the Holders and,
in the event of any transfer or assignment of rights by any Holder or the
Trustee respecting the Security upon which the foregoing Subsidiary Guarantees
are noted, the rights and privileges herein conferred upon that party shall
automatically
31
<PAGE> 39
extend to and be vested in such transferee or assignee, all subject to the
terms and conditions hereof and in the Indenture.
The Subsidiary Guarantees shall not be valid or obligatory for any
purpose until the certificate of authentication on the Security upon which the
foregoing Subsidiary Guarantees are noted shall have been executed by the
Trustee under the Indenture by the manual signature of one of its authorized
signatories.
ENERCORP GAS MARKETING, INC.,
KCS RESOURCES, INC.,
KCS MICHIGAN RESOURCES, INC.,
KCS PIPELINE SYSTEMS, INC.,
KCS ENERGY MARKETING, INC.,
KCS MEDALLION RESOURCES, INC.,
KCS ENERGY SERVICES, INC.,
MEDALLION CALIFORNIA PROPERTIES CO.,
MEDALLION GAS SERVICES, INC.,
NATIONAL ENERDRILL CORPORATION and
PROLIQ, INC.
By:
---------------------------------
Vice President
Section 2.5 Form of Trustee's Certificate of Authentication.
The Trustee's certificate of authentication shall be in substantially
the following form:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities referred to in the within mentioned
Indenture.
Dated: State Street Bank and Trust Company
-------------------------- Trustee
By:
--------------------------------
Authorized Signatory
32
<PAGE> 40
ARTICLE III
THE SECURITIES
Section 3.1 Title and Terms.
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture for original issue is limited
to $125,000,000. The aggregate principal amount of Securities Outstanding at
any one time may not exceed $125,000,000 except as provided in Section 3.7
hereof.
The Securities shall be known and designated as the "____% Senior
Subordinated Notes due 2008," of the Company. Their Stated Maturity shall be
January 15, 2008, and they shall bear interest at the rate of ____% per annum
from January ____, 1998, or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, payable semiannually on January 15
and July 15 in each year, commencing July 15, 1998, and at said Stated
Maturity, until the principal thereof is paid or duly provided for.
The principal of (and premium, if any, on) and interest on the
Securities shall be payable at the office or agency of the Company maintained
for such purpose in The City of New York; provided, however, that, at the
option of the Company, interest may be paid on Physical Securities on or
before the due date (i) by check mailed to addresses of the Persons entitled
thereto as such addresses shall appear on the Security Register, or (ii) with
respect to any Holder owning Securities in the principal amount of $500,000 or
more, by wire transfer to an account maintained by the Holder located in the
United States, as specified in a written notice to the Trustee by any such
Holder requesting payment by wire transfer and specifying the account to which
transfer is requested.
The Securities shall be redeemable as provided in Article XI hereof.
The Securities shall be subject to defeasance at the option of the
Company as provided in Article XII hereof.
The Securities shall be guaranteed by the Subsidiary Guarantors as
provided in Article XIII hereof.
The Securities shall be subordinated in right of payment to Senior
Indebtedness of the Company as provided in Article XIV hereof.
Section 3.2 Denominations.
The Securities shall be issuable only in registered form without
coupons and only in denominations of $1,000 and any integral multiple thereof.
33
<PAGE> 41
Section 3.3 Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by its
Chairman, its President or a Vice President of the Company, under its corporate
seal reproduced thereon and attested by its Secretary or an Assistant Secretary
of the Company. The signature of any of these officers on the Securities may be
manual or facsimile signatures of the present or any future such authorized
officer and may be imprinted or otherwise reproduced on the Securities.
Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time after the execution and delivery of this Indenture, the
Company may deliver Securities executed by the Company and having the notations
of Subsidiary Guarantees executed by the Subsidiary Guarantors to the Trustee
for authentication, together with a Company Order for the authentication and
delivery of such Securities, and the Trustee in accordance with such Company
Order shall authenticate and deliver such Securities with the notations of
Subsidiary Guarantees thereon as provided in this Indenture. Such Company
Order shall specify the principal amount of the Securities to be authenticated,
broken down between Global Securities and Physical Securities, and the date on
which the original issue of Securities is to be authenticated.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
duly executed by the Trustee by manual signature of an authorized signatory,
and such certificate upon any Security shall be conclusive evidence, and the
only evidence, that such Security has been duly authenticated and delivered
hereunder and is entitled to the benefits of this Indenture.
In case the Company, pursuant to and in compliance with Article VIII
hereof, shall be consolidated or merged with or into any other Person or shall
sell, convey, transfer, lease or otherwise dispose of all or substantially all
of its Properties to any Person, and the successor Person resulting from such
consolidation, or surviving such merger, or into which the Company shall have
been merged, or the Person which shall have received a sale, conveyance,
transfer, lease or other disposition as aforesaid, shall have executed an
indenture supplemental hereto with the Trustee pursuant to Article VIII hereof,
any of the Securities authenticated or delivered prior to such sale,
consolidation, merger, conveyance, transfer, lease or other disposition may,
from time to time, at the request of the successor Person be exchanged for
other Securities executed in the name of the successor Person with such changes
in phraseology and form as may be appropriate, but otherwise in substance of
like tenor as the Securities surrendered for such exchange and of like
principal amount; and the Trustee, upon Company Request of the successor
Person, shall authenticate and deliver Securities as specified in such request
for the purpose of such exchange. If Securities shall at any time be
authenticated and delivered in any new name of
34
<PAGE> 42
a successor Person pursuant to this Section in exchange or substitution for or
upon registration of transfer of any Securities, such successor Person, at the
option of the Holders but without expense to them, shall provide for the
exchange of all Securities at the time Outstanding for Securities authenticated
and delivered in such new name.
Section 3.4 Temporary Securities.
Pending the preparation of definitive Securities, the Company may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the definitive Securities in lieu of which they are issued and having
the notations of Subsidiary Guarantees thereon and with such appropriate
insertions, omissions, substitutions and other variations as the officers
executing such Securities and notations of Subsidiary Guarantees may determine,
as conclusively evidenced by their execution of such Securities and notations
of Subsidiary Guarantees.
If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at the office
or agency of the Company designated for such purpose pursuant to Section 10.2
hereof, without charge to the Holder. Upon surrender for cancellation of any
one or more temporary Securities, the Company shall execute and the Trustee
shall authenticate and deliver in exchange therefor a like principal amount of
definitive Securities of authorized denominations having the notations of
Subsidiary Guarantees thereon. Until so exchanged, the temporary Securities
shall in all respects be entitled to the same benefits under this Indenture as
definitive Securities.
Section 3.5 Registration of Transfer and Exchange.
The Company shall cause to be kept a register (the "Security
Register") in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of Securities and of
transfers of Securities. The Security Register shall be in written form or any
other form capable of being converted into written form within a reasonable
time. At all reasonable times and during normal business hours, the Security
Register shall be open to inspection by the Trustee. The Trustee is hereby
initially appointed as security registrar (the "Security Registrar") for the
purpose of registering Securities and transfers of Securities as herein
provided.
Upon surrender for registration of transfer of any Security at the
office or agency of the Company designated pursuant to Section 10.2 hereof, the
Company shall execute, and the Trustee shall authenticate and deliver, in the
name of the designated transferee or transferees, one or more new Securities of
any authorized denomination and of a like aggregate principal amount, each such
Security having the notation of Subsidiary Guarantees thereon.
35
<PAGE> 43
Furthermore, any Holder of a Global Security shall, by acceptance of
such Global Security, be deemed to have agreed that transfers of beneficial
interests in such Global Security may be effected only through a book-entry
system maintained by the Depository (or its agent), and that ownership of a
beneficial interest in a Global Security shall be required to be reflected in a
book entry.
At the option of any Holder, Securities may be exchanged for other
Securities of any authorized denomination and of a like aggregate principal
amount, upon surrender of the Securities to be exchanged at the office or
agency of the Company designated pursuant to Section 10.2 hereof. Whenever any
Securities are so surrendered for exchange, the Company shall execute, the
Subsidiary Guarantors shall execute notations of Subsidiary Guarantees on, and
the Trustee shall authenticate and deliver, the Securities which the Holder
making the exchange is entitled to receive.
All Securities and the Subsidiary Guarantees noted thereon issued upon
any registration of transfer or exchange of Securities shall be the valid
obligations of the Company and the respective Subsidiary Guarantors, evidencing
the same debt, and entitled to the same benefits under this Indenture, as the
Securities surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer
or for exchange shall (if so required by the Company or the Security Registrar)
be duly endorsed, or be accompanied by a written instrument of transfer, in
form satisfactory to the Company and the Security Registrar, duly executed by
the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange or redemption of Securities, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge that may be
imposed in connection with any registration of transfer or exchange of
Securities, other than exchanges pursuant to Section 3.4, 9.6 or 11.8 hereof
not involving any transfer.
Neither the Trustee, the Security Registrar nor the Company shall be
required (i) to issue, register the transfer of or exchange any Physical
Security during a period beginning at the opening of business 15 days before
the mailing of a notice of redemption of Securities selected for redemption
under Section 11.4 hereof and ending at the close of business on the day of
such mailing of the relevant notice of redemption, or (ii) to register the
transfer of or exchange any Physical Security so selected for redemption in
whole or in part, except the unredeemed portion of any such Security being
redeemed in part.
Section 3.6 Book-Entry Provisions for Global Securities.
Each Global Security shall be (i) registered in the name of the
Depository for such Global Security or the nominee of such Depository, (ii)
delivered to the Trustee as custodian for such Depository and (iii) bear the
legend set forth in Exhibit A hereto.
36
<PAGE> 44
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under this Indenture with respect to any Global Security held on
their behalf by the Depository, or the Trustee as its custodian, or under such
Global Security, and the Depository may be treated by the Company, the
Subsidiary Guarantors, the Trustee and any agent of the Company, the Subsidiary
Guarantors or the Trustee as the absolute owner of such Global Security for all
purposes whatsoever. Notwithstanding the foregoing, nothing herein shall
prevent the Company, the Subsidiary Guarantors, the Trustee or any agent of the
Company, the Subsidiary Guarantors or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depository
or shall impair, as between the Depository and its Agent Members, the operation
of customary practices governing the exercise of the rights of a holder of any
Security.
Transfers of a Global Security shall be limited to transfers of such
Global Security in whole, but not in part, to the Depository, its successors or
their respective nominees. Interests of beneficial owners in a Global Security
may be transferred or exchanged for Physical Securities in accordance with the
rules and procedures of the Depository and the provisions of Section 3.5
hereof. In addition, Physical Securities shall be transferred to all
beneficial owners in exchange for their beneficial interests in a Global
Security if, and only if, either (1) the Depository notifies the Company that
it is unwilling or unable to continue as depositary for the Global Security and
a successor depositary is not appointed by the Company within 90 days of such
notice, (2) an Event of Default has occurred and is continuing and the Security
Registrar has received a request from the Depository to issue Physical
Securities in lieu of all or a portion of the Global Security (in which case
the Company shall deliver Physical Securities within 30 days of such request)
or (3) the Company determines not to have the Securities represented by the
Global Security and notifies the Depository and the Security Registrar thereof.
In connection with the transfer of an entire Global Security to
beneficial owners pursuant to this Section, the Global Security shall be deemed
to be surrendered to the Trustee for cancellation, and the Company shall
execute, and the Trustee shall upon Company Order authenticate and deliver, to
each beneficial owner identified by the Depository, in exchange for its
beneficial interest in the Global Security, an equal aggregate principal amount
of Physical Securities of authorized denominations.
The Holder of a Global Security may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Indenture or the Securities.
Section 3.7 Mutilated, Destroyed, Lost and Stolen Securities.
If (i) any mutilated Security is surrendered to the Trustee or (ii)
the Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Security, and there is delivered to the
Company, the Subsidiary Guarantors and the Trustee such security or indemnity
as may be required by them to save each of them harmless, then, in the absence
of notice to the Company or the Trustee that such Security has been acquired by
a bona fide purchaser, the Company shall execute, the Subsidiary Guarantors
shall execute the notation of
37
<PAGE> 45
Subsidiary Guarantees, and upon Company Order the Trustee shall authenticate
and deliver, in exchange for any such mutilated Security or in lieu of any such
destroyed, lost or stolen Security, a new Security of like tenor and principal
amount, having the notation of Subsidiary Guarantees thereon, bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
mutilated, destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company and the respective Subsidiary
Guarantors, whether or not the mutilated, destroyed, lost or stolen Security
shall be at any time enforceable by anyone, and shall be entitled to all
benefits of this Indenture equally and proportionately with any and all other
Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.
Section 3.8 Payment of Interest; Interest Rights Preserved.
Interest on any Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name such Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest at the
office or agency of the Company maintained for such purpose pursuant to Section
10.2 hereof.
Any interest on any Security which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date shall forthwith cease
to be payable to the Holder on the Regular Record Date by virtue of having been
such Holder, and such defaulted interest and (to the extent lawful) interest on
such defaulted interest at the rate borne by the Securities (such defaulted
interest and interest thereon herein collectively called "Defaulted Interest")
may be paid by the Company, at its election in each case, as provided in clause
(a) or (b) below:
(a) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Securities (or their respective
Predecessor Securities) are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be fixed in
the following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each Security and the date
of the proposed payment, and at the same time the Company shall deposit with
the Trustee an amount of money equal to the
38
<PAGE> 46
aggregate amount proposed to be paid in respect of such Defaulted Interest or
shall make arrangements satisfactory to the Trustee for such deposit prior to
the date of the proposed payment, and such money when deposited shall be held
in trust for the benefit of the Persons entitled to such Defaulted Interest as
in this clause provided. Thereupon the Trustee shall fix a Special Record Date
for the payment of such Defaulted Interest which shall be not more than 15 days
and not less than 10 days prior to the date of the proposed payment and not
less than 10 days after the receipt by the Trustee of the notice of the
proposed payment. The Trustee shall promptly notify the Company of such Special
Record Date, and in the name and at the expense of the Company, shall cause
notice of the proposed payment of such Defaulted Interest and the Special
Record Date therefor to be given in the manner provided for in Section 15.5
hereof, not less than 10 days prior to such Special Record Date. Notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor having been so given, such Defaulted Interest shall be paid to the
Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on such Special Record Date
and shall no longer be payable pursuant to the following clause (b).
(b) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any securities
exchange on which the Securities may be listed, and upon such notice as may be
required by such exchange, if, after notice given by the Company to the Trustee
of the proposed payment pursuant to this clause, such manner of payment shall
be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
Section 3.9 Persons Deemed Owners.
Prior to the due presentment of a Security for registration of
transfer, the Company, the Subsidiary Guarantors, the Security Registrar, the
Trustee and any agent of the Company, the Subsidiary Guarantors or the Trustee
may treat the Person in whose name such Security is registered as the owner of
such Security for the purpose of receiving payment of principal of (and
premium, if any, on) and (subject to Section 3.8 hereof) interest on such
Security and for all other purposes whatsoever, whether or not such Security be
overdue, and none of the Company, the Subsidiary Guarantors, the Security
Registrar, the Trustee or any agent of the Company, the Subsidiary Guarantors
or the Trustee shall be affected by notice to the contrary.
Section 3.10 Cancellation.
All Securities surrendered for payment, redemption, registration of
transfer or exchange shall, if surrendered to any Person other than the
Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The
Company may at any time deliver to the Trustee for cancellation any Securities
previously authenticated and delivered hereunder which the Company may have
acquired in any manner whatsoever, and all Securities so delivered shall be
promptly
39
<PAGE> 47
cancelled by the Trustee. No Securities shall be authenticated in lieu of or in
exchange for any Securities cancelled as provided in this Section, except as
expressly permitted by this Indenture. All cancelled Securities held by the
Trustee shall be disposed of as directed by a Company Order or in accordance
with the Trustee's usual practice; provided, however, that the Trustee shall
not be required to destroy cancelled Securities.
Section 3.11 Computation of Interest.
Interest on the Securities shall be computed on the basis of a 360-day
year comprised of twelve 30-day months.
ARTICLE IV
SATISFACTION AND DISCHARGE
Section 4.1 Satisfaction and Discharge of Indenture.
This Indenture shall upon Company Request cease to be of further
effect (except as to surviving rights of registration of transfer or exchange
of Securities, as expressly provided for in this Indenture) as to all
Outstanding Securities, and the Trustee, at the expense of the Company, shall,
upon payment of all amounts due the Trustee under Section 6.6 hereof, execute
proper instruments acknowledging satisfaction and discharge of this Indenture
when
(a) either
(1) all Securities theretofore authenticated and
delivered (other than (i) Securities which have been destroyed, lost
or stolen and which have been replaced or paid as provided in Section
3.7 hereof and (ii) Securities for whose payment money or United
States governmental obligations of the type described in clause (i) of
the definition of Cash Equivalents have theretofore been deposited in
trust with the Trustee or any Paying Agent or segregated and held in
trust by the Company and thereafter repaid to the Company or
discharged from such trust, as provided in Section 10.3 hereof) have
been delivered to the Trustee for cancellation, or
(2) all such Securities not theretofore delivered to the
Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated
Maturity within one year, or
(iii) are to be called for redemption within one
year under arrangements satisfactory to the Trustee for the
giving of notice of redemption by the Trustee in the name, and
at the expense, of the Company,
40
<PAGE> 48
and the Company, in the case of clause (2)(i), (2)(ii) or (2)(iii)
above, has irrevocably deposited or caused to be deposited with the
Trustee funds in an amount sufficient to pay and discharge the entire
indebtedness on such Securities not theretofore delivered to the
Trustee for cancellation, for principal (and premium, if any) and
interest to the date of such deposit (in the case of Securities 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;
(b) the Company has paid or caused to be paid all other
sums then due and payable hereunder by the Company; and
(c) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, which, taken together, state
that all conditions precedent herein relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 6.6 hereof and, if
money shall have been deposited with the Trustee pursuant to this Section, the
obligations of the Trustee under Section 4.2 hereof and the last paragraph of
Section 10.3 hereof shall survive.
Section 4.2 Application of Trust Money.
Subject to the provisions of the last paragraph of Section 10.3
hereof, all money deposited with the Trustee pursuant to Section 4.1 hereof
shall be held in trust and applied by it, in accordance with the provisions of
the Securities and this Indenture, to the payment, either directly or through
any Paying Agent (including the Company acting as its own Paying Agent) as the
Trustee may determine, to the Persons entitled thereto, of the principal (and
premium, if any) and interest for whose payment such money has been deposited
with the Trustee.
ARTICLE V
REMEDIES
Section 5.1 Events of Default.
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be occasioned by the provisions of Article XIV or be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) default in the payment of the principal of or premium, if any,
on any of the Securities when the same becomes due and payable, whether such
payment is due at Stated
41
<PAGE> 49
Maturity, upon redemption, upon repurchase pursuant to a Change of Control
Offer or a Net Proceeds Offer, upon acceleration or otherwise; or
(b) default in the payment of any installment of interest on any
of the Securities, when it becomes due and payable, and the continuance of such
default for a period of 30 days; or
(c) default in the performance or breach of the provisions of
Article VIII hereof, the failure to make or consummate a Change of Control
Offer in accordance with the provisions of Section 10.16 or the failure to make
or consummate a Net Proceeds Offer in accordance with the provisions of Section
10.17; or
(d) the Company or any Subsidiary Guarantor shall fail to perform
or observe any other term, covenant or agreement contained in the Securities,
any Subsidiary Guarantee or this Indenture (other than a default specified in
subparagraph (a), (b) or (c) above) for a period of 60 days after written
notice of such failure stating that it is a "notice of default" hereunder and
requiring the Company or such Subsidiary Guarantor, as the case may be, 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 Securities then Outstanding; or
(e) the occurrence and continuation beyond any applicable grace
period of any default in the payment of the principal of (or premium, if any,
on) or interest on any Indebtedness of the Company (other than the Securities)
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 $5,000,000 or
(f) 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 this Indenture); or
(g) 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 $5,000,000 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
(h) 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 the Federal Bankruptcy Code or any other 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,
42
<PAGE> 50
or approving a petition seeking reorganization, arrangement, adjustment or
composition of the Company or any Subsidiary Guarantor or any other Restricted
Subsidiary under the Federal Bankruptcy Code or 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
(i) the commencement by the Company or any Subsidiary Guarantor or
any other Restricted Subsidiary of a voluntary case or proceeding under the
Federal Bankruptcy Code or any other 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 the Federal Bankruptcy Code or any other 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.
Section 5.2 Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than an Event of Default specified in
Section 5.1(h) or (i) hereof) occurs and is continuing, the Trustee or the
Holders of not less than 25% in aggregate principal amount of the Securities
then Outstanding, by written notice to the Company (and to the Trustee if such
notice is given by the Holders), may, and the Trustee upon the request of the
Holders of not less than 25% in aggregate principal amount of the Outstanding
Securities shall, by a notice in writing to the Company, declare all unpaid
principal of, premium, if any, and accrued and unpaid interest on all the
Securities to be due and payable immediately, upon which declaration all
amounts payable in respect of the Securities shall be immediately due and
payable. If an Event of Default specified in Section 5.1(h) or (i) hereof
occurs and is continuing, the amounts described above shall become and be
immediately due and payable without any declaration, notice or other act on the
part of the Trustee or any Holder.
Promptly after the occurrence of a declaration of acceleration, the
Company shall notify each holder of Senior Indebtedness thereof, but failure to
give any such notice shall not affect such declaration or its consequences.
43
<PAGE> 51
At any time after a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a majority
in aggregate principal amount of the Securities Outstanding, by written notice
to the Company, the Subsidiary Guarantors and the Trustee, may rescind and
annul such declaration and its consequences if
(a) the Company or any Subsidiary Guarantor has paid or deposited
with the Trustee a sum sufficient to pay,
(1) all overdue interest on all Outstanding Securities,
(2) all unpaid principal of (and premium, if any, on) any
Outstanding Securities which have become due otherwise than by such
declaration of acceleration, including any Securities required to have
been purchased on a Change of Control Date or a Net Proceeds Payment
Date pursuant to a Change of Control Offer or a Net Proceeds Offer, as
applicable, and interest on such unpaid principal at the rate borne by
the Securities,
(3) to the extent that payment of such interest is
lawful, interest on overdue interest and overdue principal at the rate
borne by the Securities (without duplication of any amount paid or
deposited pursuant to clauses (1) and (2) above), and
(4) all sums paid or advanced by the Trustee hereunder
and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel;
(b) the rescission would not conflict with any judgment or decree
of a court of competent jurisdiction as certified to the Trustee by the
Company; and
(c) all Events of Default, other than the non-payment of amounts
of principal of (or premium, if any, on) or interest on Securities which have
become due solely by such declaration of acceleration, have been cured or
waived as provided in Section 5.13 hereof.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
Notwithstanding the foregoing, if an Event of Default specified in
Section 5.1(e) hereof shall have occurred and be continuing, such Event of
Default and any consequential acceleration shall be automatically rescinded if
the Indebtedness that is the subject of such Event of Default has been repaid,
or if the default relating to such Indebtedness is waived or cured and if such
Indebtedness has been accelerated, then the holders thereof have rescinded
their declaration of acceleration in respect of such Indebtedness (provided, in
each case, that such repayment, waiver, cure or rescission is effected within a
period of 10 days from the continuation of such default beyond the applicable
grace period or the occurrence of such acceleration), and written notice of
such repayment, or cure or waiver and rescission, as the case may be, shall
have been given to the Trustee by the Company and countersigned by the holders
of such Indebtedness or a trustee,
44
<PAGE> 52
fiduciary or agent for such holders or other evidence satisfactory to the
Trustee of such events is provided to the Trustee, within 30 days after any
such acceleration in respect of the Securities, and so long as such rescission
of any such acceleration of the Securities does not conflict with any judgment
or decree as certified to the Trustee by the Company.
Section 5.3 Collection of Indebtedness and Suits for Enforcement
by Trustee.
The Company covenants that if
(a) default is made in the payment of any installment of interest
on any Security when such interest becomes due and payable and such default
continues for a period of 30 days, or
(b) default is made in the payment of the principal of (or
premium, if any, on) any Security at the Maturity thereof or with respect to
any Security required to have been purchased by the Company on the Change of
Control Purchase Date or the Net Proceeds Payment Date pursuant to a Change of
Control Offer or Net Proceeds Offer, as applicable,
then the Company will, upon demand of the Trustee, pay to the Trustee for the
benefit of the Holders of such Securities, the whole amount then due and
payable on such Securities for principal (and premium, if any) and interest,
and interest on any overdue principal (and premium, if any) and, to the extent
that payment of such interest shall be legally enforceable, upon any overdue
installment of interest, at the rate borne by the Securities, and, in addition
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon the Securities and collect the
money adjudged or decreed to be payable in the manner provided by law out of
the Property of the Company or any other obligor upon the Securities, wherever
situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
Section 5.4 Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company, any Subsidiary Guarantor or any
other obligor upon the Securities, their creditors or the Property of the
Company, any Subsidiary Guarantor or of such other obligor, the Trustee
(irrespective of whether the principal of the Securities shall then be due and
payable as therein
45
<PAGE> 53
expressed or by declaration or otherwise and irrespective of whether the
Trustee shall have made any demand on the Company, the Subsidiary Guarantors or
such other obligor for the payment of overdue principal, premium, if any, or
interest) shall be entitled and empowered, by intervention in such proceeding
or otherwise,
(a) to file and prove a claim for the whole amount of principal
(and premium, if any) and interest owing and unpaid in respect of the
Securities and to file such other papers or documents and take any other
actions including participation as a full member of any creditor or other
committee as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and of the
Holders allowed in such judicial proceeding, and
(b) subject to Article XIV, to collect and receive any money or
other Property payable or deliverable on any such claims and to distribute the
same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay
the Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any
other amounts due the Trustee under Section 6.6 hereof.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the Subsidiary Guarantees or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder in any such
proceeding.
Section 5.5 Trustee May Enforce Claims Without Possession of
Securities.
All rights of action and claims under this Indenture or the Securities
or the Subsidiary Guarantees may be prosecuted and enforced by the Trustee
without the possession of any of the Securities or the production thereof in
any proceeding relating thereto, and any such proceeding instituted by the
Trustee shall be brought in its own name and as trustee of an express trust,
and any recovery of judgment shall, after provision for the payment of the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, be for the ratable benefit of the Holders of the
Securities in respect of which such judgment has been recovered.
Section 5.6 Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in the case of the distribution of such money on account of principal (or
premium, if any) or interest, upon presentation of the Securities and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
46
<PAGE> 54
FIRST: to the payment of all amounts due the Trustee under
Section 6.6 hereof;
SECOND: subject to Article XIV, to the payment of the amounts
then due and unpaid for principal of (and premium, if any, on) and
interest on the Securities in respect of which or for the benefit of
which such money has been collected, ratably, without preference or
priority of any kind, according to the amounts due and payable on such
Securities for principal (and premium, if any) and interest,
respectively; and
THIRD: subject to Article XIV, the balance, if any, to the
Company.
Section 5.7 Limitation on Suits.
No Holder of any Securities shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder,
unless:
(a) such Holder has previously given written notice to the Trustee
of a continuing Event of Default;
(b) the Holders of not less than 25% in aggregate principal amount
of the Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding; and
(e) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority or
more in aggregate principal amount of the Outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
Section 5.8 Unconditional Right of Holders to Receive Principal,
Premium and Interest.
Notwithstanding any other provision in this Indenture, the Holder of
any Security shall have the right, which is absolute and unconditional, to
receive payment, as provided herein (including, if applicable, Article XII
hereof) and in such Security of the principal of (and premium if any, on) and
(subject to Section 3.8 hereof) interest on, such Security on the respective
Stated
47
<PAGE> 55
Maturities expressed in such Security (or, in the case of redemption, on the
Redemption Date) and to institute suit for the enforcement of any such payment,
and such rights shall not be impaired without the consent of such Holder.
Section 5.9 Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Subsidiary Guarantors, the
Trustee and the Holders shall be restored severally and respectively to their
former positions hereunder and thereunder and all rights and remedies of the
Trustee and the Holders shall continue as though no such proceeding had been
instituted.
Section 5.10 Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities in the last
paragraph of Section 3.7 hereof, no right or remedy herein conferred upon or
reserved to the Trustee or to the Holders is intended to be exclusive of any
other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
Section 5.11 Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Security
to exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein. Every right and remedy given by this Article or by law
to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
Section 5.12 Control by Holders.
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Securities shall 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, provided that
(a) such direction shall not be in conflict with any rule of law
or with this Indenture,
(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction, and
48
<PAGE> 56
(c) the Trustee need not take any action which might involve it in
personal liability or be unduly prejudicial to the Holders not joining therein.
Section 5.13 Waiver of Past Defaults.
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Securities may on behalf of the Holders of all the
Securities waive any existing Default or Event of Default hereunder and its
consequences, except a Default or Event of Default
(a) in respect of the payment of the principal of (or premium, if
any, on) or interest on any Security, or
(b) in respect of a covenant or provision hereof which under
Article IX hereof cannot be modified or amended without the consent of the
Holder of each Outstanding Security affected thereby.
Upon any such waiver, such Default or Event of Default shall cease to
exist for every purpose under this Indenture, but no such waiver shall extend
to any subsequent or other fault or Event of Default or impair any right
consequent thereon.
Section 5.14 Waiver of Stay, Extension or Usury Laws.
Each of the Company and the Subsidiary Guarantors covenants (to the
extent that each may lawfully do so) that it will not at any time insist upon,
plead or in any manner whatsoever claim or take the benefit or advantage of,
any stay, extension, or usury law or other law wherever enacted, now or at any
time hereafter in force, which would prohibit or forgive the Company or any
Subsidiary Guarantor from paying all or any portion of the principal of
(premium, if any, on) or interest on the Securities as contemplated herein, or
which may affect the covenants or the performance of this Indenture; and (to
the extent that it may lawfully do so) each of the Company and the Subsidiary
Guarantors hereby expressly waives all benefit or advantage of any such law,
and covenant that they will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution
of every such power as though no such law had been enacted.
ARTICLE VI
THE TRUSTEE
Section 6.1 Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise the rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent person
would exercise or use under the circumstances in the conduct of his own
affairs.
49
<PAGE> 57
(b) Except during the continuance of an Event of Default:
(i) the Trustee undertakes to perform such duties and
only such duties as are specifically set forth in this Indenture and
no implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee
may conclusively rely, and shall be fully protected in so relying, as
to the truth of the statements and the correctness of the opinions
expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture;
provided, however, the Trustee shall examine the certificates and
opinions to determine whether or not they conform to the requirements
of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful
misconduct, except that:
(i) this paragraph shall not limit the effect of Section
6.1(b);
(ii) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it is
proved that the Trustee was negligent in ascertaining the pertinent
facts; and
(iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 5.12.
Section 6.2 Certain Rights of Trustee.
Subject to the provisions of Section 6.1 hereof:
(a) the Trustee may conclusively rely and shall be protected in
acting or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the proper
party or parties;
(b) any request or direction of the Company mentioned herein shall
be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a Board
Resolution;
(c) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its
part, rely upon an Officers' Certificate;
50
<PAGE> 58
(d) the Trustee may consult with counsel and the written advice of
such counsel or any Opinion of Counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request or direction
of any of the Holders pursuant to this Indenture, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction;
(f) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document, but
the Trustee, in its discretion, may make such further inquiry or investigation
into such facts or matters as it may reasonably see fit;
(g) the Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder;
(h) the Trustee shall not be liable for any action taken, suffered
or omitted by it in good faith and believed by it in good faith to be
authorized or within the discretion or rights or powers conferred upon it by
this Indenture; and
(i) the Trustee shall not be deemed to have notice or knowledge of
any matter unless a Responsible Officer has actual knowledge thereof or unless
written notice thereof is received by the Trustee at its Corporate Trust Office
and such notice references the Securities generally, the Company or this
Indenture.
The Trustee shall not be required to advance, expend or risk its own
funds or otherwise incur any financial liability in the performance of any of
its duties hereunder, or in the exercise of any of its rights or powers if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it.
Section 6.3 Trustee Not Responsible for Recitals or Issuance of
Securities.
The recitals contained herein and in the Securities and the notations
of Subsidiary Guarantees thereon, except for the Trustee's certificates of
authentication, shall be taken as the statements of the Company or the
Subsidiary Guarantors, as the case may be, and the Trustee assumes no
responsibility for their correctness. The Trustee makes no representations as
to the validity or sufficiency of this Indenture, the Subsidiary Guarantees or
the Securities, except that the Trustee represents that it is duly authorized
to execute and deliver this Indenture, authenticate the Securities and perform
its obligations hereunder, and that the statements made by it in the Statement
of Eligibility and Qualification on Form T-1 supplied to the Company are true
and
51
<PAGE> 59
accurate, subject to the qualifications set forth therein. The Trustee shall
not be accountable for the use or application by the Company of any Securities
or the proceeds thereof.
Section 6.4 May Hold Securities.
The Trustee, any Paying Agent, any Security Registrar or any other
agent of the Company, the Subsidiary Guarantors or of the Trustee, in its
individual or any other capacity, may become the owner or pledgee of Securities
and, subject to TIA Sections 310(b) and 311 in the case of the Trustee, may
otherwise deal with the Company and the Subsidiary Guarantors with the same
rights it would have if it were not the Trustee, Paying Agent, Security
Registrar or such other agent.
Section 6.5 Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed with the Company or any Subsidiary Guarantor.
Section 6.6 Compensation and Reimbursement.
The Company agrees:
(a) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder (which compensation
shall not be limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(b) except as otherwise expressly provided herein, to reimburse
the Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
this Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to the Trustee's wilful misconduct,
negligence or bad faith; and
(c) to indemnify the Trustee for, and to hold it harmless against,
any loss, liability or expense incurred without wilful misconduct, negligence
or bad faith on its part, (i) arising out of or in connection with the
acceptance or administration of this trust, including the costs and expenses of
defending itself against any claim or liability in connection with the exercise
or performance of any of its powers or duties hereunder or (ii) in connection
with enforcing this indemnification provision.
The obligations of the Company under this Section 6.6 to compensate
the Trustee, to pay or reimburse the Trustee for expenses, disbursements and
advances and to indemnify and hold harmless the Trustee shall not be
subordinated to the payment of Senior Indebtedness of the Company pursuant to
Article XIV hereof and shall constitute additional indebtedness hereunder and
shall survive the satisfaction and discharge of this Indenture or any other
termination under any Insolvency or Liquidation Proceeding. As security for the
performance of such obligations of
52
<PAGE> 60
the Company, the Trustee shall have a claim and lien prior to the Securities
upon all property and funds held or collected by the Trustee as such, except
funds held in trust for payment of principal of (and premium, if any, on) or
interest on particular Securities. Such lien shall survive the satisfaction and
discharge of this Indenture or any other termination under any Insolvency or
Liquidation Proceeding.
When the Trustee incurs expenses or renders services after the
occurrence of an Event of Default specified in paragraph (h) or (i) of Section
5.1 of this Indenture, such expenses and the compensation for such services are
intended to constitute expenses of administration under any Insolvency or
Liquidation Proceeding.
Section 6.7 Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be
eligible to act as Trustee under TIA Section 310(a)(1) and shall have a
combined capital and surplus of at least $50,000,000. If such corporation
publishes reports of condition at least annually, pursuant to law or to the
requirements of federal, state, territorial or District of Columbia supervising
or examining authority, then for the purposes of this Section 6.7, the combined
capital and surplus of such corporation shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. If at any time the Trustee shall cease to be eligible in accordance
with the provisions of this Section, it shall resign immediately in the manner
and with the effect hereinafter specified in this Article.
Section 6.8 Conflicting Interests.
The Trustee shall comply with the provisions of Section 310(b) of the
Trust Indenture Act; provided, however, that there shall be excluded from the
operation of TIA Section 310(b)(1) any indenture or indentures under which
other securities or certificates of interest or participation in other
securities of the Company are outstanding if the requirements for such
exclusion set forth in TIA Section 310(b)(1) are met.
Section 6.9 Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of
a successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 6.10 hereof.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company. If the instrument of acceptance by a successor Trustee
required by Section 6.10 hereof shall not have been delivered to the Trustee
within 30 days after the giving of such notice of resignation, the resigning
Trustee may petition any court of competent jurisdiction for the appointment of
a successor Trustee.
53
<PAGE> 61
(c) The Trustee may be removed at any time by Act of the Holders
of not less than a majority in aggregate principal amount of the Outstanding
Securities, delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the provisions
of TIA Section 310(b) after written request therefor by the Company or
by any Holder who has been a bona fide Holder of a Security for at
least six months, or
(2) the Trustee shall cease to be eligible under Section
6.7 hereof and shall fail to resign after written request therefor by
the Company or by any Holder who has been a bona fide Holder of a
Security for at least six months, or
(3) the Trustee shall become incapable of acting or shall
be adjudged a bankrupt or insolvent or a receiver of the Trustee or of
its property shall be appointed or any public officer shall take
charge or control of the Trustee or of its property or affairs for the
purpose of rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company, by a Board Resolution, may remove the
Trustee, or (ii) subject to TIA Section 315(e), any Holder who has been a bona
fide Holder of a Security for at least six months may, on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of
the Holders of a majority in aggregate principal amount of the Outstanding
Securities delivered to the Company and the retiring Trustee, the successor
Trustee so appointed shall, forthwith upon its acceptance of such appointment,
become the successor Trustee and supersede the successor Trustee appointed by
the Company. If no successor Trustee shall have been so appointed by the
Company or the Holders and accepted appointment in the manner hereinafter
provided, any Holder who has been a bona fide Holder of a Security for at least
six months may, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the appointment of a successor
Trustee. The evidence of such successorship may, but need not be, evidenced by
a supplemental indenture.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to the
Holders of Securities in the manner provided for in Section 15.5 hereof. Each
notice shall include the name of the successor Trustee and the address of its
Corporate Trust Office.
54
<PAGE> 62
Section 6.10 Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers,
trusts and duties of the retiring Trustee; but, on request of the Company or
the successor Trustee, such retiring Trustee shall, upon payment of all amounts
due it under Section 6.6 hereof, execute and deliver an instrument transferring
to such successor Trustee all the rights, powers and trusts of the retiring
Trustee and shall duly assign, transfer and deliver to such successor Trustee
all money and other Property held by such retiring Trustee hereunder. Upon
request of any such successor Trustee, the Company shall execute any and all
instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.
Section 6.11 Merger, Conversion, Consolidation or Succession to
Business.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Trustee shall be a party, or
any corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so authenticated with the same
effect as if such successor Trustee had itself authenticated such Securities;
and in case at that time any of the Securities shall not have been
authenticated, any successor Trustee may authenticate such Securities either in
the name of any predecessor hereunder or in the name of the successor Trustee;
and in all such cases such certificates shall have the full force which it is
anywhere in the Securities or in this Indenture provided; provided, however,
that the right to adopt the certificate of authentication of any predecessor
Trustee or to authenticate Securities in the name of any predecessor Trustee
shall apply only to its successor or successors by merger, conversion or
consolidation.
Section 6.12 Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company
(or any other obligor under the Securities), the Trustee shall be subject to
the provisions of the Trust Indenture Act regarding the collection of claims
against the Company (or any such other obligor).
55
<PAGE> 63
Section 6.13 Notice of Defaults.
Within 60 days after the occurrence of any Default hereunder, the
Trustee shall transmit in the manner and to the extent provided in TIA Section
313(c), notice of such Default hereunder known to the Trustee, unless such
Default shall have been cured or waived; provided, however, that, except in the
case of a Default in the payment of the principal of (or premium, if any, on)
or interest on any Security, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Responsible Officers of the Trustee in good
faith determines that the withholding of such notice is in the interest of the
Holders.
ARTICLE VII
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.1 Holders' Lists; Holder Communications; Disclosures
Respecting Holders.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
the Holders. Neither the Company, any Subsidiary Guarantor nor the Trustee
shall be under any responsibility with regard to the accuracy of such list. If
the Trustee is not the Security Registrar, the Company shall furnish to the
Trustee semi-annually before each Regular Record Date, and at such other times
as the Trustee may reasonably request in writing, a list, in such form as the
Trustee may reasonably request, as of such date of the names and addresses of
the Holders then known to the Company. The Company and the Trustee shall also
satisfy any other requirements imposed upon each of them by TIA Section 312(a).
Holders may communicate pursuant to Section 312(b) of the TIA with
other Holders with respect to their rights under this Indenture or the
Securities. Every Holder of Securities, by receiving and holding the same,
agrees with the Company, the Subsidiary Guarantors, the Security Registrar and
the Trustee that none of the Company, the Subsidiary Guarantors, the Security
Registrar or the Trustee, or any agent of any of them, shall be held
accountable by reason of the disclosure of any information as to the names and
addresses of the Holders in accordance with TIA Section 312, regardless of the
source from which such information was derived, that each of such Persons shall
have the protection of TIA Section 312(c) and that the Trustee shall not be
held accountable by reason of mailing any material pursuant to a request made
under TIA Section 312(b).
Section 7.2 Reports By Trustee.
Within 60 days after May 15 of each year commencing with May 15, 1998,
the Trustee shall transmit by mail to the Holders, as their names and addresses
appear in the Security Register, a brief report dated as of such May 15 in
accordance with and to the extent required under TIA Section 313(a). The
Trustee shall also comply with TIA Sections 313(b) and 313(c).
56
<PAGE> 64
The Company shall promptly notify the Trustee in writing if the
Securities become listed on any stock exchange or automatic quotation system.
A copy of each Trustee's report, at the time of its mailing to Holders
of Securities, shall be mailed to the Company and filed with the Commission and
each stock exchange, if any, on which the Securities are listed.
Section 7.3 Reports by Company.
The Company shall:
(a) file with the Trustee, within 30 days after the Company is
required to file the same with the Commission, copies of the annual reports and
of the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) which the Company may be required to file with the
Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if
the Company is not required to file information, documents or reports pursuant
to either of said Sections, then the Company shall file with the Trustee such
information, documents or reports as required pursuant to Section 10.9 hereof;
(b) file with the Trustee and the Commission, in accordance with
rules and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by the
Company with the conditions and covenants of this Indenture as may be required
from time to time by such rules and regulations; and
(c) transmit by mail to all Holders, in the manner and to the
extent provided in TIA Section 313(c), such summaries of any information,
documents and reports (without exhibits except to the extent required by TIA
Section 313(c)) required to be filed by the Company pursuant to paragraph (a)
or (b) of this Section as may be required by rules and regulations prescribed
from time to time by the Commission.
ARTICLE VIII
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
Section 8.1 Company May Consolidate, etc., Only on Certain Terms.
The Company shall not, in any single transaction or a 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 the Properties of the Company and its Restricted Subsidiaries
on a consolidated basis to any Person or group of Affiliated Persons, and the
Company shall 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 a sale, assignment, conveyance,
transfer, lease or other disposition of all or substantially all of the
Properties of the
57
<PAGE> 65
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
affect thereto:
(a) either (i) if the transaction is a merger or consolidation,
the Company shall be the surviving Person of such merger or consolidation, or
(ii) the Person (if other than the Company) formed by such consolidation or
into which the Company is merged or to which the Properties 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 called 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 this Indenture executed and delivered to
the Trustee, in form satisfactory to the Trustee, all the obligations of the
Company under the Securities and this Indenture, and, in each case, this
Indenture shall remain in full force and effect;
(b) 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 the Company or any of its
Restricted Subsidiaries which becomes the obligation of the Company or any of
its Restricted Subsidiaries in connection with or as a result of such
transaction or transactions as having been incurred at the time of such
transaction or transactions), no Default or Event of Default shall have
occurred and be continuing;
(c) 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 this Indenture) is at least equal to the Consolidated
Net Worth of the Company immediately before such transaction or transactions;
(d) 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 full 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 this Indenture) could incur $1.00
of additional Indebtedness (excluding Permitted Indebtedness) under Section
10.12(a) hereof;
(e) if the Company is not the continuing obligor under this
Indenture, then each Subsidiary Guarantor, unless it is the Surviving Entity,
shall have by supplemental indenture confirmed that its Subsidiary Guarantee of
the Securities shall apply to the Surviving Entity's obligations under this
Indenture and the Securities:
(f) if any of the Properties 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
58
<PAGE> 66
Permitted Lien), the creation or imposition of such Lien shall have been in
compliance with Section 10.15 hereof; and
(g) the Company (or the Surviving Entity if the Company is not the
continuing obligor under this Indenture) shall have delivered to the Trustee,
in form and substance reasonably satisfactory to the Trustee, (i) an Officers'
Certificate stating that such consolidation, merger, conveyance, transfer,
lease or other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture, comply with this
Indenture and (ii) an Opinion of Counsel stating that the requirements of
Section 8.1(a) have been satisfied.
Section 8.2 Successor Substituted.
Upon any consolidation of the Company with or merger of the Company
into any other corporation or any sale, assignment, lease, conveyance, transfer
or other disposition of all or substantially all of the Properties of the
Company and its Restricted Subsidiaries on a consolidated basis in accordance
with Section 8.1 hereof, the Surviving Entity shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such Surviving Entity had been named
as the Company herein, and in the event of any such sale, assignment, lease,
conveyance, transfer or other disposition, the Company (which term shall for
this purpose mean the Person named as the "Company" in the first paragraph of
this Indenture or any successor Person which shall theretofore become such in
the manner described in Section 8.1 hereof), except in the case of a lease,
shall be discharged of all obligations and covenants under this Indenture and
the Securities, and the Company may be dissolved and liquidated and such
dissolution and liquidation shall not cause a Change of Control under clause
(e) of the definition thereof to occur unless the sale, assignment, lease,
conveyance, transfer or other disposition of all or substantially all of the
Properties of the Company and its Restricted Subsidiaries on a consolidated
basis to any Person otherwise results in a Change of Control.
ARTICLE IX
SUPPLEMENTAL INDENTURES
Section 9.1 Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a
Board Resolution, each of the Subsidiary Guarantors, when authorized by a Board
Resolution, and the Trustee upon Company Request, at any time and from time to
time, may enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
(a) to evidence the succession of another Person to the Company
and the assumption by any such successor of the covenants of the Company
contained herein and in the Securities; or
(b) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the Company;
or
59
<PAGE> 67
(c) to comply with any requirement of the SEC in connection with
qualifying this Indenture under the TIA or maintaining such qualification
thereafter; or
(d) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee pursuant to the requirements of Sections 6.9
and 6.10 hereof; or
(e) to cure any ambiguity, to correct or supplement any provision
herein which may be defective or inconsistent with any other provision herein,
or to make any other provisions with respect to matters or questions arising
under this Indenture provided that such action shall not adversely affect the
interests of the Holders in any material respect; or
(f) to secure the Securities or the Subsidiary Guarantees pursuant
to the requirements of Section 10.15 hereof or otherwise; or
(g) to add any Restricted Subsidiary as an additional Subsidiary
Guarantor as provided in Section 10.13(a) hereof or to evidence the succession
of another Person to any Subsidiary Guarantor pursuant to Section 13.2(b)
hereof and the assumption by any such successor of the covenants and agreements
of such Subsidiary Guarantor contained herein, in the Securities and in the
Subsidiary Guarantee of such Subsidiary Guarantor; or
(h) to release a Subsidiary Guarantor from its Subsidiary
Guarantee pursuant to Section 13.3 hereof; or
(i) to provide for uncertificated Securities in addition to or in
place of certificated Securities.
Section 9.2 Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in
aggregate principal amount of the Outstanding Securities, by Act of said
Holders delivered to the Company and the Trustee, the Company, when authorized
by a Board Resolution, each of the Subsidiary Guarantors, when authorized by a
Board Resolution, and the Trustee upon Company Request may enter into an
indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture or of modifying in any manner the rights of the Holders under
this Indenture; provided, however, that no such supplemental indenture shall,
without the consent of the Holder of each Outstanding Security affected
thereby:
(a) change the Stated Maturity of the principal of, or any
installment of interest on, any Security, or reduce the principal amount
thereof or the rate of interest thereon or any premium thereon, or change the
coin or currency in which principal of any Security or any premium or the
interest on any Security is payable, or impair the right to institute suit for
the enforcement of any such payment after the Stated Maturity thereof (or, in
the case of redemption, on or after the Redemption Date); or
60
<PAGE> 68
(b) reduce the percentage of aggregate principal amount of the
Outstanding Securities, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for any
waiver of compliance with certain provisions of this Indenture or certain
defaults hereunder or the consequences of a default provided for in this
Indenture; or
(c) modify any of the provisions of this Section or Sections 5.13
and 10.20 hereof, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived without
the consent of the Holder of each Outstanding Security affected thereby;
(d) modify any of the provisions of Section 13.8 or Article XIV
hereof in a manner adverse to the Holders; or
(e) 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 to make and consummate a Net Proceeds Offer with respect to any Asset Sale,
or modify any of the provisions or definitions with respect thereto.
It shall not be necessary for any Act of the Holders under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
Section 9.3 Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby
of the trusts created by this Indenture, the Trustee shall be entitled to
receive, and shall be fully protected in relying upon, an Opinion of Counsel
stating that the execution of such supplemental indenture is authorized or
permitted by this Indenture. The Trustee may, but shall not be obligated to,
enter into any such supplemental indenture which affects the Trustee's own
rights, duties or immunities under this Indenture or otherwise.
Section 9.4 Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every
Holder of Securities theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
Section 9.5 Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act as then in effect.
Section 9.6 Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities so modified as to conform, in the opinion of the Trustee and the
61
<PAGE> 69
Company, to any such supplemental indenture may be prepared and executed by the
Company, with the notations of Subsidiary Guarantees thereon executed by the
Subsidiary Guarantors, and authenticated and delivered by the Trustee in
exchange for Outstanding Securities.
Section 9.7 Notice of Supplemental Indentures.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 9.2 hereof, the
Company shall give notice thereof to the Holders of each Outstanding Security
affected, in the manner provided for in Section 15.5 hereof, setting forth in
general terms the substance of such supplemental indenture.
ARTICLE X
COVENANTS
Section 10.1 Payment of Principal, Premium, if any, and Interest.
The Company covenants and agrees for the benefit of the Holders that
it will duly and punctually pay the principal of (and premium, if any, on) and
interest on the Securities in accordance with the terms of the Securities and
this Indenture.
Section 10.2 Maintenance of Office or Agency.
The Company shall maintain an office or agency where Securities may be
presented or surrendered for payment, where Securities may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Company in respect of the Securities, the Subsidiary Guarantees and this
Indenture may be served. The Corporate Trust Office shall be such office or
agency of the Company, unless the Company shall designate and maintain some
other office or agency for one or more of such purposes. The Company will give
prompt written notice to the Trustee of any change in the location of any such
office or agency. If at any time the Company shall fail to maintain any such
required office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the aforementioned office of the Trustee, and the Company hereby
appoints the Trustee as its agent to receive all such presentations,
surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for
any or all such purposes and may from time to time rescind any such
designation. Further, if at any time there shall be no such office or agency
in The City of New York where the Securities may be presented or surrendered
for payment, the Company shall forthwith designate and maintain such an office
or agency in The City of New York, in order that the Securities shall at all
times be payable in The City of New York. The Company will give prompt written
notice to the Trustee of any such designation or rescission and any change in
the location of any such other office or agency.
62
<PAGE> 70
Section 10.3 Money for Security Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it
shall, on or before 11:00 a.m., Eastern time, on each due date of the principal
of (and premium, if any, on) or interest on any of the Securities, segregate
and hold in trust for the benefit of the Persons entitled thereto a sum
sufficient to pay the principal (and premium, if any) or interest so becoming
due until such sum shall be paid to such Persons or otherwise disposed of as
herein provided and will promptly notify the Trustee of its action or failure
so to act.
Whenever the Company shall have one or more Paying Agents for the
Securities, it will on or before 11:00 a.m., Eastern time, on each due date of
the principal of (and premium, if any, on), or interest on, any Securities,
deposit with a Paying Agent immediately available funds in a sum sufficient to
pay the principal (and premium, if any) or interest so becoming due, such funds
to be held in trust for the benefit of the Persons entitled to such principal,
premium or interest, and (unless such Paying Agent is the Trustee) the Company
shall promptly notify the Trustee of such action or any failure so to act.
The Company shall cause each Paying Agent (other than the Trustee) to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:
(a) hold all sums held by it for the payment of the principal of
(and premium, if any, on) or interest on Securities in trust for the benefit of
the Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(b) give the Trustee notice of any default by the Company (or any
other obligor upon the Securities) in the making of any payment of principal
(and premium, if any) or interest; and
(c) at any time during the continuance of any such default, upon
the written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held
in trust by the Company or such Paying Agent, such sums to be held by the
Trustee upon the same trusts as those upon which such sums were held by the
Company or such Paying Agent; and, upon such payment by any Paying Agent to the
Trustee, such Paying Agent shall be released from all further liability with
respect to such sums. The Trustee and each Paying Agent shall promptly pay to
the Company, upon Company Request, any money held by them (other than pursuant
to Article XII) at any time in excess of amounts required to pay principal,
premium, if any, or interest on the Securities.
Subject to applicable escheat and abandoned property laws, any money
deposited with the Trustee or any Paying Agent, or then held by the Company, in
trust for the payment of the principal of (and premium, if any, on) or interest
on any Security and remaining unclaimed for two years after such principal (and
premium, if any) or interest has become due and payable shall be paid to the
Company on Company Request, or (if then held by the Company) shall be
discharged from such trust; and the Holder of such Security shall thereafter,
as an unsecured general creditor,
63
<PAGE> 71
look only to the Company for payment thereof, and all liability of the Trustee
or such Paying Agent with respect to such trust money, and all liability of the
Company as trustee thereof, shall thereupon cease; provided, however, that the
Trustee or such Paying Agent, before being required to make any such repayment,
may at the expense of the Company cause to be published once, in a newspaper
published in the English language, customarily published on each Business Day
and of general circulation in the Borough of Manhattan, The City of New York,
notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such
publication, any unclaimed balance of such money then remaining will be repaid
to the Company.
Section 10.4 Corporate Existence.
Except as expressly permitted by Article VIII hereof, Section 10.17
hereof or other provisions of this Indenture, the Company shall do or cause to
be done all things necessary to preserve and keep in full force and effect the
corporate existence, rights (charter and statutory) and franchises of the
Company and each Restricted Subsidiary; provided, however, that the Company
shall not be required to preserve any such existence of its Restricted
Subsidiaries, rights or franchises, if the Board of Directors of the Company
shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company and its Restricted Subsidiaries, taken
as a whole, and that the loss thereof is not disadvantageous in any material
respect to the Holders.
Section 10.5 Payment of Taxes; Maintenance of Properties;
Insurance.
The Company shall pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all material taxes, assessments
and governmental charges levied or imposed upon the Company or any Restricted
Subsidiary or upon the income, profits or Property of the Company or any
Restricted Subsidiary and (b) all lawful claims for labor, materials and
supplies, which, if unpaid, might by law become a Lien upon the Property of the
Company or any Restricted Subsidiary; provided, however, that the Company shall
not be required to pay or discharge or cause to be paid or discharged any such
tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings and for which
appropriate provision has been made in accordance with GAAP.
The Company shall cause all material Properties owned by the Company
or any Restricted Subsidiary and used or held for use in the conduct of its
business or the business of any Restricted Subsidiary to be maintained and kept
in good condition, repair and working order (ordinary wear and tear excepted),
all as in the judgment of the Company or such Restricted Subsidiary may be
necessary so that its business may be properly and advantageously conducted at
all times; provided, however, that nothing in this Section shall prevent the
Company or any Restricted Subsidiary from discontinuing the maintenance of any
of such Properties if such discontinuance is, in the judgment of the Company or
such Restricted Subsidiary, as the case may be, desirable in the conduct of the
business of the Company or such Restricted Subsidiary and not disadvantageous
in any material respect to the Holders. Notwithstanding the foregoing, nothing
contained in this Section 10.5 shall limit or impair in any way the right of
the Company and its
64
<PAGE> 72
Restricted Subsidiaries to sell, divest and otherwise to engage in transactions
that are otherwise permitted by this Indenture.
The Company shall at all times keep all of its, and cause its
Restricted Subsidiaries to keep their, Properties which are of an insurable
nature insured with insurers, believed by the Company to be responsible,
against loss or damage to the extent that property of similar character and in
a similar location is usually so insured by corporations similarly situated and
owning like Properties.
The Company or any Restricted Subsidiary may adopt such other plan or
method of protection, in lieu of or supplemental to insurance with insurers,
whether by the establishment of an insurance fund or reserve to be held and
applied to make good losses from casualties, or otherwise, conforming to the
systems of self-insurance maintained by corporations similarly situated and in
a similar location and owning like Properties, as may be determined by the
Board of Directors of the Company or such Restricted Subsidiary.
Section 10.6 Limitation on Other Senior Subordinated Indebtedness
Notwithstanding the provisions of Section 10.12 hereof, (i) the
Company shall not incur (as such term is defined in Section 10.12(a) hereof)
any Indebtedness that is expressly subordinate or junior in right of payment to
any Senior Indebtedness of the Company and senior in right of payment to the
Securities and (ii) no Subsidiary Guarantor shall incur (as such term is
defined in Section 10.12(a) hereof) any Indebtedness that is expressly
subordinate or junior in right of payment to any Senior Indebtedness of such
Subsidiary Guarantor and senior in right of payment to its Subsidiary
Guarantee, provided, however, that the foregoing limitations shall not apply to
distinctions between categories of Indebtedness that exist by reason of any
Liens arising or created in respect of some but not all such Indebtedness.
Section 10.7 Limitation on Conduct of Business.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, engage in the conduct of any business other than the Oil and
Gas Business.
Section 10.8 Statement by Officers as to Default.
(a) The Company shall deliver to the Trustee, within 100 days
after the end of each fiscal year of the Company and within 45 days of the end
of each of the first, second and third quarters of each fiscal year of the
Company, an Officers' Certificate stating that a review of the activities of
the Company and its Restricted Subsidiaries during the preceding fiscal quarter
or fiscal year, as applicable, has been made under the supervision of the
signing Officers with a view to determining whether the Company has kept,
observed, performed and fulfilled its obligations under this Indenture, and
further stating, as to each such Officer signing such certificate, that to the
best of such Officer's knowledge the Company has kept, observed, performed and
fulfilled each and every condition and covenant contained in this Indenture and
no Default or Event of Default has occurred and is continuing (or, if a Default
or Event of Default shall have occurred to either such Officer's knowledge,
describing all such Defaults or Events of Default of which
65
<PAGE> 73
such Officer may have knowledge and what action the Company is taking or
proposes to take with respect thereto). Such Officers' Certificate shall comply
with TIA Section 314(a)(4). For purposes of this Section 10.8(a), such
compliance shall be determined without regard to any period of grace or
requirement of notice under this Indenture.
(b) The Company shall, so long as any of the Securities is
outstanding, deliver to the Trustee, upon any of its Officers becoming aware of
any Default or Event of Default, an Officers' Certificate specifying such
Default or Event of Default and what action the Company proposes to take with
respect thereto, within 10 days of its occurrence.
Section 10.9 Provision of Financial Information.
The Company shall file on a timely basis with the SEC, 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
shall also file with the Trustee (with exhibits), and provide to each Holder of
Securities (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, if filing such reports and documents with the Commission is not
accepted by the Commission or is prohibited under the Exchange Act, the Company
shall supply at its cost copies of such reports and documents (including any
exhibits thereto) to any Holder of Securities promptly upon written request
given in accordance with Section 15.4 hereof.
Section 10.10 Limitation on Restricted Payments.
(a) The Company shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, take the following actions:
(i) declare or pay any dividend on, or make any
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
proceeds of Permitted Refinancing Indebtedness, or
66
<PAGE> 74
(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), (A) no Default or Event of Default shall have
occurred and be continuing, (B) the Company could incur $1.00 of additional
Indebtedness (excluding Permitted Indebtedness) in accordance with Section
10.12(a) hereof and (C) the aggregate amount of all Restricted Payments
declared or made after the date of this Indenture shall not exceed the sum
(without duplication) of the following:
(1) 50% of the Consolidated Net Income of the Company accrued on
a cumulative basis during the period beginning on October 1, 1997 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 shall be a loss, minus 100% of such loss),
plus
(2) the aggregate Net Cash Proceeds received after the date of
this Indenture by the Company from the issuance or sale (other than to
any of its Restricted Subsidiaries) of shares of Qualified Capital
Stock of the Company or any options, warrants or rights to purchase
such shares of Qualified Capital Stock of the Company, plus
(3) the aggregate Net Cash Proceeds received after the date of
this 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, plus
(4) the aggregate Net Cash Proceeds received after the date of
this 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, plus
(5) 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 this 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 this Indenture, plus
(6) $25,000,000.
67
<PAGE> 75
(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), (iii) and (iv) 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 of, a substantially concurrent issue and sale (other
than to a Restricted Subsidiary) of shares of Qualified Capital Stock
of the Company;
(iii) the repurchase, 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 issue and sale (other than
to a Restricted Subsidiary) of shares of Qualified Capital Stock of
the Company; and
(iv) repurchases, acquisitions or retirements of shares of
Qualified Capital Stock of the Company deemed to occur upon the
exercise of stock options or similar rights issued under employee
benefit plans of the Company if such shares represent all or a portion
of the exercise price or are surrendered in connection with satisfying
any federal income tax obligation. The actions described in clauses
(i), (ii), (iii) and (iv) 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 (C) 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 (C) of paragraph (a) when declared, but not
also when subsequently paid pursuant to such clause (i).
(c) In computing Consolidated Net Income under paragraph (a)
above, (1) the Company shall use audited financial statements for the portions
of the relevant period for which audited financial statements are available on
the date of determination and unaudited financial statements and other current
financial data based on the books and records of the Company for the remaining
portion of such period and (2) the Company shall be permitted to rely in good
faith on the financial statements and other financial data derived from the
books and records of the Company that are available on the date of
determination. If the Company makes a Restricted Payment which, at the time of
the making of such Restricted Payment would in the good faith determination of
the Company be permitted under the requirements of this Indenture, such
Restricted Payment shall be deemed to have been made in compliance with this
Indenture notwithstanding any subsequent
68
<PAGE> 76
adjustments made in good faith to the Company's financial statements affecting
Consolidated Net Income of the Company for any period.
Section 10.11 Limitation on Guarantees by Subsidiary Guarantors.
The Company shall 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 Securities; provided, however, that this Section 10.11 shall 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's becoming a Subsidiary
of the Company.
Section 10.12 Limitation on Indebtedness and Disqualified Capital
Stock.
(a) The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, create, incur, 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 Common 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
fiscal quarters immediately preceding such event, taken as one period, would
have been equal to or greater than 2.5 to 1.0.
(b) The amount of any guarantee by the Company or any Restricted
Subsidiary of any Indebtedness of the Company or one or more Restricted
Subsidiaries shall not be deemed to be outstanding or incurred for purposes of
this Section 10.12 hereof in addition to the amount of Indebtedness which it
guarantees.
(c) For purposes of this Section 10.12, Indebtedness of any Person
that becomes a Restricted Subsidiary by merger, consolidation or other
acquisition shall be deemed to have been incurred by the Company and the
Restricted Subsidiary at the time such Person becomes a Restricted Subsidiary.
Section 10.13 Additional Subsidiary Guarantors.
(a) The Company shall cause each Restricted Subsidiary that
becomes, or comes into existence as, a Restricted Subsidiary after the date of
this Indenture and has assets, businesses, divisions, real property or
equipment with a Fair Market Value in excess of $1,000,000 to execute and
deliver a supplemental indenture to this Indenture agreeing to be bound by its
terms applicable to a Subsidiary Guarantor and providing for a Subsidiary
Guarantee of the Securities by such Restricted Subsidiary.
(b) Notwithstanding the foregoing and the other provisions of this
Indenture, any Subsidiary Guarantee incurred by a Restricted Subsidiary
pursuant to this Section 10.13 shall
69
<PAGE> 77
provide by its terms that it shall be automatically and unconditionally
released and discharged upon the terms and conditions set forth in Section 13.3
hereof.
Section 10.14 Limitation on Issuances and Sales of Capital Stock by
Restricted Subsidiaries.
The Company (a) shall not permit any Restricted Subsidiary to issue or
sell any Capital Stock to any Person other than to the Company or another
Restricted Subsidiary (unless, after giving effect thereto, such Restricted
Subsidiary no longer qualifies as such) and (b) shall not permit any Person
other than the Company or another Restricted Subsidiary to own any Capital
Stock of any Restricted Subsidiary.
Section 10.15 Limitation on Liens.
The Company shall not, and shall 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 Properties, whether now owned or acquired after the date of
this Indenture, or any income or profits 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
Securities 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 in right of payment to the
Securities or the Subsidiary Guarantees, the Lien securing such Indebtedness
shall be subordinated and junior to the Lien securing the Securities or the
Subsidiary Guarantees, as the case may be, with the same relative priority as
such Indebtedness has with respect to the Securities or the Subsidiary
Guarantees. The foregoing covenant shall not apply to any Lien securing
Acquired Indebtedness, provided that any such Lien extends only to the
Properties 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.
Section 10.16 Purchase of Securities Upon Change of Control.
(a) Upon the occurrence of a Change of Control, the Company shall
be obligated to make an offer to purchase (a "Change of Control Offer") all of
the then Outstanding Securities, in whole or in part, from the Holders of such
Securities in integral multiples of $1,000, at a purchase price (the "Change of
Control Purchase Price") equal to 101% of the aggregate principal amount of
such Securities, plus accrued and unpaid interest, if any, to the Change of
Control Purchase Date (as defined below), in accordance with the procedures set
forth in paragraphs (b), (c) and (d) of this Section. The Company shall,
subject to the provisions described below, be required to purchase all
Securities properly tendered into the Change of Control Offer and not
withdrawn. 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
70
<PAGE> 78
of Control Offer to be made by the Company and purchases all Securities validly
tendered and not withdrawn under such Change of Control Offer.
(b) 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 (as defined below).
(c) Not later than the 30th day following any Change of Control,
the Company shall give to the Trustee in the manner provided in Section 15.4
and each Holder of the Securities in the manner provided in Section 15.5, a
notice (the "Change of Control Notice") governing the terms of the Change of
Control Offer and stating:
(1) that a Change in Control has occurred and that such
Holder has the right to require the Company to repurchase such
Holder's Securities, or portion thereof, at the Change of Control
Purchase Price;
(2) any information regarding such Change of Control
required to be furnished pursuant to Rule 13e-1 under the Exchange Act
and any other securities laws and regulations thereunder;
(3) a purchase date (the "Change of Control Purchase
Date") which shall be on a Business Day and no earlier than 30 days
nor later than 60 days from the date the Change of Control occurred;
(4) that any Security, or portion thereof, not tendered
or accepted for payment will continue to accrue interest:
(5) that unless the Company defaults in depositing money
with the Paying Agent in accordance with the last paragraph of clause
(d) of this Section 10.16, or payment is otherwise prevented, any
Security, or portion thereof, accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the
Change of Control Purchase Date; and
(6) the instructions a Holder must follow in order to
have his Securities repurchased in accordance with paragraph (d) of
this Section.
If any of the Securities subject to the Change of Control Offer is in the form
of a Global Security, then the Company shall modify the Change of Control
Notice to the extent necessary to accord with the procedures of the Depository
applicable thereto.
(d) Holders electing to have Securities purchased will be required
to surrender such Securities to the Paying Agent at the address specified in
the Change of Control Notice at least five Business Days prior to the Change of
Control Purchase Date. Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than three Business Days prior to the
Change of Control Purchase Date, a telegram, telex, facsimile transmission or
letter setting forth the name
71
<PAGE> 79
of the Holder, the certificate number(s) (in the case of Physical Securities)
and principal amount of the Securities delivered for purchase by the Holder as
to which his election is to be withdrawn and a statement that such Holder is
withdrawing his election to have such Securities purchased. Holders whose
Securities are purchased only in part will be issued new Securities equal in
principal amount to the unpurchased portion of the Securities surrendered.
On the Change of Control Purchase Date, the Company shall (i) accept
for payment Securities or portions thereof validly tendered pursuant to a
Change of Control Offer, (ii) deposit with the Paying Agent money sufficient to
pay the purchase price of all Securities or portions thereof so tendered, and
(iii) deliver or cause to be delivered to the Trustee the Securities so
accepted. The Paying Agent shall promptly mail or deliver to Holders of the
Securities so tendered payment in an amount equal to the purchase price for the
Securities, and the Company shall execute and the Trustee shall authenticate
and mail or make available for delivery to such Holders a new Security having
the notation of Subsidiary Guarantees thereon executed by the Subsidiary
Guarantors and equal in principal amount to any unpurchased portion of the
Security which any such Holder did not surrender for purchase. The Company
shall announce the results of a Change of Control Offer on or as soon as
practicable after the Change of Control Purchase Date. For purposes of this
Section 10.16, the Trustee will act as the Paying Agent.
(e) The Company shall comply with Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable, in the event that a Change of Control
occurs and the Company is required to purchase Securities as described in this
Section 10.16.
Section 10.17 Limitation on Asset Sales.
(a) The Company shall not, and shall 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 Properties
sold or otherwise disposed of pursuant to the Asset Sale, (ii) at least 75% 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)
of this Section 10.17(a). 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 Senior Indebtedness (including Senior
72
<PAGE> 80
Notes) or Pari Passu Indebtedness (provided that, in connection with the
reduction of Pari Passu Indebtedness, the Company or such Restricted Subsidiary
shall redeem a pro rata portion of the Securities pursuant to Article XI
hereof) 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 Available Proceeds thereof in Properties 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 shall constitute "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals or exceeds
$10,000,000 (the "Trigger Date"), the Company shall make an offer to purchase,
from all Holders of the Securities, an aggregate principal amount of Securities
equal to such Excess Proceeds as follows:
(1) Not later than the 30th day following the Trigger
Date, the Company shall give to the Trustee in the manner provided in
Section 15.4 hereof and each Holder of the Securities in the manner
provided in Section 15.5 hereof, a notice (a "Purchase Notice")
offering to purchase (a "Net Proceeds Offer") from all Holders of the
Securities the maximum principal amount (expressed as a multiple of
$1,000) of Securities that may be purchased out of an amount (the
"Payment Amount") equal to such Excess Proceeds.
(2) The offer price for the Securities shall be payable
in cash in an amount equal to 100% of the aggregate principal amount
of the Securities tendered pursuant to a Net Proceeds Offer (the
"Offered Price"), plus accrued and unpaid interest, if any, to the
date such Net Proceeds Offer is consummated, in accordance with
paragraph (d) of this Section. To the extent that the aggregate
Offered Price of the Securities 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 Section 10.10 hereof.
(3) If the aggregate Offered Price of Securities validly
tendered and not withdrawn by Holders thereof exceeds the Payment
Amount, Securities to be purchased will be selected on a pro rata
basis by the Trustee based on the aggregate principal amount of
Securities so tendered. Upon completion of a Net Proceeds Offer, the
amount of Excess Proceeds shall be reset to zero.
(4) The Purchase Notice shall set forth a purchase date
(the "Net Proceeds Payment Date"), which shall be on a Business Day no
earlier than 30 days nor later than 60 days from the Trigger Date. The
Purchase Notice shall also state (i) that a Trigger Date with respect
to one or more Asset Sales has occurred and that such Holder has the
right to require the Company to repurchase such Holder's Securities at
the Offered Price, subject to the limitations described in the
foregoing paragraph (3), (ii) any information regarding such Net
Proceeds Offer required to be furnished pursuant to Rule 13e-1 under
the Exchange Act and any other securities laws and regulations
thereunder, (iii) that any Security, or portion thereof, not tendered
or accepted for payment will continue to accrue
73
<PAGE> 81
interest, (iv) that, unless the Company defaults in depositing money
with the Paying Agent in accordance with the last paragraph of clause
(d) of this Section 10.17, or payment is otherwise prevented, any
Security, or portion thereof, accepted for payment pursuant to the Net
Proceeds Offer shall cease to accrue interest after the Net Proceeds
Payment Date, and (v) the instructions a Holder must follow in order
to have his Securities repurchased in accordance with paragraph (d) of
this Section.
(d) Holders electing to have Securities purchased will be required
to surrender such Securities to the Paying Agent at the address specified in
the Purchase Notice at least five Business Days prior to the Net Proceeds
Payment Date. Holders will be entitled to withdraw their election if the Paying
Agent receives, not later than three Business Days prior to the Net Proceeds
Payment Date, a telegram, telex, facsimile transmission or letter setting forth
the name of the Holder, the certificate number(s) (in the case of Physical
Securities) and principal amount of the Securities delivered for purchase by
the Holder as to which his election is to be withdrawn and a statement that
such Holder is withdrawing his election to have such Securities purchased.
Holders whose Securities are purchased only in part will be issued new
Securities equal in principal amount to the unpurchased portion of the
Securities surrendered.
On the Net Proceeds Payment Date, the Company shall (i) accept for
payment Securities or portions thereof validly tendered pursuant to a Net
Proceeds Offer in an aggregate principal amount equal to the Payment Amount or
such lesser amount of Securities as has been tendered, (ii) deposit with the
Paying Agent money sufficient to pay the purchase price of all Securities or
portions thereof so tendered in an aggregate principal amount equal to the
Payment Amount or such lesser amount and (iii) deliver or cause to be delivered
to the Trustee the Securities so accepted. The Paying Agent shall promptly mail
or deliver to Holders of the Securities so accepted payment in an amount equal
to the purchase price, and the Company shall execute and the Trustee shall
authenticate and mail or make available for delivery to such Holders a new
Security having the notation of Subsidiary Guarantees thereon executed by the
Subsidiary Guarantors and equal in principal amount to any unpurchased portion
of the Security which any such Holder did not surrender for purchase. Any
Securities not so accepted will be promptly mailed or delivered to the Holder
thereof. The Company shall announce the results of a Net Proceeds Offer on or
as soon as practicable after the Net Proceeds Payment Date. For purposes of
this Section 10.17, the Trustee will act as the Paying Agent.
(e) The Company shall 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
shall 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 Securities as described in this
Section 10.17.
74
<PAGE> 82
Section 10.18 Limitation on Transactions with Affiliates.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries 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 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 related transactions is on terms that are no less favorable to the Company
or such Restricted Subsidiary, as the case may be, than would be available in a
comparable transaction in arm's-length dealings with an unrelated third party,
(ii) with respect to a transaction or series of related transactions involving
aggregate payments in excess of $1,000,000, the Company delivers an Officers'
Certificate to the Trustee certifying that such transaction or series of
related transactions complies with clause (i) above and that such transaction
or series of related 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 related transactions involving aggregate payments in
excess of $10,000,000, 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 related 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 related 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 $1,000,000
outstanding at any one time, (x) indemnities of officers, directors, employees
and other agents of the Company or any Restricted Subsidiary permitted by
corporate charter or other organizational document, 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.
Section 10.19 Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries.
The Company shall not, and shall 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 to (a) pay dividends, in cash or otherwise, or
make any other distributions on or in respect of 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 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
75
<PAGE> 83
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 of the
Person, so acquired, provided that such Indebtedness was not incurred in
anticipation of such acquisition or (iii) the Bank Credit Facilities as in
effect on the date of this Indenture or any agreement that amends, modifies,
supplements, restates, extends, renews or refinances the Bank Credit
Facilities, provided that the terms and conditions of any Payment Restriction
thereunder are not materially less favorable to the Holders of the Securities
than those under the Bank Credit Facilities as in effect on the date of this
Indenture.
Section 10.20 Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Sections 10.5 through 10.12, Sections
10.14 and 10.15 and Sections 10.18 through 10.19 hereof if, before or after the
time for such compliance, the Holders of at least a majority in aggregate
principal amount of the Outstanding Securities and the Subsidiary Guarantors,
by Act of such Holders and written agreement of the Subsidiary Guarantors,
waive such compliance in such instance with such term, provision or condition,
but no such waiver shall extend to or affect such term, provision or condition
except to the extent so expressly waived, and, until such waiver shall become
effective, the obligations of the Company and the duties of the Trustee in
respect of any such term, provision or condition shall remain in full force and
effect.
ARTICLE XI
REDEMPTION OF SECURITIES
Section 11.1 Right of Redemption.
The Securities may be redeemed, at the election of the Company, as a
whole or from time to time in part, at any time on or after January 15, 2003,
upon not less than 30 or more than 60 days' notice to each Holder of Securities
to be redeemed, subject to the conditions and at the Redemption Prices
(expressed as percentages of principal amount) specified in the form of
Security, together with accrued and unpaid interest, if any, to the Redemption
Date.
In addition, at any time on or prior to January 15, 2001, up to
$35,000,000 in aggregate principal amount of Securities may be redeemed, at the
election of the Company, upon not less than 30 or more than 60 days' notice to
each Holder of Securities to be redeemed, from the Net Cash Proceeds of a
Public Equity Offering, at the Redemption Price (expressed as a percentage of
principal amount) specified in the form of Security, together with accrued and
unpaid interest, if any, to the Redemption Date, provided that at least
$95,000,000 in aggregate principal amount of Securities remains Outstanding
immediately after such redemption and that such redemption occurs within 60
days following the closing of such Public Equity Offering.
76
<PAGE> 84
Section 11.2 Applicability of Article.
Redemption of Securities at the election of the Company or otherwise,
as permitted or required by any provision of this Indenture, shall be made in
accordance with such provision and this Article.
Section 11.3 Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities pursuant to
Section 11.1 hereof shall be evidenced by a Board Resolution. In case of any
redemption at the election of the Company, the Company shall, at least 60 days
prior to the Redemption Date fixed by the Company (unless a shorter notice
shall be satisfactory to the Trustee), notify the Trustee of such Redemption
Date and of the principal amount of Securities to be redeemed and shall deliver
to the Trustee such documentation and records as shall enable the Trustee to
select the Securities to be redeemed pursuant to Section 11.4 hereof. Any
election to redeem Securities shall be revocable until the Company gives a
notice of redemption pursuant to Section 11.5 hereof to the Holders of
Securities to be redeemed.
Section 11.4 Selection by Trustee of Securities to Be Redeemed.
If less than all the Securities are to be redeemed, the particular
Securities to be redeemed shall be selected not less than 30 days nor more than
60 days prior to the Redemption Date by the Trustee, from the Outstanding
Securities not previously called for redemption, pro rata, by lot or by any
other method as the Trustee shall deem fair and appropriate and which may
provide for the selection for redemption of portions of the principal of
Securities; provided, however, that any such partial redemption shall be in
integral multiples of $1,000.
The Trustee shall promptly notify the Company in writing of the
Securities selected for redemption and, in the case of any Securities selected
for partial redemption, the principal amount thereof to be redeemed.
The provisions of the two preceding paragraphs of this Section 11.4
shall not apply with respect to any redemption affecting only a Global
Security, whether such Global Security is to be redeemed in whole or in part.
In the case of any such redemption in part, the unredeemed portion of the
principal amount of the Global Security shall be in an authorized denomination.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Securities shall relate, in
the case of any Security redeemed or to be redeemed only in part, to the
portion of the principal amount of such Security which has been or is to be
redeemed.
77
<PAGE> 85
Section 11.5 Notice of Redemption.
Notice of redemption shall be given in the manner provided for in
Section 15.5 hereof not less than 30 nor more than 60 days prior to the
Redemption Date, to each Holder of Securities to be redeemed.
All notices of redemption shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) if less than all Outstanding Securities are to be redeemed,
the identification (and, in the case of a partial redemption, the principal
amounts) of the particular Securities to be redeemed;
(d) that on the Redemption Date the Redemption Price (together
with accrued interest, if any, to the Redemption Date payable as provided in
Section 11.7 hereof) will become due and payable upon each such Security, or
the portion thereof, to be redeemed, and that, unless the Company shall default
in the payment of the Redemption Price and any applicable accrued interest,
interest thereon will cease to accrue on and after said date; and
If any of the Securities to be redeemed is in the form of a Global
Security, then the Company shall modify such notice to the extent necessary to
accord with the procedures of the Depositary applicable to redemptions.
(e) the place or places where such Securities are to be
surrendered for payment of the Redemption Price.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company. Failure to give such
notice by mailing to any Holder of Securities or any defect therein shall not
affect the validity of any proceedings for the redemption of other Securities.
Section 11.6 Deposit of Redemption Price.
On or before 11:00 a.m., Eastern time, on any Redemption Date, the
Company shall deposit with the Trustee or with a Paying Agent (or, if the
Company is acting as its own Paying Agent, segregate and hold in trust as
provided in Section 10.3 hereof) an amount of money sufficient to pay the
Redemption Price of, and accrued and unpaid interest on, all the Securities
which are to be redeemed on such Redemption Date.
78
<PAGE> 86
Section 11.7 Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified (together with accrued and unpaid interest,
if any, to the Redemption Date), and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued and
unpaid interest) such Securities shall cease to bear interest. Upon surrender
of any such Security for redemption in accordance with said notice, such
Security shall be paid by the Company at the Redemption Price, together with
accrued and unpaid interest, if any, to the Redemption Date; provided, however,
that installments of interest whose Stated Maturity is on or prior to the
Redemption Date shall be payable to the Holders of such Securities, or one or
more Predecessor Securities, registered as such at the close of business on the
relevant Record Dates according to their terms and the provisions of Section
3.8 hereof.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal (and premium, if any) shall,
until paid, bear interest from the Redemption Date at the rate borne by the
Securities.
Section 11.8 Securities Redeemed in Part.
Any Security which is to be redeemed only in part shall be surrendered
at the office or agency of the Company maintained for such purpose pursuant to
Section 10.2 hereof (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or such Holder's
attorney duly authorized in writing), and the Company shall execute, and the
Trustee shall authenticate and deliver to the Holder of such Security without
service charge, a new Security or Securities, of any authorized denomination as
requested by such Holder, in aggregate principal amount equal to and in
exchange for the unredeemed portion of the principal amount of the Security so
surrendered.
ARTICLE XII
DEFEASANCE AND COVENANT DEFEASANCE
Section 12.1 Company's Option to Effect Defeasance or Covenant
Defeasance.
The Company may, at its option by Board Resolution, at any time, with
respect to the Securities, elect to have either Section 12.2 or Section 12.3
hereof be applied to all Outstanding Securities upon compliance with the
conditions set forth below in this Article XII.
Section 12.2 Defeasance and Discharge.
Upon the Company's exercise under Section 12.1 hereof of the option
applicable to this Section 12.2, the Company and the Subsidiary Guarantors
shall be deemed to have been discharged from their respective obligations with
respect to all Outstanding Securities on the date
79
<PAGE> 87
the conditions set forth in Section 12.4 hereof are satisfied (hereinafter,
"legal defeasance"). For this purpose, such legal defeasance means that the
Company and the Subsidiary Guarantors shall be deemed (i) to have paid and
discharged their respective obligations under the Outstanding Securities;
provided, however, that the Securities shall continue to be deemed to be
"Outstanding" for purposes of Section 12.5 hereof and the other Sections of
this Indenture referred to in clauses (A) and (B) below, and (ii) to have
satisfied all their other obligations with respect to such Securities and this
Indenture (and the Trustee, at the expense and direction of the Company, shall
execute proper instruments acknowledging the same), except for the following
which shall survive until otherwise terminated or discharged hereunder: (A)
the rights of Holders of Outstanding Securities to receive, solely from the
trust fund described in Section 12.4 hereof and as more fully set forth in such
Section, payments in respect of the principal of (and premium if any, on) and
interest on such Securities when such payments are due (or at such time as the
Securities would be subject to redemption at the option of the Company in
accordance with this Indenture), (B) the respective obligations of the Company
and the Subsidiary Guarantors under Sections 3.3, 3.4, 3.5, 3.6, 3.7, 5.8,
5.14, 6.6, 6.9, 6.10, 10.2, 10.3, 13.1 (to the extent it relates to the
foregoing Sections and this Article XII), 13.4 and 13.5 hereof, (C) the rights,
powers, trusts, duties and immunities of the Trustee hereunder, and (D) the
obligations of the Company and the Subsidiary Guarantors under this Article
XII. Subject to compliance with this Article XII, the Company may exercise its
option under this Section 12.2 notwithstanding the prior exercise of its option
under Section 12.3 hereof with respect to the Securities.
Section 12.3 Covenant Defeasance.
Upon the Company's exercise under Section 12.1 hereof of the option
applicable to this Section 12.3, the Company and each Subsidiary Guarantor
shall be released from their respective obligations under any covenant
contained in Article VIII, in Sections 10.5 through 10.19 and in Section 13.2
hereof with respect to the Outstanding Securities on and after the date the
conditions set forth below are satisfied (hereinafter, "covenant defeasance"),
and the Securities shall thereafter be deemed not to be "Outstanding" for the
purposes of any direction, waiver, consent or declaration or Act of Holders
(and the consequences of any thereof) in connection with such covenants, but
shall continue to be deemed "Outstanding" for all other purposes hereunder. For
this purpose, such covenant defeasance means that, with respect to the
Outstanding Securities, the Company and each Subsidiary Guarantor may omit to
comply with and shall have no liability in respect of any term, condition or
limitation set forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant or by reason of
any reference in any such covenant to any other provision herein or in any
other document and such omission to comply shall not constitute a Default or an
Event of Default under Section 5.1(c) or 5.1(d) hereof, but, except as
specified above, the remainder of this Indenture and such Securities shall be
unaffected thereby.
Section 12.4 Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either Section
12.2 or Section 12.3 hereof to the Outstanding Securities:
80
<PAGE> 88
(a) The Company or any Subsidiary Guarantor shall irrevocably have
deposited or caused to be deposited with the Trustee (or another trustee
satisfying the requirements of Section 6.7 hereof who shall agree to comply
with the provisions of this Article XII applicable to it) as trust funds in
trust for the purpose of making the following payments, specifically pledged as
security for, and dedicated solely to, the benefit of the Holders of such
Securities, (A) cash in United States dollars in an amount, or (B) U.S.
Government Obligations which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will provide, not
later than one day before the due date of any payment, money in an amount, or
(C) a combination thereof, sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, to pay and discharge, and which
shall be applied by the Trustee (or other qualifying trustee) to pay and
discharge, the principal of (and premium, if any, on) and interest on the
Outstanding Securities on the Stated Maturity thereof (or Redemption Date, if
applicable), provided that the Trustee shall have been irrevocably instructed
in writing by the Company to apply such money or the proceeds of such U.S.
Government Obligations to said payments with respect to the Securities. Before
such a deposit, the Company may give to the Trustee, in accordance with Section
11.3 hereof, a notice of its election to redeem all of the Outstanding
Securities at a future date in accordance with Article XI hereof, which notice
shall be irrevocable. Such irrevocable redemption notice, if given, shall be
given effect in applying the foregoing. For this purpose, "U.S. Government
Obligations" means securities that are (x) direct obligations of the United
States of America for the timely payment of which its full faith and credit is
pledged or (y) obligations of a Person controlled or supervised by and acting
as an agency or instrumentality of the United States of America the timely
payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to
the holder of such depository receipt from any amount received by the custodian
in respect of the U.S. Government Obligation or the specific payment of
principal of or interest on the U.S. Government Obligation evidenced by such
depository receipt.
(b) No Default or Event of Default with respect to the Securities
shall have occurred and be continuing on the date of such deposit or, insofar
as Sections 5.1(h) and 5.1(i) are concerned, at any time during the period
ending on the 91st day after the date of such deposit.
(c) Such legal defeasance or covenant defeasance shall not cause
the Trustee to have a conflicting interest under this Indenture or the Trust
Indenture Act with respect to any securities of the Company or any Subsidiary
Guarantor.
(d) Such legal defeasance or covenant defeasance shall not result
in a breach or violation of, or constitute a default under, any other material
agreement or instrument to which the Company or any Subsidiary Guarantor is a
party or by which it is bound, as evidenced to the Trustee in an Officers'
Certificate delivered to the Trustee concurrently with such deposit.
81
<PAGE> 89
(e) In the case of an election under Section 12.2 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel stating that
(i) the Company has received from, or there has been published by, the Internal
Revenue Service a ruling, or (ii) since the date of this Indenture there has
been a change in the applicable federal income tax laws, in either case
providing that the Holders of the Outstanding Securities will not recognize
income, gain or loss for federal income tax purposes as a result of such legal
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 had not occurred (it being understood that (x) such Opinion of
Counsel shall also state that such ruling or applicable law is consistent with
the conclusions reached in such Opinion of Counsel and (y) the Trustee shall be
under no obligation to investigate the basis or correctness of such ruling).
(f) In the case of an election under Section 12.3 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Holders of the Outstanding Securities will not recognize income, gain
or loss for federal income tax purposes as a result of such 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 covenant
defeasance had not occurred.
(g) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, which, taken together, state that all
conditions precedent provided for relating to either the legal defeasance under
Section 12.2 hereof or the covenant defeasance under Section 12.3 (as the case
may be) have been complied with.
Section 12.5 Deposited Money and U.S. Government Obligations to Be
Held in Trust; Other Miscellaneous Provisions.
Subject to the provisions of the last paragraph of Section 10.3
hereof, all money and U.S. Government Obligations (including the proceeds
thereof) deposited with the Trustee (or other qualifying trustee--collectively
for purposes of this Section 12.5, the "Trustee") pursuant to Section 12.4
hereof in respect of the Outstanding Securities shall be held in trust and
applied by the Trustee, in accordance with the provisions of such Securities
and this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Holders of such Securities of all sums due and to become due
thereon in respect of principal (and premium, if any) and interest, but such
money need not be segregated from other funds except to the extent required by
law.
The Company shall pay and indemnify the Trustee against all taxes,
fees or other charges imposed on or assessed against the U.S. Governmental
Obligations deposited pursuant to Section 12.4 hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the Outstanding
Securities.
Anything in this Article XII to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government
82
<PAGE> 90
Obligations held by it as provided in Section 12.4 hereof which, in the opinion
of a nationally recognized firm of independent public accountants expressed in
a written certification thereof delivered to the Trustee, are in excess of the
amount thereof which would then be required to be deposited to effect an
equivalent legal defeasance or covenant defeasance, as applicable, in
accordance with this Article.
Section 12.6 Reinstatement.
If the Trustee or any Paying Agent is unable to apply any money in
accordance with Section 12.5 hereof by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, then the Company's and the Subsidiary Guarantors' obligations
under this Indenture and the Securities shall be revived and reinstated as
though no deposit had occurred pursuant to Section 12.2 or 12.3 hereof, as the
case may be, until such time as the Trustee or Paying Agent is permitted to
apply all such money in accordance with Section 12.5 hereof; provided, however,
that if the Company or any Subsidiary Guarantor makes any payment of principal
of (or premium, if any, on) or interest on any Security following the
reinstatement of its obligations, the Company or such Subsidiary Guarantor
shall be subrogated to the rights of the Holders of such Securities to receive
such payment from the money held by the Trustee or Paying Agent.
ARTICLE XIII
SUBSIDIARY GUARANTEES
Section 13.1 Unconditional Guarantee.
Each Subsidiary Guarantor hereby unconditionally, jointly and
severally, guarantees (each such guarantee being referred to herein as this
"Subsidiary Guarantee," with all such guarantees being referred to herein as
the "Subsidiary Guarantees") to each Holder of Securities authenticated and
delivered by the Trustee and to the Trustee and its successors and assigns, the
full and prompt performance of the Company's obligations under this Indenture
and the Securities and that:
(a) the principal of (and premium, if any, on) and interest on the
Securities will be promptly paid in full when due, whether at maturity, by
acceleration, redemption or otherwise, and interest on the overdue principal of
and interest on the Securities, if any, to the extent lawful, and all other
obligations of the Company to the Holders or the Trustee hereunder or
thereunder will be promptly paid in full or performed, all in accordance with
the terms hereof and thereof; and
(b) in case of any extension of time of payment or renewal of any
Securities or of any such other obligations, the same will be promptly paid in
full when due or performed in accordance with the terms of the extension or
renewal, whether at Stated Maturity, by acceleration or otherwise;
83
<PAGE> 91
subject, however, in the case of clauses (a) and (b) above, to the limitations
set forth in Section 13.4 hereof.
Failing payment when due of any amount so guaranteed or any
performance so guaranteed for whatever reason, the Subsidiary Guarantors will
be jointly and severally obligated to pay the same immediately. Each Subsidiary
Guarantor hereby agrees that its obligations hereunder shall, to the extent
permitted by law, be unconditional, irrespective of the validity, regularity or
enforceability of the Securities or this Indenture, the absence of any action
to enforce the same, any waiver or consent by any Holder of the Securities with
respect to any provisions hereof or thereof, the recovery of any judgment
against the Company, any action to enforce the same or any other circumstance
which might otherwise constitute a legal or equitable discharge or defense of a
guarantor. Each Subsidiary Guarantor hereby waives, to the extent permitted by
law, diligence, presentment, demand of payment, filing of claims with a court
in the event of insolvency or bankruptcy of the Company, any right to require a
proceeding first against the Company, protest, notice and all demands
whatsoever and covenants that its Subsidiary Guarantee will not be discharged
except by complete performance of the obligations contained in the Securities,
this Indenture and in this Subsidiary Guarantee. If any Holder or the Trustee
is required by any court or otherwise to return to the Company, any Subsidiary
Guarantor, or any custodian, trustee, liquidator or other similar official
acting in relation to the Company or any Subsidiary Guarantor, any amount paid
by the Company or any Subsidiary Guarantor to the Trustee or such Holder, this
Subsidiary Guarantee, to the extent theretofore discharged, shall be reinstated
in full force and effect. Each Subsidiary Guarantor agrees it shall not be
entitled to enforce any right of subrogation in relation to the Holders in
respect of any obligations guaranteed hereby until payment in full of all
obligations guaranteed hereby. Each Subsidiary Guarantor further agrees that,
as between each Subsidiary Guarantor, on the one hand, and the Holders and the
Trustee, on the other hand, (x) the maturity of the obligations guaranteed
hereby may be accelerated as provided in Article V hereof for the purposes of
this Subsidiary Guarantee, notwithstanding any stay, injunction or other
prohibition preventing such acceleration in respect of the obligations
guaranteed hereby, and (y) in the event of any acceleration of such obligations
as provided in Article V hereof, such obligations (whether or not due and
payable) shall forthwith become due and payable by each Subsidiary Guarantor
for the purpose of this Subsidiary Guarantee.
Section 13.2 Subsidiary Guarantors May Consolidate, etc., on
Certain Terms.
(a) Except as set forth in Article VIII hereof, nothing contained
in this Indenture or in any of the Securities shall prevent any consolidation
or merger of a Subsidiary Guarantor with or into the Company or another
Subsidiary Guarantor or shall prevent any sale, conveyance or other disposition
of all or substantially all the Properties of a Subsidiary Guarantor to the
Company or another Subsidiary Guarantor.
(b) Except as set forth in Article VIII hereof, nothing contained
in this Indenture or in any of the Securities shall prevent any consolidation
or merger of a Subsidiary Guarantor with or into a Person other than the
Company or another Subsidiary Guarantor (whether or not Affiliated with the
Subsidiary Guarantor), or successive consolidations or mergers in which a
Subsidiary Guarantor or its successor or successors shall be a party or
parties, or shall prevent any sale,
84
<PAGE> 92
conveyance or other disposition of all or substantially all the Properties of a
Subsidiary Guarantor to a Person other than the Company or another Subsidiary
Guarantor (whether or not Affiliated with the Subsidiary Guarantor) authorized
to acquire and operate the same; provided, however, that (i) immediately after
such transaction, and giving effect thereto, no Default or Event of Default
shall have occurred as a result of such transaction and be continuing, (ii)
such transaction shall not violate any of the covenants of Sections 10.1
through 10.19 hereof, and (iii) each Subsidiary Guarantor hereby covenants and
agrees that, upon any such consolidation, merger, sale, conveyance or other
disposition, such Subsidiary Guarantor's Subsidiary Guarantee set forth in this
Article XIII and in a notation to the Securities, and the due and punctual
performance and observance of all of the covenants and conditions of this
Indenture to be performed by such Subsidiary Guarantor, shall be expressly
assumed (in the event that the Subsidiary Guarantor is not the surviving
corporation in a merger), by supplemental indenture satisfactory in form to the
Trustee, executed and delivered to the Trustee, by such Person formed by such
consolidation, or into which the Subsidiary Guarantor shall have merged, or by
the Person that shall have acquired such Property (except to the extent the
following Section 13.3 would result in the release of such Subsidiary
Guarantee, in which case such surviving Person or transferee of such Property
shall not have to execute any such supplemental indenture and shall not have to
assume such Subsidiary Guarantor's Subsidiary Guarantee). In the case of any
such consolidation, merger, sale, conveyance or other disposition and upon the
assumption by the successor Person, by supplemental indenture executed and
delivered to the Trustee and satisfactory in form to the Trustee of the due and
punctual performance of all of the covenants and conditions of this Indenture
to be performed by the Subsidiary Guarantor, such successor Person shall
succeed to and be substituted for the Subsidiary Guarantor with the same effect
as if it had been named herein as the initial Subsidiary Guarantor.
Section 13.3 Release of Subsidiary Guarantors.
Upon the sale or disposition (by merger or otherwise) of a Subsidiary
Guarantor (or all or substantially all of its Properties) to a Person other
than the Company or another Subsidiary Guarantor and pursuant to a transaction
that is otherwise in compliance with the terms of this Indenture, including but
not limited to the provisions of Section 13.2 hereof or pursuant to Article
VIII hereof, such Subsidiary Guarantor shall be deemed released from its
Subsidiary Guarantee and all related obligations under this Indenture;
provided, however, that any such release 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 other Restricted Subsidiary
shall also be released upon such sale or other disposition. The Trustee shall
deliver an appropriate instrument evidencing such release upon receipt of a
Company Request accompanied by an Officers' Certificate and an Opinion of
Counsel certifying that such sale or other disposition was made by the Company
in accordance with the provisions of this Indenture. Each Subsidiary Guarantor
that is designated as an Unrestricted Subsidiary in accordance with the
provisions of this Indenture shall be released from its Subsidiary Guarantee
and all related obligations under this Indenture for so long as it remains an
Unrestricted Subsidiary. The Trustee shall deliver an appropriate instrument
evidencing such release upon its receipt of the Board Resolution designating
such Unrestricted Subsidiary. Any Subsidiary Guarantor not released in
accordance with this Section 13.3 shall
85
<PAGE> 93
remain liable for the full amount of principal of (and premium, if any, on) and
interest on the Securities as provided in this Article XIII.
Section 13.4 Limitation of Subsidiary Guarantors' Liability.
Each Subsidiary Guarantor, and by its acceptance hereof each Holder,
hereby confirm that it is the intention of all such parties that the guarantee
by such Subsidiary Guarantor pursuant to its Subsidiary Guarantee not
constitute a fraudulent transfer or conveyance for purposes of the Federal
Bankruptcy Code, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent
Transfer Act or any similar federal or state law. To effectuate the foregoing
intention, the Holders and each Subsidiary Guarantor hereby irrevocably agree
that the obligations of such Subsidiary Guarantor under its Subsidiary
Guarantee shall 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 Section 13.5
hereof, result in the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee not constituting such a fraudulent conveyance or
fraudulent transfer. This Section 13.4 is for the benefit of the creditors of
each Subsidiary Guarantor.
Section 13.5 Contribution.
In order to provide for just and equitable contribution among the
Subsidiary Guarantors, the Subsidiary Guarantors agree, inter se, that in the
event any payment or distribution is made by any Subsidiary Guarantor (a
"Funding Guarantor") under its Subsidiary Guarantee, such Funding Guarantor
shall be entitled to a contribution from each other Subsidiary Guarantor (if
any) in a pro rata amount based on the Adjusted Net Assets of each Subsidiary
Guarantor (including the Funding Guarantor) for all payments, damages and
expenses incurred by that Funding Guarantor in discharging the Company's
obligations with respect to the Securities or any other Subsidiary Guarantor's
obligations with respect to its Subsidiary Guarantee.
Section 13.6 Execution and Delivery of Notations of Subsidiary
Guarantees.
To evidence its Subsidiary Guarantee set forth in Section 13.1 hereof,
each Subsidiary Guarantor hereby agrees to execute the notations of Subsidiary
Guarantees in substantially the form set forth in Section 2.4 hereof to be
endorsed on all Securities ordered to be authenticated and delivered by the
Trustee, and each Subsidiary Guarantor agrees that this Indenture shall be
executed on behalf of such Subsidiary Guarantor by its President or one of its
Vice Presidents. Each Subsidiary Guarantor hereby agrees that its Subsidiary
Guarantee set forth in Section 13.1 hereof shall remain in full force and
effect notwithstanding any failure to endorse on each Security a notation of
such Subsidiary Guarantee. Each such notation of Subsidiary Guarantee shall be
signed on behalf of each Subsidiary Guarantor by its President or one of its
Vice Presidents (each of whom shall, in each case, have been duly authorized by
all requisite corporate action) prior to the authentication of the Security on
which it is endorsed, and the delivery of such Security by the Trustee, after
the authentication thereof hereunder, shall constitute due delivery of the
Subsidiary
86
<PAGE> 94
Guarantee set forth in this Indenture on behalf of such Subsidiary Guarantor.
Such signatures upon the notation of Subsidiary Guarantee may be by manual or
facsimile signature of such officers and may be imprinted or otherwise
reproduced on the Subsidiary Guarantee, and in case any such officer who shall
have signed the notation of Subsidiary Guarantee shall cease to be such officer
before the Security on which such notation of Subsidiary Guarantee is endorsed
shall have been authenticated and delivered by the Trustee or disposed of by
the Company, such Security nevertheless may be authenticated and delivered or
disposed of as though the person who signed the notation of Subsidiary
Guarantee had not ceased to be such officer of the Subsidiary Guarantor.
Section 13.7 Severability.
In case any provision of this Subsidiary Guarantee shall be invalid,
illegal or unenforceable, that portion of such provision that is not invalid,
illegal or unenforceable shall remain in effect, and the validity, legality,
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
Section 13.8 Subordination of Subsidiary Guarantees.
The obligations of each Subsidiary Guarantor under its Subsidiary
Guarantee pursuant to this Article XIII shall be subordinated to the Senior
Indebtedness of such Subsidiary Guarantor to the same extent and in the same
manner as the Securities are subordinated to Senior Indebtedness of the
Company. For the purposes of the foregoing sentence, the Trustee and the
Holders shall have the right to receive or retain payments by any of the
Subsidiary Guarantors only at such times as they may receive or retain payments
in respect of the Securities pursuant to this Indenture, including Article XIV
hereof.
ARTICLE XIV
SUBORDINATION
Section 14.1 Agreement to Subordinate
The Company agrees, and each Holder by accepting a Security agrees,
that the Indebtedness evidenced by the Security is subordinated in right of
payment, to the extent and in the manner provided in this Article XIV, to the
prior payment in full of all Senior Indebtedness (whether outstanding on the
date hereof or hereafter created, incurred, assumed or guaranteed), and that
the subordination is for the benefit of the holders of Senior Indebtedness.
Section 14.2 Certain Definitions.
"Bankruptcy Law" means the Federal Bankruptcy Code or any similar
federal or state law for the relief of debtors.
"Obligations" means any principal, trust, penalties, fees,
indemnities, reimbursements, damages and other liabilities payable under the
documentation governing any Indebtedness.
87
<PAGE> 95
"Representative" means the indenture trustee or other trustee, agent
or representative for any Senior Indebtedness.
A "distribution" may consist of cash, securities or other property, by
set-off or otherwise.
All Designated Senior Indebtedness now or hereafter existing and all
other Obligations relating thereto shall not be deemed to have been paid in
full unless the holders or owners thereof shall have received payment in full
in cash (or other form of payment consented to by the holders of Designated
Senior Indebtedness) with respect to such Designated Senior Indebtedness and
all other Obligations with respect thereto and the holders or owners thereof
have no further commitment or obligation to readvance funds under the related
Bank Credit Facility or other credit agreement.
All references to "Designated Senior Indebtedness" in this Article XIV
are to Designated Senior Indebtedness of the Company.
Section 14.3 Liquidation; Dissolution; Bankruptcy.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, or
in an assignment for the benefit of creditors or any marshaling of the
Company's assets and liabilities:
(1) the holders of Senior Indebtedness shall be entitled
to receive payment in full of all Obligations due in respect of such
Senior Indebtedness (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior
Indebtedness) before the Holders of Securities shall be entitled to
receive any payment with respect to the Securities (except that
Holders of Securities may receive (i) securities that are subordinated
to at least the same extent as the Securities to (a) Senior
Indebtedness and (b) any securities issued in exchange for Senior
Indebtedness, provided that the operation of this clause (b) shall not
cause the Securities to be treated in any case or proceeding or
similar event described in this Section 14.3 in the same class of
claims as the Senior Indebtedness or any class of claims pari passu
with the Senior Indebtedness for any payment or distribution and (ii)
payments and other distributions made from any defeasance trust
created pursuant to Article XII hereof); and
(2) until all Obligations with respect to Senior
Indebtedness (as provided in subsection (1) above) are paid in full,
any distribution to which the Holders of Securities would be entitled
shall be made to holders of Senior Indebtedness (except that Holders
of Securities may receive (i) securities that are subordinated at
least to the same extent as the Securities to (a) Senior Indebtedness
and (b) any securities issued in exchange for Senior Indebtedness,
provided that the operation of this clause (b) shall not cause the
Securities to be treated in any case or proceeding or similar event
described in this Section 14.3 in the same class of claims as the
Senior Indebtedness or any class of claims pari passu with
88
<PAGE> 96
the Senior Indebtedness for any payment or distribution and (ii)
payments and other distributions made from any defeasance trust
created pursuant to Article XII hereof).
Under the circumstances described in this Section 14.3, the Company or any
receiver, trustee in bankruptcy, liquidating trustee, agent or other similar
Person making any payment or distribution of cash or other property is
authorized or instructed to make any payment or distribution to which the
Holders of the Securities would otherwise be entitled (other than the payments
made from any defeasance trust referred to in the second parenthetical clause
of each of clauses (1) and (2) above, which shall be delivered or paid to the
Holders of Securities as set forth in such clauses) directly to the holders of
the Senior Indebtedness (pro rata to such holders on the basis of the
respective amounts of Senior Indebtedness held by such holders) or their
Representatives, as their respective interests appear, to the extent necessary
to pay all such Senior Indebtedness in full, after giving effect to any
concurrent payment, distribution or provision therefor to or for the holders of
such Senior Indebtedness.
To the extent any payment of Senior Indebtedness (whether by or on
behalf of the Company, as proceeds of security or enforcement of any right of
setoff or otherwise) is declared to be fraudulent or preferentially set aside
or required to be paid to any receiver, trustee in bankruptcy, liquidating
trustee, agent or other similar Person under any bankruptcy, insolvency,
receivership, fraudulent conveyance or similar law, then if such payment is
recovered by, or paid over to, such receiver, trustee in bankruptcy,
liquidating trustee, agent or other similar Person, the Senior Indebtedness or
part thereof originally intended to be satisfied shall be deemed to be
reinstated and outstanding as if such payment had not occurred. To the extent
the obligation to repay any Senior Indebtedness is declared to be fraudulent,
invalid or otherwise set aside under any bankruptcy, insolvency, receivership,
fraudulent conveyance or similar law, then the obligation so declared
fraudulent, invalid or otherwise set aside (and all other amounts that would
come due with respect thereto had such obligation not been so affected) shall
be deemed to be reinstated and outstanding as Senior Indebtedness for all
purposes hereof as if such declaration, invalidity or setting aside had not
occurred.
Section 14.4 Default on Designated Senior Indebtedness.
The Company may not make any payment or distribution to the Trustee or
any Holder in respect of Obligations with respect to the Securities and may not
acquire from the Trustee or any Holder any Securities for cash or other
property (other than (i) securities that are subordinated to at least the same
extent as the Securities to (a) Senior Indebtedness and (b) any securities
issued in exchange for Senior Indebtedness, provided that the operation of this
clause (b) shall not cause the Securities to be treated in any case or
proceeding or similar event described in Section 14.3 in the same class of
claims as the Senior Indebtedness or any class of claims pari passu with the
Senior Indebtedness for any payment or distribution and (ii) payments and other
distributions made from any defeasance trust created pursuant to Article XII
hereof) until all principal and other Obligations with respect to the Senior
Indebtedness have been paid in full if:
(i) a default in the payment of any principal or other
Obligations with respect to Designated Senior Indebtedness occurs and
is continuing beyond any applicable grace
89
<PAGE> 97
period in the agreement, indenture orother document governing such
Designated Senior Indebtedness; or
(ii) a default, other than a payment default, on
Designated Senior Indebtedness occurs and is continuing that then
permits, or with the giving of notice or passage of time or both
(unless cured or waived) would permit, holders of the Designated
Senior Indebtedness as to which such default relates to accelerate its
maturity and the Trustee receives a notice of the default (a "Payment
Blockage Notice") from a Person who may give it pursuant to Section
14.12 hereof. If the Trustee receives any such Payment Blockage
Notice, no subsequent Payment Blockage Notice shall be effective for
the purposes of this Section unless and until (i) at least 360 days
shall have elapsed since the date of commencement of the payment
blockage period resulting from the immediately prior Payment Blockage
Notice and (ii) all scheduled payments of principal, premium, if any,
and interest on the Securities that have come due have been paid in
full in cash. No nonpayment default that existed or was continuing on
the date of delivery of any Payment Blockage Notice to the Trustee
shall be, or be made, the basis for a subsequent Payment Blockage
Notice, unless such default shall have been cured or waived for at
least one full 90 consecutive day period commencing after the date of
delivery of such Payment Blockage Notice.
The Company shall resume payments on and distributions in respect of
the Securities and may acquire them upon the earliest of:
(1) the date upon which the default is cured or waived,
(2) the holders of such Designated Senior Indebtedness
have agreed to such resumption or such Designated Senior Indebtedness
has been paid in full, or
(3) in the case of a default referred to in Section
14.4(ii) hereof, 179 days past the date on which the Payment Blockage
Notice is received if the maturity of such Designated Senior
Indebtedness has not been accelerated (or, if it has been accelerated,
such acceleration has been rescinded or annulled),
if this Article XIV otherwise permits the payment, distribution or acquisition
at the time of such payment or acquistion.
In no event will a payment blockage period referred to in Section
14.4(ii) hereof extend beyond 179 days from the date of the receipt by the
Trustee of the notice and there must be a 181 consecutive day period in any
360-day period during which no payment blockage period is in effect.
90
<PAGE> 98
Section 14.5 Acceleration of Securities.
If payment of the Securities is accelerated because of an Event of
Default, the Company shall promptly notify holders of Senior Indebtedness of
the acceleration.
Section 14.6 When Distribution Must Be Paid Over.
In the event that the Trustee or any Holder receives any payment of
any Obligations with respect to the Securities at a time when the Trustee or
such Holder, as applicable, has actual knowledge that such payment is
prohibited by Section 14.3 or Section 14.4 hereof, such payment shall be held
by the Trustee or such Holder, in trust for the benefit of, and shall be paid
forthwith over and delivered, upon written request, to, the holders of Senior
Indebtedness or their Representative, as their respective interests may appear,
for application to the payment of all Obligations with respect to Senior
Indebtedness remaining unpaid to the extent necessary to pay such Obligations
in full in accordance with their terms, after giving effect to any concurrent
payment or distribution to or for the holders of Senior Indebtedness.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article XIV, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to
owe any fiduciary duty to the holders of Senior Indebtedness, and shall not be
liable to any such holders if the Trustee shall pay over or distribute to or on
behalf of Holders of Securities or the Company or any other Person money or
other assets to which any holders of Senior Indebtedness shall be entitled by
virtue of this Article XIV, except if such payment is made as a result of the
wilful misconduct or gross negligence of the Trustee.
Section 14.7 Notice by Company.
The Company shall promptly notify the Trustee and the Paying Agent of
any facts known to the Company that would cause a payment of any Obligations
with respect to the Securities to violate this Article XIV, but failure to give
such notice shall not affect the subordination of the Securities to the Senior
Indebtedness as provided in this Article XIV.
Section 14.8 Subrogation.
After all Senior Indebtedness is paid in full and until the Securities
are paid in full, Holders of Securities shall be subrogated (equally and
ratably with all other Pari Passu Indebtedness) to the rights of holders of
Senior Indebtedness to receive distributions applicable to Senior Indebtedness
to the extent that distributions otherwise payable to the Holders of Securities
have been applied to the payment of Senior Indebtedness. A distribution made
under this Article XIV to holders of Senior Indebtedness that otherwise would
have been made to Holders of Securities
91
<PAGE> 99
is not, as between the Company and Holders of Securities, a payment by the
Company on the Securities.
Section 14.9 Relative Rights.
This Article XIV defines the relative rights of Holders of
Indebtedness and holders of Senior Indebtedness. Nothing in this Indenture
shall:
(1) impair, as between the Company and Holders of
Securities, the obligation of the Company, which is absolute and
unconditional, to pay principal of, premium, if any, and interest on
the Securities in accordance with their terms;
(2) affect the relative rights of Holders of Securities
and creditors of the Company other than their rights in relation to
holders of Senior Indebtedness; or
(3) prevent the Trustee or any Holder from exercising its
available remedies upon a Default or Event of Default, subject to the
rights of holders and owners of Senior Indebtedness to receive
distributions and payments otherwise payable to Holders of Securities.
If the Company fails because of this Article XIV to pay
principal of, premium, if any, or interest on a Security on the due
date, the failure is still a Default or Event of Default.
Section 14.10 Subordination May Not Be Impaired by Company.
No right of any present or future holders of any Senior Indebtedness
to enforce subordination as provided in this Article XIV will at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act, in good faith, by any such holder,
or by any noncompliance by the Company with the terms of this Indenture,
regardless of any knowledge thereof that any holder of Senior Indebtedness may
have or otherwise be charged with. The provisions of this Article XIV are
intended to be for the benefit of, and shall be enforceable directly by, the
holders of Senior Indebtedness.
Section 14.11 Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to holders of
Senior Indebtedness, the distribution may be made and the notice given to their
Representative.
Upon any payment or distribution of assets of the Company referred to
in this Article XIV, the Trustee and the Holders of Securities shall be
entitled to rely upon any order or decree made by any court of competent
jurisdiction or upon any certificate of such Representative or of the
liquidating trustee or agent or other Person making any distribution to the
Trustee or to the Holders of Securities for the purpose of ascertaining the
Persons entitled to participate in such
92
<PAGE> 100
distribution, the holders of the Senior Indebtedness and other Indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Article
XIV.
Section 14.12 Rights of Trustee and Paying Agent.
Notwithstanding the provisions of this Article XIV or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Securities, unless the Trustee shall have received at
its Corporate Trust Office at least two Business Days prior to the date of such
payment written notice of facts that would cause the payment of any Obligations
with respect to the Securities to violate this Article XIV, which notice shall
specifically refer to Section 14.4 hereof. Only the Company or a
Representative may give the notice. Nothing in this Article XIV shall impair
the claims of, or payments to, the Trustee under or pursuant to Section 6.6
hereof.
The Trustee in its individual or any other capacity may hold Senior
Indebtedness with the same rights it would have if it were not Trustee. Any
Paying Agent and Security Registrar may do the same with like rights.
Section 14.13 Authorization to Effect Subordination.
Each Holder by the Holder's acceptance thereof authorizes and directs
the Trustee on the Holder's behalf to take such action as may be necessary or
appropriate to effectuate the subordination as provided in this Article XIV,
and appoints the Trustee to act as the Holder's attorney-in-fact for any and
all such purposes. If the Trustee does not file a proper proof of claim or
proof of debt in the form required in any proceeding referred to in Section 5.4
hereof at least ten days before the expiration of the time to file such claim,
a Representative or each lender under, or holder of, Senior Indebtedness is
hereby authorized to file an appropriate claim for and on behalf of the Holders
of Securities.
Section 14.14 Amendments.
The provisions of this Article XIV shall not be amended or modified
without the written consent of the holders of all Senior Indebtedness (or their
Representative).
Section 14.15 No Waiver of Subordination Provisions.
Without in any way limiting the generality of Section 14.9 of this
Indenture, the holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Trustee or the Holders, without
incurring responsibility to the Holders and without impairing or releasing the
subordination provided in this Article XIV or the obligations hereunder of the
Holders to the holders of Senior Indebtedness, do any one or more of the
following:
93
<PAGE> 101
(a) change the manner, place or terms of payment or extend the time of payment
of, or renew or alter, Senior Indebtedness or any instrument evidencing the
same or any agreement under which Senior Indebtedness is outstanding or
secured; (b) sell, exchange, release or otherwise deal with any property
pledged, mortgaged or otherwise securing Senior Indebtedness; (c) release any
Person liable in any manner for the collection of Senior Indebtedness; and (d)
exercise or refrain from exercising any rights against the Company and any
other Person.
ARTICLE XV
MISCELLANEOUS
Section 15.1 Compliance Certificates and Opinions.
Upon any application or request by the Company or any Subsidiary
Guarantor to the Trustee to take any action under any provision of this
Indenture, the Company or such Subsidiary Guarantor, as the case may be, shall
furnish to the Trustee such certificates and opinions as may be required under
the Trust Indenture Act or this Indenture. Each such certificate and each such
legal opinion shall be in the form of an Officers' Certificate or an Opinion of
Counsel, as applicable, and shall comply with the requirements of this
Indenture.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that each Person signing such certificate
or opinion has read such covenant or condition and the definitions
herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such Person,
such Person has made such examination or investigation as is necessary
to enable him to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of each
such Person, such condition or covenant has been complied with.
The certificates and opinions provided pursuant to this Section 15.1
and the statements required by this Section 15.1 shall comply in all respects
with TIA Sections 314(c) and (e).
94
<PAGE> 102
Section 15.2 Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer may be based, insofar as it
relates to legal matters, upon a certificate or opinion of, or representations
by, counsel, unless such officer knows, or in the exercise of reasonable care
should know, that the certificate or opinion or representations with respect to
the matters upon which his certificate or opinion is based are erroneous. Any
such Opinion of Counsel may be based, insofar as it relates to factual matters,
upon an officers' certificate, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate with respect to such matters
is erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 15.3 Acts of Holders.
(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or taken
by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agents duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and conclusive in favor of the Trustee and the Company, if made in
the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where
such execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
95
<PAGE> 103
(c) The ownership, principal amount and serial numbers of
Securities held by any Person, and the date of holding the same, shall be
proved by the Security Register.
(d) If the Company shall solicit from the Holders of Securities
any request, demand, authorization, direction, notice, consent, waiver or other
Act, the Company may, at its option, by or pursuant to a Board Resolution, fix
in advance a record date for the determination of Holders entitled to give such
request, demand, authorization, direction, notice, consent, waiver or other
Act, but the Company shall have no obligation to do so. Notwithstanding TIA
Section 316(c), such record date shall be the record date specified in or
pursuant to such Board Resolution, which shall be a date not earlier than the
date 30 days prior to the first solicitation of Holders generally in connection
therewith and not later than the date such solicitation is completed. If such a
record date is fixed, such request, demand, authorization, direction, notice,
consent, waiver or other Act may be given before or after such record date, but
only the Holders of record at the close of business on such record date shall
be deemed to be Holders for the purposes of determining whether Holders of the
requisite proportion of Outstanding Securities have authorized or agreed or
consented to such request, demand, authorization, direction, notice, consent,
waiver or other Act, and for that purpose the Outstanding Securities shall be
computed as of such record date, provided that no such authorization, agreement
or consent by the Holders on such record date shall be deemed effective unless
it shall become effective pursuant to the provisions of this Indenture not
later than eleven months after the record date.
(e) Any request, demand, authorization, direction, notice,
consent, waiver or other Act of the Holder of any Security shall bind every
future Holder of the same Security and the Holder of every Security issued upon
the registration of transfer thereof or in exchange therefor or in lieu thereof
in respect of anything done, omitted or suffered to be done by the Trustee or
the Company in reliance thereon, whether or not notation of such action is made
upon such Security.
Section 15.4 Notices, etc. to Trustee, Company and Subsidiary
Guarantors.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to or filed with,
(1) the Trustee by any Holder, the Company, any Subsidiary
Guarantor or any holder of Senior Indebtedness shall be sufficient for
every purpose hereunder if made, given, furnished or filed in writing
(in the English language) and delivered in person or mailed by
certified or registered mail (return receipt requested) to the Trustee
at its Corporate Trust Office; or
(2) the Company or any Subsidiary Guarantor by the Trustee or by
any Holder shall be sufficient for every purpose hereunder (unless
otherwise herein expressly provided) if in writing (in the English
language) and delivered in person or mailed by certified or registered
mail (return receipt requested) to the Company or such Subsidiary
Guarantor,
96
<PAGE> 104
as applicable, addressed to it at the Company's offices located at 379 Thornall
Street, Edison, New Jersey 08837, Attention: Treasurer, or at any other
address otherwise furnished in writing to the Trustee by the Company.
Section 15.5 Notice to Holders; Waiver.
Where this Indenture provides for notice of any event to Holders by
the Company or the Trustee, such notice shall be sufficiently given (unless
otherwise herein expressly provided) if in writing (in the English language)
and mailed, first-class postage prepaid, to each Holder affected by such event,
at his address as it appears in the Security Register, not later than the
latest date, and not earlier than the earliest date, prescribed for the giving
of such notice. In any case where notice to Holders is given by mail, neither
the failure to mail such notice, nor any defect in any notice so mailed, to any
particular Holder shall affect the sufficiency of such notice with respect to
other Holders. Any notice mailed to a Holder in the manner herein prescribed
shall be conclusively deemed to have been received by such Holder, whether or
not such Holder actually receives such notice. Where this Indenture provides
for notice in any manner, such notice may be waived in writing by the Person
entitled to receive such notice, either before or after the event, and such
waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
In case by reason of the suspension of or irregularities in regular
mail service or by reason of any other cause, it shall be impracticable to mail
notice of any event to Holders when such notice isrequired to be given pursuant
to any provision of this Indenture, then any manner of giving such notice as
shall be satisfactory to the Trustee shall be deemed to be a sufficient giving
of such notice for every purpose hereunder.
Section 15.6 Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
Section 15.7 Successors and Assigns.
All covenants and agreements in this Indenture by the Company and the
Subsidiary Guarantors shall bind their respective successors and assigns,
whether so expressed or not. All agreements of the Trustee in this Indenture
shall bind its successor.
Section 15.8 Severability.
In case any provision in this Indenture or in the Securities or the
Subsidiary Guarantees shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining
97
<PAGE> 105
provisions shall not in any way be affected or impaired thereby, and a Holder
shall have no claim therefor against any party hereto.
Section 15.9 Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied,
shall give to any Person (other than the parties hereto, any Paying Agent, any
Securities Registrar and their successors hereunder, the Holders and, to the
extent set forth in Section 13.4 hereof, creditors of Subsidiary Guarantors and
the holders of Senior Indebtedness) any benefit or any legal or equitable
right, remedy or claim under this Indenture.
Section 15.10 Governing Law; Trust Indenture Act Controls.
(a) THIS INDENTURE, THE SUBSIDIARY GUARANTEES AND THE SECURITIES
SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF
THE STATE OF NEW YORK. THE COMPANY AND EACH SUBSIDIARY GUARANTOR IRREVOCABLY
SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW
YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN, THE CITY OF NEW YORK IN
ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE, THE
SECURITIES OR THE SUBSIDIARY GUARANTEES, AND THE COMPANY AND EACH SUBSIDIARY
GUARANTOR IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED BY ANY SUCH COURT.
(b) This Indenture is subject to the provisions of the Trust
Indenture Act that are required to be part of this Indenture and shall, to the
extent applicable, be governed by such provisions. If and to the extent that
any provision of this Indenture limits, qualifies or conflicts with the duties
imposed by operation of Section 318(c) of the Trust Indenture Act, or conflicts
with any provision (an "incorporated provision") required by or deemed to be
included in this Indenture by operation of such Trust Indenture Act section,
such imposed duties or incorporated provision shall control.
Section 15.11 Legal Holidays.
In any case where any Interest Payment Date, Redemption Date, or
Stated Maturity or Maturity of any Security shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or of the Securities or
the Subsidiary Guarantee) payment of interest or principal (and premium, if
any) need not be made on such date, but may be made on the next succeeding
Business Day with the same force and effect as if made on the Interest Payment
Date, Redemption Date or at the Stated Maturity or Maturity; provided, however,
that no interest shall accrue for the period from and after such Interest
Payment Date, Redemption Date, Stated Maturity or Maturity, as the case may be.
98
<PAGE> 106
Section 15.12 No Recourse Against Others.
A director, officer, employee, stockholder, incorporator or Affiliate,
as such, past, present or future, of the Company or any Subsidiary Guarantor
shall not have any personal liability under the Securities or this Indenture by
reason of his or its status as a director, officer, employee, stockholder,
incorporator or Affiliate or any liability for any obligations of the Company
or any Subsidiary Guarantor under the Securities or this Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation. Each Holder, by accepting any of the Securities, waives and releases
all such liability to the extent permitted by applicable law.
Section 15.13 Duplicate Originals.
The parties may sign any number of copies or counterparts of this
Indenture. Each signed copy shall be an original, but all of them together
represent the same agreement.
Section 15.14 No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or any of its Subsidiaries. Any such indenture,
loan or debt agreement may not be used to interpret this Indenture.
99
<PAGE> 107
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, all as of the day and year first above written.
ISSUER:
KCS ENERGY, INC.
By:
--------------------------------------
Name:
--------------------------------
Title:
--------------------------------
SUBSIDIARY GUARANTORS:
ENERCORP GAS MARKETING, INC.,
KCS RESOURCES, INC.,
KCS MICHIGAN RESOURCES, INC.,
KCS PIPELINE SYSTEMS, INC.,
KCS ENERGY MARKETING, INC.,
KCS MEDALLION RESOURCES, INC.,
KCS ENERGY SERVICES, INC.,
MEDALLION CALIFORNIA PROPERTIES CO.,
MEDALLION GAS SERVICES, INC.,
NATIONAL ENERDRILL CORPORATION AND
PROLIQ, INC.
By:
--------------------------------------
Name:
--------------------------------
Title:
--------------------------------
TRUSTEE:
STATE STREET BANK AND TRUST COMPANY
By:
--------------------------------------
Name:
--------------------------------
Title:
--------------------------------
<PAGE> 108
EXHIBIT A
FORM OF LEGEND FOR GLOBAL SECURITIES
Any Global Security authenticated and delivered hereunder shall bear a
legend in substantially the following form:
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A
DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY.
THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE
NAME OF A PERSON OTHER THAN THE DEPOSITORY OF ITS NOMINEE EXCEPT IN
THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER
OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY
THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE
DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY
BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE &
CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
A-1
<PAGE> 1
EXHIBIT 5
[Mayor, Day, Caldwell & Keeton, L.L.P. Letterhead]
December 29, 1997
Board of Directors
KCS Energy, Inc.
379 Thornall Street
Edison, NJ 08837
RE: __% Senior Subordinated Notes due 2008
Gentlemen:
Reference is made to (i) the proposed issuance under the Securities Act
of 1993 (the "Securities Act") by KCS Energy, Inc., a Delaware corporation (the
"Company"), of up to $125,000,000 aggregate principal amount of its __ % Senior
Subordinated Notes due 2008 and the guarantee of such notes by certain
subsidiaries of the Company (the "Debt Securities") and (ii) the Company's
Registration Statement on Form S-3 (the "Registration Statement"), including a
Prospectus, with respect to such Debt Securities to be filed with the Securities
and Exchange Commission under the Securities Act. The Debt Securities are to be
issued in accordance with duly adopted resolutions of the Company's Board of
Directors and under and pursuant to the provisions of the Indenture to be dated
as of January __, 1998 between the Company, certain of its subsidiaries and
State Street Bank and Trust Company, as trustee (the "Trustee") (such Indenture
being hereinafter called the "Indenture").
We have examined drafts of the Indenture, the global note and the
certificated notes being issued under the Indenture, and such statutes,
corporate records and documents, certificates of corporate and public officials
and such other instruments and documents as we have deemed necessary or
appropriate for the purposes of the opinions expressed herein.
Based upon the foregoing and subject to the qualifications,
limitations, assumptions and other statements set forth herein, we are of the
opinion that:
(1) the Company is a validly existing corporation under the laws of the
State of Delaware; and
(2) the Debt Securities when issued for the consideration as set forth
in the Prospectus will be validly issued and will constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms (subject to applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws affecting creditors'
rights generally from time to time in effect and subject to general principles
<PAGE> 2
KCS Energy, Inc.
December 29, 1997
Page 2
of equity, regardless of whether such enforceability is considered in a
proceeding in equity or at law).
The opinion expressed in paragraph (2) assumes that with respect to
Debt Securities issued under the Indenture (i) the Trustee is qualified to act
as Trustee under the Indenture (ii) the Trustee has duly executed and delivered
the Indenture, (iii) the Indenture has been duly authorized and validly executed
and delivered by the Company to the Trustee, (iv) the Indenture has been duly
qualified under the Trust Indenture Act of 1939, as amended, and (v) such Debt
Securities have been duly executed, authenticated, issued and delivered in
accordance with the provisions of the Indenture and for the consideration as set
forth in the Prospectus.
Except as otherwise stated below, the opinions expressed herein are
based upon, and limited to, the laws of the State of Texas and the United States
and the Delaware General Corporation Law, and to case decisions reported as of
this date under such laws, and to facts known to us on this date, and we do not
undertake to provide any opinion as to any matter or to advise any person with
respect to any events or changes occurring subsequent to the date of this
letter. Our opinions as to the legality, validity, binding nature and
enforceability of the Debt Securities are based upon, and limited to, the laws
of the State of New York (as to which we have relied upon opinions of other
counsel to the Company licensed to practice therein) and the United States. The
opinions expressed in this letter are provided as legal opinions only and not as
any guaranties or warranties of the matters discussed herein, and such opinions
are strictly limited to the matters stated herein, and no other opinions may be
implied. This opinion letter is intended solely for your benefit. Without our
prior written consent, the opinions expressed herein may not be published or
relied upon by you other than in connection with the Registration Statement or
the transactions contemplated therein, or published or relied upon by any other
person in connection with any matter or in any manner whatsoever.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Certain Legal Matters" in the Prospectus constituting a part of the
Registration Statement.
Sincerely,
/s/ MAYOR, DAY, CALDWELL & KEETON, L.L.P
MAYOR, DAY, CALDWELL & KEETON, L.L.P
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and all references to our firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
New York, New York
December 29, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF RYDER SCOTT COMPANY INDEPENDENT PETROLEUM ENGINEER(S)
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of KCS Energy, Inc., of information from the
reserve reports prepared by us relating to the oil and gas reserves of KCS
Energy, Inc. at year-end 1996 in conformance with guidelines of the Securities
and Exchange Commission (SEC). We also consent to the references to us as
experts under the heading "Experts" and elsewhere in such Prospectus.
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Ryder Scott Company
Petroleum Engineers
Houston, Texas
December 24, 1997
2
<PAGE> 1
EXHIBIT 23.4
[R.A. LENSER AND ASSOCIATES, INC. LETTERHEAD]
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of KCS Energy, Inc. of information from the
reserve report(s) prepared by us relating to the oil and gas reserves of KCS
Energy, Inc. at year-end 1996. We also consent to the references to us as
experts under the heading "Experts" and elsewhere in such Prospectus.
R.A. LENSER & ASSOCIATES, INC.
/s/ RONALD A. LENSER
Ronald A. Lenser
December 24, 1997
RAL/lmc
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of KCS Energy, Inc., of information from the
reserve report(s) prepared by us relating to the oil and gas reserves of KCS
Energy, Inc. at year-end 1996 in conformance with guidelines of the Securities
and Exchange Commission (SEC). We also consent to the references to us as
experts under the heading "Experts" and elsewhere in such Prospectus.
/s/ H.J. GRUY AND ASSOCIATES, INC.
H.J. Gruy and Associates, Inc.
Houston, Texas
December 29, 1997
3
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of KCS Energy, Inc., of information from the
reserve report prepared by us relating to the oil and gas reserves of KCS
Energy, Inc. at year end 1996 in conformance with guidelines of the Securities
and Exchange Commission (SEC). We also consent to the references to us as
experts under the heading "Experts" and elsewhere in such Prospectus.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ FREDERIC D. SEWELL
-------------------------------------
Frederic D. Sewell
President
Dallas, Texas
December 29, 1997
<PAGE> 1
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
----------------
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2)___
STATE STREET BANK AND TRUST COMPANY
(Exact name of trustee as specified in its charter)
Massachusetts 04-1867445
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
John R. Towers, Esq. Executive Assistant Vice President and General Counsel
225 Franklin Street, Boston, Massachusetts 02110
(617) 654-3253
(Name, address and telephone number of agent for service)
----------------
KCS ENERGY, INC.
(AND CERTAIN SUBSIDIARIES IDENTIFIED IN FOOTNOTE * BELOW)
(Exact name of obligor as specified in its charter)
DELAWARE 22-28895787
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
379 THORNALL STREET
EDISON, NJ 08837
(Address of principal executive offices) (Zip Code)
----------------
Senior Subordinated Notes due 2008
(Title of indenture securities)
*The following subsidiaries of KCS Energy, Inc. are co-registrants incorporated
in the states and having the I.R.S. Employer Identification Numbers indicated:
(i) KCS Resources, Inc., a Delaware corporation (76-0413320), (ii) KCS Michigan
Resources, Inc., a Delaware corporation (76-0482274), (iii) KCS Medallion
Resources, Inc., a Delaware corporation (76-0482274), (iv) KCS Energy Marketing,
Inc., a New Jersey corporation (22-2267499), (v) Enercorp Gas Marketing, Inc., a
Delaware corporation (76-0420837), (vi) KCS Pipeline Systems, Inc., a Delaware
corporation (76-0413321), (vii) KCS Energy Services, Inc., a Delaware
corporation (76-0516389), (viii) National Enerdrill Corporation, a New Jersey
corporation (22-9196560), (ix) Proliq, Inc., a New Jersey corporation
(22-1516527), (x) Medallion California Properties Co., a Texas corporation
(76-0267470) and (xi) Medallion Gas Services, Inc., an Oklahoma corporation
(73-1385098).
<PAGE> 2
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO
WHICH IT IS SUBJECT.
Department of Banking and Insurance of The Commonwealth of
Massachusetts, 100 Cambridge Street, Boston, Massachusetts.
Board of Governors of the Federal Reserve System,
Washington, D.C., Federal Deposit Insurance Corporation,
Washington, D.C.
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee or of its parent,
State Street Boston Corporation.
(See note on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF
ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN
EFFECT.
A copy of the Articles of Association of the trustee, as now in
effect, is on file with the Securities and Exchange Commission as
Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the Registration
Statement of Morse Shoe, Inc. (File No. 22-17940) and is
incorporated herein by reference thereto.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO
COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A copy of a Statement from the Commissioner of Banks of
Massachusetts that no certificate of authority for the trustee to
commence business was necessary or issued is on file with the
Securities and Exchange Commission as Exhibit 2 to Amendment No.
1 to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement of Morse Shoe,
Inc. (File No. 22-17940) and is incorporated herein by reference
thereto.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE
TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS
SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE.
A copy of the authorization of the trustee to exercise corporate
trust powers is on file with the Securities and Exchange
Commission as Exhibit 3 to Amendment No. 1 to the Statement of
Eligibility and Qualification of Trustee (Form T-1) filed with
the Registration Statement of Morse Shoe, Inc. (File No.
22-17940) and is incorporated herein by reference thereto.
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect, is on
file with the Securities and Exchange Commission as Exhibit 4 to
the Statement of Eligibility and Qualification of Trustee (Form
T-1) filed with the Registration Statement of Eastern Edison
Company (File No. 33-37823) and is incorporated herein by
reference thereto.
1
<PAGE> 3
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4, IF THE OBLIGOR IS
IN DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(b) OF THE ACT.
The consent of the trustee required by Section 321(b) of the Act
is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING
AUTHORITY.
A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority is annexed hereto as Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2 of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Hartford and the
State of Connecticut on the 16 day of December, 1997.
STATE STREET BANK AND TRUST COMPANY
By: /s/ SUSAN C. MERKER
----------------------------
Susan C. Merker
Assistant Vice President
2
<PAGE> 4
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act
of 1939, as amended, in connection with the proposed issuance by KCS Energy,
Inc. of its Senior Subordinated Notes due 2008, we hereby consent that reports
of examination by Federal, State, Territorial or District authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ SUSAN C. MERKER
-------------------------------
Susan C. Merker
Assistant Vice President
Dated: December 16, 1997
3
<PAGE> 5
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company,
Massachusetts and foreign and domestic subsidiaries, a state banking institution
organized and operating under the banking laws of this commonwealth and a member
of the Federal Reserve System, at the close of business June 30, 1997, published
in accordance with a call made by the Federal Reserve Bank of this District
pursuant to the provisions of the Federal Reserve Act and in accordance with a
call made by the Commissioner of Banks under General Laws, Chapter 172, Section
22(a).
<TABLE>
<CAPTION>
Thousands of
Dollars
ASSETS
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin ................... 1,842,337
Interest-bearing balances ............................................ 8,771,397
Securities ................................................................ 10,596,119
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary .................................. 5,953,036
Loans and lease financing receivables:
Loans and leases, net of unearned income ................. 5,769,090
Allowance for loan and lease losses ...................... 74,031
Allocated transfer risk reserve .......................... 0
Loans and leases, net of unearned income and allowances .............. 5,695,059
Assets held in trading accounts ........................................... 916,608
Premises and fixed assets ................................................. 374,999
Other real estate owned ................................................... 755
Investments in unconsolidated subsidiaries ................................ 28,992
Customers' liability to this bank on acceptances outstanding .............. 99,209
Intangible assets ......................................................... 229,412
Other assets .............................................................. 1,589,526
----------
Total assets .............................................................. 36,097,449
==========
LIABILITIES
Deposits:
In domestic offices .................................................. 11,082,135
Noninterest-bearing ................................. 8,932,019
Interest-bearing .................................... 2,150,116
In foreign offices and Edge subsidiary ............................... 13,811,677
Noninterest-bearing ................................. 112,281
Interest-bearing .................................... 13,699,396
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary .................................. 6,785,263
Demand notes issued to the U.S. Treasury and Trading Liabilities .......... 755,676
Other borrowed money ...................................................... 716,013
Subordinated notes and debentures ......................................... 0
Bank's liability on acceptances executed and outstanding .................. 99,605
Other liabilities ......................................................... 841,566
Total liabilities ......................................................... 34,091,935
----------
EQUITY CAPITAL
Perpetual preferred stock and related surplus ............................. 0
Common stock .............................................................. 29,931
Surplus ................................................................... 437,183
Undivided profits and capital reserves/Net
unrealized holding gains (losses) ................................... 1,542,695
Cumulative foreign currency translation adjustments ....................... (4,295)
Total equity capital ...................................................... 2,005,514
----------
Total liabilities and equity capital ...................................... 36,097,449
==========
</TABLE>
4
<PAGE> 6
I, Rex S. Schuette, Senior Assistant Vice President and Comptroller of the
above named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
David A. Spina
Marshall N. Carter
Truman S. Casner
5
