<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
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>
<S> <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>
<S> <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>
% Convertible Subordinated Notes due 2004(3)............. $143,750,000 $43,561
- ------------------------------------------------------------------------------------------------------------------
Guarantees(4).............................................. -- --
==================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
Includes the Underwriters' over-allotment option.
(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 Convertible Subordinated Notes being
offered hereby. No consideration is to be received upon the exercise of such
Convertible Subordinated Notes.
(3) There is also registered hereunder an indeterminate number of shares of
Common Stock, par value $.01 per share, of KCS Energy, Inc. as may be
issuable upon the exercise of such Convertible Subordinated Notes.
(4) Guarantees by subsidiaries of the Registrant of the payment of the principal
and interest on the Convertible 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, , 1997
PROSPECTUS
$125,000,000
KCS ENERGY, INC. [KCS ENERGY, INC. LOGO]
% CONVERTIBLE SUBORDINATED NOTES DUE 2004
INTEREST PAYABLE AND
The % Convertible Subordinated Notes due 2004 (the "Notes") offered
hereby (the "Offering") are convertible into Common Stock, par value $.01 per
share (the "Common Stock"), of KCS Energy, Inc. (the "Company") at any time at
or before maturity, unless previously redeemed, at a conversion price of
$ per share (equivalent to a conversion rate of shares per
$1,000 principal amount of Notes), subject to adjustment in certain events. The
Common Stock is listed on the New York Stock Exchange under the symbol "KCS." On
, 1997, the last reported sale price for the Common Stock as
reported on the New York Stock Exchange Composite Transactions Tape was
$ per share.
The Notes do not provide for a sinking fund. The Notes are not redeemable
by the Company prior to , 2000. Thereafter, the Notes are 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. Upon a Repurchase
Event (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 100% of the principal amount thereof, plus accrued
interest. See "Description of the Notes -- Certain Rights to Require Repurchase
of Notes."
The Notes are unsecured obligations of the Company and are subordinate to
all present and future Senior Indebtedness (as defined herein) of the Company.
As of September 30, 1997, Senior Indebtedness of the Company was approximately
$276.2 million. Each of the Company's current and future significant
wholly-owned subsidiaries will unconditionally guarantee, jointly and severally,
the Company's obligations under the Notes. The Indenture will not restrict the
incurrence of any other indebtedness or liabilities by the Company or its
subsidiaries. See "Description of the Notes -- Subordination."
Application will be made to list the Notes on the New York Stock Exchange
upon official notice of issuance. For a description of certain income tax
consequences to holders of the Notes, see "Certain United States Federal Income
Tax Consequences."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 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>
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PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note...................................... % % %
- -------------------------------------------------------------------------------------------------------------------
Total(4)...................................... $ $ $
===================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from the date of 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
$ .
(4) The Company has granted the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an additional $18,750,000
aggregate principal amount of Notes on the same terms as set forth
above solely to cover over-allotments, if any. If the Underwriters
exercise such option in full, the total Price to Public, Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
---------------------
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
, 1997.
---------------------
SMITH BARNEY INC. SALOMON BROTHERS INC
PRUDENTIAL SECURITIES INCORPORATED
CIBC OPPENHEIMER
MORGAN KEEGAN & COMPANY, INC.
, 1997
<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, THE
COMMON STOCK, OR BOTH. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN
CONNECTION WITH THE OFFERING, MAY BID FOR, AND PURCHASE, THE NOTES, THE COMMON
STOCK, OR BOTH, 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
the headings "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
and assumes no exercise of the Underwriters' over-allotment option. 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. 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 primarily 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 estimated 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
currently 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 pending completion of a sour gas treatment plant and
associated acid gas injection system. Based on drilling and production results
and accumulation of additional seismic data, the Company believes that the seven
productive formations located in the greater Manderson Field 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 $50 million to drill and complete as many as 70 to
100 wells in this field.
1
<PAGE> 5
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 45%. 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.
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
2
<PAGE> 6
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 14% of the Company's common stock, and
the Company has established minimum direct ownership requirements for all
officers and directors.
3
<PAGE> 7
THE OFFERING
SECURITIES OFFERED............ $125,000,000 principal amount of %
Convertible Subordinated Notes due 2004, not
including $18,750,000 additional principal
amount of Notes subject to the Underwriters'
over-allotment option.
MATURITY...................... , 2004
PAYMENT OF INTEREST........... and , commencing
, 1998.
CONVERSION.................... Convertible into Common Stock of the Company at
the option of the holder at any time at or
before maturity, unless previously redeemed, at
$ per share, subject to adjustment
upon the occurrence of certain events.
SUBORDINATION; SUBSIDIARY
GUARANTEES.................... Subordinated to all present and future Senior
Indebtedness (as defined) of the Company.
Senior Indebtedness of the Company aggregated
approximately $276.2 million at September 30,
1997. See "Capitalization." The indenture
governing the Notes (the "Indenture") contains
no limitation on the incurrence of indebtedness
(including Senior Indebtedness) or other
liabilities by the Company and its
subsidiaries. Each of the Company's current and
future wholly-owned significant subsidiaries
will unconditionally guarantee, jointly and
severally, the Company's obligations under the
Indenture.
OPTIONAL REDEMPTION........... The Notes are 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 , 2000.
REPURCHASE EVENT.............. In the event that there shall occur a
Repurchase Event (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 100% of their principal
amount, plus accrued interest. The term
Repurchase Event is limited to transactions
involving a Change in Control or a Termination
of Trading (each as defined), and 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 Repurchase
Event 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 Repurchase Event.
USE OF PROCEEDS............... 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.
LISTING....................... The Notes are expected to trade on the New York
Stock Exchange under the symbol " ."
COMMON STOCK TRADING.......... The Common Stock is traded on the New York
Stock Exchange under the symbol "KCS."
4
<PAGE> 8
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
</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................................................ 614,043 614,043
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 % Convertible
Subordinated Notes due 2004 offered hereby and the application of the
estimated net proceeds as described under "Use of Proceeds."
5
<PAGE> 9
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.
6
<PAGE> 10
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
7
<PAGE> 11
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 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.
SUBSTANTIAL INDEBTEDNESS AND RESTRICTIONS
At September 30, 1997, the Company had outstanding $150 million in 11%
Senior Notes (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. See "Capitaliza-
8
<PAGE> 12
tion." 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 are 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 includes 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. The Indenture
does not limit the amount of additional indebtedness, including Senior
Indebtedness, which the Company can create, incur, assume or guarantee. By
reason of the subordination of the Notes, in the event of insolvency,
bankruptcy, liquidation, reorganization, dissolution or winding up of the
business of the Company or upon default in payment with respect to any Senior
Indebtedness of the Company or an event of default with respect to such
indebtedness resulting in the acceleration thereof, the assets of the Company
will be available to pay the amounts due on the Notes only after all 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."
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 wholly-owned significant 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 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
9
<PAGE> 13
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 at such time as the
subsidiary guarantor is no longer either a significant subsidiary or a member of
an affiliated group (within the meaning of Section 279(g) of the Internal
Revenue Code of 1986, as amended) which includes the Company, including, without
limitation, upon the sale or disposition (whether by merger, stock purchase,
asset sale or otherwise) of such subsidiary guarantor. The Indenture does not
impose any limitations on the Company's ability to sell or dispose of any
subsidiary guarantor. See "Description of the Notes -- Subsidiary Guarantees."
LIMITATIONS ON REPURCHASE UPON A REPURCHASE EVENT
In the event of a Repurchase Event, which includes a Change in Control and
a Termination of Trading (each 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
100% of the principal amount thereof plus accrued interest thereon to the
repurchase date. The Company's ability to repurchase the Notes upon a Repurchase
Event 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 Repurchase Event 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 Repurchase Event. The term "Repurchase Event" 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 Repurchase Event
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.
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.
10
<PAGE> 14
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 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. See "Business and
Properties -- Rocky Mountain Region -- Manderson
11
<PAGE> 15
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.
POSSIBLE VOLATILITY OF TRADING PRICES FOR NOTES AND COMMON STOCK
The stock market has from time to time experienced extreme price and volume
fluctuations which in some circumstances have been unrelated to the operating
performance of particular companies. The market prices for the Notes and for
shares of the Common Stock may be highly volatile depending on various factors,
including, but not limited to, the state of the national economy, stock market
conditions, industry research reports, actions by governmental agencies,
litigation involving the Company, earnings and other announcements by the
Company or its competitors and general conditions in the oil and gas business.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law contain provisions that may have the effect of
discouraging unsolicited takeover proposals for the Company. These provisions,
among other things, provide for the classification of the Board of Directors,
restrict the ability of stockholders to take action by written consent,
authorize the Board of Directors to designate the terms of and issue new series
of preferred stock, limit the personal liability of directors, require the
Company
12
<PAGE> 16
to indemnify directors and officers to the fullest extent permitted by
applicable law and impose restrictions on business combinations with certain
interested parties.
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.
13
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the Notes are estimated to be
approximately $121.2 million ($139.4 million if the Underwriters' over-allotment
option is exercised in full), 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 September 30, 1997, the outstanding balance under the Bank Credit
Facilities was $126.2 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."
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
% Convertible Subordinated Notes due 2004............... -- 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>
14
<PAGE> 18
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the New York Stock Exchange under the symbol
"KCS." The high and low closing sales prices for the periods listed below were
taken from the New York Stock Exchange Composite Transactions Tape and give
effect to the two-for-one stock split effective June 30, 1997. The last reported
sales price of the Common Stock on November , 1997 was $ .
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter............................................... $ 8.63 $ 7.31
Second Quarter.............................................. 11.13 7.63
Third Quarter............................................... 10.94 6.88
Fourth Quarter.............................................. 8.38 4.94
1996
First Quarter............................................... 7.88 6.69
Second Quarter.............................................. 14.38 7.81
Third Quarter............................................... 17.81 13.38
Fourth Quarter.............................................. 22.06 14.44
1997
First Quarter............................................... 21.81 15.75
Second Quarter.............................................. 21.19 13.31
Third Quarter............................................... 30.00 19.63
Fourth Quarter (through November , 1997)..................
</TABLE>
There were 1,149 stockholders of record of the Common Stock on September
30, 1997.
DIVIDEND POLICY
The Company commenced paying cash dividends on its Common Stock in February
1992. For the years ended December 1994, 1995 and 1996, the Company's annual
dividends paid were $0.045, $0.060 and $0.060 per share, respectively. In 1997,
the Company paid $0.015 per share in each of the first two quarters, and
increased its dividend to $0.020 per share in the third quarter of 1997. The
Company's policy is to retain a substantial portion of its earnings to provide
funds for reinvestment within the Company's business. The Company is a holding
company that conducts all of its operations through its subsidiaries. As a
result, the Company's ability to pay dividends is dependent upon the cash flow
of its subsidiaries. The payment of dividends is also contingent upon, among
other factors, business conditions, business results, operating cash
requirements and the financial condition of the Company, and will be at the
discretion of the Board of Directors. In addition, under the terms of the Senior
Notes and the Bank Credit Facilities, the payment of dividends is limited to 50%
of the Company's consolidated net income commencing October 1, 1995. See Note 5
to the Consolidated Financial Statements.
15
<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
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.
16
<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
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,
17
<PAGE> 21
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 of the increase primarily due to the expanded operations in the Rocky
Mountain region, especially in the Manderson Field.
18
<PAGE> 22
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 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
19
<PAGE> 23
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, 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
20
<PAGE> 24
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.
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,
21
<PAGE> 25
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
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
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<PAGE> 26
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 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.
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<PAGE> 27
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.
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<PAGE> 28
BUSINESS AND PROPERTIES
GENERAL
KCS is an independent oil and gas company primarily 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 estimated 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
currently 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 pending completion of a sour gas treatment plant and
associated acid gas injection system. Based on drilling and production results
and accumulation of additional seismic data, the Company believes that the seven
productive formations located in the greater Manderson Field 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 $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 45%. 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
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<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.
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<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.
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<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>
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<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 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,
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<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. Operation of the amine plant has been severely
limited due to delays in receipt of acid gas disposal equipment. Once fully
operational, the Company's treatment plant will have the 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 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.
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 permits pending for 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 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 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.
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<PAGE> 34
At October 31, 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 production (although less than half 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.
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 5 gross
(4.0 net) development wells and 10 gross (7.0 net) exploratory wells by the end
of 1997 and expects to participate in approximately 15 gross development wells
and 13 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
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.
31
<PAGE> 35
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 net revenue
interest of approximately 45%. 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.
32
<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.
33
<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.
34
<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 after
September 30, 1997 are 42,328 MMcf of gas and 1,008 Mbbls of oil without the
burden of development and lease operating expenses. 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>
35
<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 low-risk and high-risk,
high-potential prospects in order to maintain a
36
<PAGE> 40
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."
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
37
<PAGE> 41
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. 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.
38
<PAGE> 42
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.
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.
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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 changes would affect the Company only indirectly, they
are intended to further enhance competition in the natural gas markets.
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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 amend the valuation procedure for the sale of federal
royalty oil. The Company cannot predict what action the
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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 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
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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 other
air emission-related issues. The Company does not believe, however, that its
operations will be materially adversely affected by any such requirements.
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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 KCS 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. On August 12, 1997, the trial judge signed an order granting
the Company's motion and denying the royalty owners' motion.
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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 have appealed the
trial court's decision to the Fifth District Court of Appeals in Dallas, Texas,
and the royalty owners in the Jesus Yzaguirre Unit have indicated the trial
court's final judgment in that matter will be appealed in due course 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.
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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 Senior Vice 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. Mr. Jurand has 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
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Assistant Treasurer from May 1991 to December 1995. She joined the Company upon
its formation in 1988, holding various management and supervisory positions.
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 has 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, Reserves and
Production of KCS Medallion Resources, Inc. (formerly InterCoast Oil and Gas
Company) since 1994. 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 a member of the Council of the World LP Gas Forum. 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.
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<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
48
<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 THE NOTES
The Notes will be issued under an indenture to be dated as of ,
1997 (the "Indenture") between the Company and State Street Bank and Trust
Company, as trustee (the "Trustee"). The terms of the Indenture also will be
governed by certain provisions contained in the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The following summaries of certain
provisions of the Indenture do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Indenture, including the definition therein of certain terms. Wherever
particular sections or defined terms of the Indenture are referred to, such
sections or defined terms are incorporated herein by reference. Copies of the
proposed form of Indenture are available from the Company upon request.
GENERAL
The Notes will be unsecured subordinated obligations of the Company, will
be limited to $125,000,000 in aggregate principal amount ($143,750,000 if the
Underwriters' over-allotment option is exercised in full) and will mature on
. Each of the Company's significant wholly-owned subsidiaries will
unconditionally guarantee, jointly and severally, the Company's obligations
under the Indenture, on a subordinated basis. The Notes will bear interest at
the rate per annum shown on the front cover of this Prospectus from and
including the date of the Indenture, or from and including the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semi-annually on and of each year, commencing ,
1998, to the Person in whose name the Note (or any predecessor Note) is
registered at the close of business on the preceding or , as
the case may be. Interest on the Notes will be paid on the basis of a 360-day
year of twelve 30-day months.
Principal of, and premium, if any, and interest on, the Notes will be
payable (i) in respect of Notes held of record by The Depository Trust Company
("DTC") or its nominee in same day funds on or prior to the payment dates with
respect to such amounts and (ii) in respect of Notes held of record by holders
other than DTC or its nominee at the office or agency of the Company maintained
for such purpose in the City of New York, and the Notes may be surrendered for
transfer, exchange or conversion at the corporate trust office of the Trustee.
In addition, with respect to Notes held of record by any holder ("Holder") other
than DTC or its nominee, payment of interest may be made at the option of the
Company by check mailed on or before the due date to the address of the person
entitled thereto as it appears in the Security Register for the Notes on the
Regular Record Date for such interest.
The Notes will be issued only in registered form, without coupons and in
denominations of $1,000 or any integral multiple thereof. No service charge will
be made for any transfer or exchange of the Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge and
any other expenses (including the fees and expenses of the Trustee) payable in
connection therewith. The Company is not required (i) to issue, register the
transfer of or exchange any Notes during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption and
ending at the close of business on the day of such mailing, or (ii) to register
the transfer of or exchange any Note selected for redemption in whole or in
part, except the unredeemed portion of Notes being redeemed in part.
All monies paid by the Company to the Trustee or any Paying Agent for the
payment of principal of and premium and interest on any Note which remain
unclaimed for two years after such principal, premium or interest become due and
payable may be repaid to the Company. Thereafter, the Holder of such Note may,
as an unsecured general creditor, look only to the Company for payment thereof.
The Indenture will not contain any financial covenants or restrictions on
payment of dividends or any provisions that would provide protection to Holders
of the Notes against a sudden and dramatic decline in credit quality of the
Company resulting from any takeover, recapitalization or similar restructuring,
except as described below under "Certain Rights to Require Repurchase of Notes."
49
<PAGE> 53
CONVERSION RIGHTS
The Notes will be convertible in integral multiples of $1,000 principal
amount thereof into shares of Common Stock at any time prior to redemption,
repurchase or final maturity, initially at the conversion price of $
per share. The right to convert Notes which have been called for redemption or
delivered for repurchase will terminate at the close of business on the second
business day preceding the Redemption Date or Repurchase Date. See "Optional
Redemption" and "Certain Rights to Require Repurchase of Notes" below.
The conversion price will be subject to adjustment upon the occurrence of
any of the following events: (i) the subdivision, combination or
reclassification of outstanding shares of Common Stock; (ii) the payment in
shares of Common Stock of a dividend or distribution on any class of capital
stock of the Company; (iii) the issuance of rights or warrants to all holders of
Common Stock entitling them to acquire shares of Common Stock at a price per
share less than the Current Market Price; provided that if such rights or
warrants are only exercisable upon the occurrence of certain triggering events,
then the conversion price shall not be adjusted until such an event occurs; (iv)
the distribution to all holders of Common Stock of shares of capital stock other
than Common Stock, evidences of indebtedness, cash or other assets (including
securities, but excluding dividends or distributions paid exclusively in cash
and dividends, distributions, rights and warrants referred to above); (v) a
distribution consisting exclusively of cash (excluding any cash distributed upon
a merger or consolidation to which the next succeeding paragraph applies) to all
holders of Common Stock in an aggregate amount that, together with (A) all other
distributions exclusively in cash (excluding any cash distributed upon a merger
or consolidation to which the next succeeding paragraph applies) made within the
12 months preceding such distribution in respect of which no adjustment has been
made and (B) any cash and the fair market value of other consideration paid in
respect of any other tender offer by the Company or a subsidiary of the Company
for Common Stock consummated within the 12 months preceding such distribution in
respect of which no adjustment has been made, exceeds 15% of the Company's
market capitalization (determined as provided in the Indenture) on the date
fixed for determining the stockholders entitled to such distribution; and (vi)
the consummation of a tender offer made by the Company or any subsidiary of the
Company for Common Stock which involves an aggregate consideration that,
together with (X) any cash and the fair market value of other consideration
payable in respect of any tender offer by the Company or a subsidiary of the
Company for Common Stock consummated within the 12 months preceding the
consummation of such tender offer in respect of which no adjustment has been
made and (Y) the aggregate amount of all cash distributions (excluding any cash
distributed upon a merger or consolidation to which the next succeeding
paragraph applies) to all holders of the Common Stock within the 12 months
preceding the consummation of such tender offer in respect of which no
adjustment has been made, exceeds 15% of the Company's market capitalization at
the date of consummation of such tender offer. No adjustment of the conversion
price will be required to be made until cumulative adjustments amount to at
least one percent of the conversion price, as last adjusted. Any adjustment that
would otherwise be required to be made shall be carried forward and taken into
account in any subsequent adjustment.
In addition to the foregoing adjustments, the Company from time to time
may, to the extent permitted by law, reduce the conversion price of the Notes by
any amount for any period of at least 20 days, in which case the Company shall
give at least 15 days' notice of such decrease. The Company also will be
permitted to reduce the conversion price as it considers to be advisable in
order that any event treated for federal income tax purposes as a dividend of
stock or stock rights will not be taxable to the holders of the Common Stock or,
if that is not possible, to diminish any income taxes that are otherwise payable
because of such event. In the case of any consolidation or merger of the Company
with any other Person (other than one in which no change is made in the Common
Stock), or any sale or other transfer of all or substantially all of the assets
of the Company, the Holder of any Note then outstanding will, with certain
exceptions, have the right thereafter to convert such Note only into the kind
and amount of securities, cash and other property receivable upon such
consolidation, merger or transfer by a holder of the number of shares of Common
Stock into which such Note might have been converted immediately prior to such
consolidation, merger or transfer; and adjustments will be provided for events
subsequent thereto that are as nearly equivalent as practical to the conversion
price adjustments described above.
50
<PAGE> 54
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon the then
Closing Price at the close of business on the day of conversion. If any Notes
are surrendered for conversion during the period after the close of business on
any Regular Record Date through and until the close of business on the next
succeeding Interest Payment Date, interest on such Notes will be paid on such
Interest Payment Date; provided, however, when such Notes are surrendered for
conversion (except any such Notes called for redemption), such Notes must be
accompanied by payment to the Company in next day funds of an amount equal to
the interest thereon which the registered Holder on such Regular Record Date is
to receive. Except as described in the preceding sentence, no interest will be
payable by the Company on converted Notes with respect to any Interest Payment
Date subsequent to the date of conversion. No other payment or adjustment for
interest or dividends is to be made upon conversion.
SUBORDINATION
The payment of the principal of and premium, if any, and interest on the
Notes will, to the extent set forth in the Indenture, be subordinated in right
of payment to the prior payment in full of all Senior Indebtedness of the
Company. If there is a payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshalling of assets or any bankruptcy, insolvency or similar
proceedings of the Company, the holders of all Senior Indebtedness of the
Company will be entitled to receive payment in full of all amounts due or to
become due thereon or in respect thereof or provision shall be made for such
payment in money or money's worth before the Holders of the Notes will be
entitled to receive any payment on account of the principal of or premium, if
any, or interest on the Notes. In the event of the acceleration of the maturity
of the Notes, the holders of all Senior Indebtedness of the Company will first
be entitled to receive payment in full in cash of all amounts due thereon or in
respect thereof or provision shall be made for such payment in money or money's
worth before the Holders of the Notes will be entitled to receive any payment on
account of principal of or premium, if any, or interest on the Notes or on
account of the purchase or other acquisition of the Notes. No payments on
account of principal of or premium, if any, or interest on the Notes or on
account of the purchase or other acquisition of Notes may be made if there has
occurred and is continuing a default (beyond any applicable grace period) in any
payment of principal of or premium or interest on any Senior Indebtedness of the
Company (that has not been rescinded or annulled), any acceleration of the
maturity of any Senior Indebtedness of the Company or if any judicial proceeding
is pending with respect to any such default or the event giving rise to any such
acceleration.
Senior Indebtedness with respect to the Company is defined in the Indenture
as all indebtedness of the Company for money borrowed, whether outstanding on
the date of execution of the Indenture or thereafter created, incurred or
assumed, except any indebtedness that by the terms of the instrument or
instruments by which such indebtedness was created or incurred expressly
provides that it (i) is junior in right of payment to the Notes or (ii) ranks
pari passu in right of payment with the Notes. The term "indebtedness for money
borrowed" when used with respect to the Company is defined to mean (i) any
obligation of, or any obligation guaranteed by, the Company for the repayment of
borrowed money, whether or not evidenced by bonds, debentures, notes or other
written instruments, (ii) any deferred payment obligation of, or any such
obligation guaranteed by, the Company for the payment of the purchase price of
property or assets evidenced by a note or similar instrument, (iii) any
obligation of, or any such obligation guaranteed by, the Company for the payment
of rent or other amounts under a lease of property or assets which obligation is
required to be classified and accounted for as a capitalized lease on the
balance sheet of the Company under generally accepted accounting principles,
(iv) any obligation of, or any such obligation which is guaranteed by, the
Company for the reimbursement of any obligor of any letter of credit, banker's
acceptance or similar credit transaction, (v) any obligation of, or any such
obligation which is guaranteed by, the Company under interest rate swaps, caps,
collars, options and similar arrangements, (vi) any obligation of the Company
under any foreign exchange contract, currency or commodity swap agreement,
futures contract, currency or commodity option contract or other foreign
currency or commodity hedge and (vii) any interest, fees, penalties and other
obligations in respect of any obligation referred to in the foregoing clauses
(i)-(vi). Senior Indebtedness with respect to the Company's subsidiaries for
purposes of the subsidiary guarantees of the Notes will have a corresponding
meaning.
51
<PAGE> 55
The Notes will be obligations of the Company. The operations of the Company
are currently conducted principally through subsidiaries, which are separate and
distinct legal entities. Each of the Company's significant wholly-owned
subsidiaries will guarantee the Company's payment obligations under the Notes on
a subordinated basis, so long as such subsidiary is either a Significant
Subsidiary (as defined under "--Subsidiary Guarantees") or a member of an
affiliated group (within the meaning of Section 279(g) of the Internal Revenue
Code of 1986, as amended) which includes the Company. The satisfaction by the
Company's subsidiaries of their contractual guarantees, as well as the payment
of dividends and certain loans and advances to the Company by such subsidiaries,
are subject to certain statutory or contractual restrictions, are contingent
upon the earnings of such subsidiaries and are subject to various business
considerations. Any right of the Company to receive assets of any subsidiary of
the Company upon the liquidation or reorganization of any such subsidiary will
be effectively subordinated to the claims of that subsidiary's creditors, except
to the extent that the Company is itself recognized as a creditor of such
subsidiary, in which case the claims of the Company would still be subordinate
to any security interest in the assets of such subsidiary and any indebtedness
of such subsidiary senior to that held by the Company.
The Indenture will not limit or prohibit the incurrence of Senior
Indebtedness by the Company or any of its subsidiaries. At September 30, 1997,
the aggregate amount of Senior Indebtedness of the Company and its subsidiaries
outstanding was approximately $276.2 million (excluding intercompany
indebtedness and subsidiary guarantees of Senior Indebtedness of the Company).
The Company expects that it and its subsidiaries will incur substantial
additional indebtedness, including Senior Indebtedness, from time to time in the
future. See "Capitalization."
SUBSIDIARY GUARANTEES
Each of the Company's current and future wholly-owned significant
subsidiaries will unconditionally guarantee, jointly and severally, the
Company's obligations under the Notes. The indebtedness represented by the
guarantees will be subordinated to all Senior Indebtedness of such subsidiaries
in the same manner as the Notes are subordinated to all Senior Indebtedness of
the Company as described above. In addition to the initial subsidiary
guarantors, the Indenture will obligate the Company to cause each Person that
becomes, or comes into existence as, a wholly-owned subsidiary of the Company
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 $1,000,000 (a "Significant
Subsidiary") to guarantee the Company's obligations under the Notes on the same
terms and conditions as the guarantees thereof by the initial subsidiary
guarantors.
At such time as a subsidiary guarantor is no longer (i) a Significant
Subsidiary (as certified to the Trustee in an Officer's Certificate) or (ii) a
member of an affiliated group (within the meaning of Section 279(g) of the
Internal Revenue Code of 1986, as amended) which includes the Company,
including, without limitation, upon the sale or disposition (whether by merger,
stock purchase, asset sale or otherwise) of such subsidiary guarantor, such
subsidiary guarantor shall be released from all its obligations under the
subsidiary guarantee.
The obligations of each subsidiary guarantor under its guarantee 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 guarantee, or pursuant to its contribution obligations under
its guarantee, result in the obligations of such subsidiary guarantor under its
guarantee not constituting a fraudulent conveyance or fraudulent transfer under
federal, state or foreign law. See "Risk Factors -- Risks Relating to
Enforceability of Subsidiary Guarantees."
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or from
time to time in part, at any time on or after , 2000, upon not less
than 30 nor more than 60 days' notice mailed to each Holder of Notes to be
redeemed at its address appearing in the Security Register at the following
Redemption Prices
52
<PAGE> 56
(expressed as percentages of the principal amount) plus accrued and unpaid
interest to the Redemption Date (subject to the right of Holders of record on
the relevant Regular Record Date to receive interest due on an Interest Payment
Date that is on or prior to the Redemption Date).
If redeemed during the 12-month period beginning in the year
indicated (except that such date shall be for the year 2000), the
Redemption Price shall be:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2000......................................... %
2001.........................................
2002.........................................
2003.........................................
</TABLE>
No sinking fund will be provided for the Notes.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture will provide that the Company will not consolidate with or
merge with or into any other Person or convey, transfer or lease all or
substantially all of its assets to any Person, unless (a) if applicable, the
Person formed by such consolidation or into which the Company is merged or the
Person which acquires all or substantially all of the properties and assets of
the Company is a corporation validly organized and existing under the laws of
the United States or any state thereof or the District of Columbia and expressly
assumes payment of the principal of and premium, if any, and interest on the
Notes and performance or observance of each obligation of the Company under the
Indenture, (b) after consummating such consolidation, merger, conveyance,
transfer or lease, no Default or Event of Default shall have occurred and be
continuing, and (c) the Company (or the successor Person) has delivered to the
Trustee an Officers' Certificate stating that such consolidation, merger,
conveyance, transfer or lease complies with the provisions of the Indenture and
an Opinion of Counsel stating that the requirements of clause (a) of this
paragraph have been satisfied.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF NOTES
In the event of any Repurchase Event (as defined below) occurring after the
date of the Indenture and on or prior to stated maturity of the Notes, each
Holder of Notes will have the right, at the Holder's option, to require the
Company to repurchase all or any part of the Holder's Notes on a date (the
"Repurchase Date") that is no more than 30 days after the date the Company gives
notice of the Repurchase Event as described below at a price equal to 100% of
the principal amount thereof (the "Repurchase Price"), together with accrued and
unpaid interest to the Repurchase Date. On or prior to the Repurchase Date, the
Company shall deposit with the Trustee or a Paying Agent an amount of money
sufficient to pay the Repurchase Price of the Notes which are to be repaid on
the Repurchase Date, together with accrued and unpaid interest thereon to the
Repurchase Date.
Failure by the Company to provide timely notice of a Repurchase Event, as
provided for below, or to repurchase the Notes when required under the preceding
paragraph will result in an Event of Default under the Indenture whether or not
such repurchase is permitted by the subordination provisions of the Indenture.
On or before the 30th day after the occurrence of a Repurchase Event, the
Company will be obligated to mail to all Holders of Notes a notice of the
occurrence of such Repurchase Event and identifying the Repurchase Date, the
date by which the repurchase right must be exercised, the Repurchase Price for
Notes and the procedures which the Holder must follow to exercise this right. To
exercise the repurchase right, the Holder of a Note must deliver, on or before
the close of business on the Repurchase Date, written notice to the Company (or
an agent designated by the Company for such purpose) and to the Trustee of the
Holder's exercise of such right, together with the certificates evidencing the
Notes (unless they are in global form) with respect to which the right is being
exercised, duly endorsed for transfer.
53
<PAGE> 57
A "Repurchase Event" shall have occurred upon the occurrence of a Change in
Control or a Termination of Trading (each as defined below).
A "Change in Control" shall occur when: (i) all or substantially all of the
assets of the Company and its subsidiaries, taken as a whole, are sold,
assigned, conveyed, transferred, leased or otherwise disposed of, either in one
transaction or a series of related transactions, to any Person; (ii) there shall
be consummated any consolidation or merger of the Company pursuant to which the
Common Stock would be converted into cash, securities or other property, in each
case other than a consolidation or merger of the Company in which the holders of
the Voting Stock of the Company immediately prior to the consolidation or merger
own, directly or indirectly, at least a majority of the Voting Stock of the
continuing or surviving corporation immediately after such consolidation or
merger; (iii) any person, or any persons acting together which would constitute
a "group" for purposes of Section 13(d) of the Exchange Act, shall beneficially
own (as defined in Rule 13d-3 under the Exchange Act) more than 50% of the
Voting Stock of the Company (iv) at any time 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 (v) the Company is liquidated or dissolved. For the purposes of this
paragraph, "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 or entity (irrespective of whether or not, at the
time, stock of any other class or classes have, or might have, voting power by
reason of the happening of any contingency.)
A "Termination of Trading" shall occur if the Common Stock (or other common
stock into which the Notes are then convertible) is neither listed for trading
on a U.S. national securities exchange nor approved for trading on an
established automated over-the-counter trading market in the United States.
The phrase "all or substantially all" of the assets of the Company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale, transfer or other disposition is of "all or substantially all" of the
assets of the Company.
The right to require the Company to repurchase Notes as a result of the
occurrence of a Repurchase Event could create an event of default under Senior
Indebtedness of the Company, as a result of which any repurchase could, absent a
waiver, be blocked by the subordination provisions of the Indenture. See
"Subordination." Failure by the Company to repurchase the Notes when required
will result in an Event of Default with respect to the Notes whether or not such
repurchase is permitted by the subordination provisions. The Company's ability
to pay cash to the Holders of Notes upon a repurchase also may be limited by
certain financial covenants contained in the Company's Senior Indebtedness.
In the event a Repurchase Event occurs and the Holders exercise their
rights to require the Company to repurchase Notes, the Company intends to comply
with applicable tender offer rules under the Exchange Act, including Rules 13e-4
and 14e-1, as then in effect, with respect to any such purchase.
The foregoing provisions would not necessarily afford the Holders of the
Notes protection in the event of highly leveraged or other transactions
involving the Company that may adversely affect Holders. In addition, the
foregoing provisions may discourage open market purchases of the Common Stock or
a non-negotiated tender or exchange offer for such stock and, accordingly, may
limit a stockholder's ability to realize a premium over the market price of the
Common Stock in connection with any such transaction.
54
<PAGE> 58
REPORTS
Whether or not the Company is subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company shall deliver to the
Trustee and to each Holder, within 15 days after it is or would have been
required to file such with the Commission, annual and quarterly consolidated
financial statements substantially equivalent to financial statements that would
have been included in reports filed with the Commission if the Company was
subject to the requirements of Section 13 or 15(d) of the Exchange Act,
including, with respect to annual information only, a report thereon by the
Company's certified independent public accountants as such would be required in
such reports to the Commission and, in each case, together with a management's
discussion and analysis of operations and financial condition as such would be
so required.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture with respect to
the Notes: (a) default in the payment of principal of or any premium on any Note
when due (even if such payment is prohibited by the subordination provisions of
the Indenture), whether at stated maturity, upon redemption, upon acceleration
or otherwise; (b) default in the payment of any interest on any Note when due,
which default continues for 30 days (even if such payment is prohibited by the
subordination provisions of the Indenture); (c) failure to provide timely notice
of a Repurchase Event as required by the Indenture; (d) default in the payment
of the Redemption Price or Repurchase Price in respect of any Note on the
Redemption Date or Repurchase Date therefor (even if such payment is prohibited
by the subordination provisions of the Indenture); (e) default in the
performance of any other covenant of the Company in the Indenture which
continues for 60 days after written notice shall have been given to the Company
by the Trustee or to the Company and the Trustee by the Holders of at least 25%
in aggregate principal amount of the Outstanding Notes specifying such default
and requiring it to be remedied; (f) default under one or more bonds,
debentures, notes or other evidences of indebtedness for money borrowed by the
Company or any subsidiary of the Company or under one or more mortgages,
indentures or instruments under which there may be issued or by which there may
be secured or evidenced any indebtedness for money borrowed by the Company or
any subsidiary of the Company, whether such indebtedness now exists or shall
hereafter be created, which default individually or in the aggregate shall
constitute a failure to pay the principal of indebtedness in excess of
$10,000,000 when due and payable after the expiration of any applicable grace
period with respect thereto or shall have resulted in indebtedness in excess of
$10,000,000 becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable, without such indebtedness
having been discharged, or such acceleration having been rescinded or annulled,
within a period of 30 days after there shall have been given to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least 25% in
aggregate principal amount of the Outstanding Notes a written notice specifying
such default and requiring the Company to cause such indebtedness to be
discharged or cause such acceleration to be rescinded or annulled; and (g)
certain events in bankruptcy, insolvency or reorganization of the Company or any
subsidiary guarantor.
If an Event of Default with respect to the Notes shall occur and be
continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Outstanding Notes may declare the principal of and
premium, if any, on all Outstanding Notes to be due and payable immediately, but
if the Company cures all Events of Default (except the nonpayment of interest
on, premium, if any, and principal of any Notes due solely by declaration of
such acceleration) and certain other conditions are met, such declaration may be
canceled, and past defaults may be waived by the Holders of a majority in
aggregate principal amount of Outstanding Notes except a default in payment of
the principal of, or premium, if any, or interest on any Outstanding Notes and
certain other provisions specified below which cannot be modified or amended
without the consent of each Holder of an Outstanding Note. If an Event of
Default shall occur as a result of an event of bankruptcy, insolvency or
reorganization of the Company or any subsidiary guarantor, the aggregate
principal amount of the Notes shall automatically become due and payable. The
Company is required to furnish to the Trustee annually a statement as to the
performance by the Company of its obligations under the Indenture and as to any
default in such performance. The Indenture will provide that the Trustee may
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withhold notice to the Holders of the Notes of any continuing default (except in
the payment of the principal of or premium, if any, or interest on any Notes) if
the Trustee considers it in the interest of Holders of the Notes to do so.
MODIFICATION, AMENDMENTS AND WAIVERS
The Indenture will contain provisions permitting the Company and the
Trustee, with the consent of the Holders of not less than a majority of the
aggregate principal amount of the Outstanding Notes, to execute a supplemental
indenture to add provisions to, or change in any manner or eliminate any
provisions of, the Indenture or modify the rights of the Holders, provided that,
without the consent of each Holder of Outstanding Notes, no supplemental
indenture may (i) change the stated maturity of the principal of, or any
installment of interest on, any Note, or reduce the principal amount thereof or
the rate of interest thereon or any premium payable upon the redemption thereof,
or change the place of payment where, or the coin or currency in which, any Note
or any premium or interest thereon is payable, or impair the right to institute
suit for enforcement of any such payment on or after the stated maturity thereof
(or, in the case of redemption, on or after the Redemption Date), (ii) modify
the provisions of the Indenture with respect to the right of Holders of Notes to
require the Company to repurchase Notes upon the occurrence of a Repurchase
Event or, the conversion or subordination of the Notes in a manner adverse to
the Holders of Notes, or (iii) reduce the percentage in aggregate principal
amount of Outstanding Notes, the consent of whose Holders is required to modify
or amend the Indenture or for any waiver of compliance with certain provisions
of the Indenture or certain defaults thereunder.
Modifications and amendments of the Indenture may be made by the Company
and the Trustee without the consent of the Holders to: (a) cause the Indenture
to be qualified, and to maintain such qualification, under the Trust Indenture
Act or otherwise to comply with the provisions of the Trust Indenture Act; (b)
evidence the succession of another Person to the Company and the assumption by
any such successor of the covenants of the Company in the Indenture and the
Notes; (c) add to the covenants of the Company for the benefit of the Holders or
an additional Event of Default, or surrender any right or power conferred upon
the Company; (d) secure the Notes; (e) make provision with respect to the
conversion rights of Holders in the event of a consolidation, merger or transfer
of assets involving the Company, as required by the Indenture; (f) evidence and
provide for the acceptance of appointment by a successor Trustee with respect to
the Notes; or (g) cure any ambiguity, correct or supplement any provision which
may be defective or inconsistent with any other provision, or make any other
provisions with respect to matters or questions arising under the Indenture
which shall not adversely affect the interests of the Holders in any material
respect.
SATISFACTION AND DISCHARGE
The Company may discharge its obligations under the Indenture while Notes
remain Outstanding if (a) all Outstanding Notes will become due and payable at
their scheduled maturity within one year or (b) all Outstanding Notes are
scheduled for redemption within one year, and in either case the Company has
deposited with the Trustee an amount sufficient to pay and discharge all
Outstanding Notes on the date of their scheduled maturity or the scheduled date
of redemption.
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.
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 "Partici-
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pants"). 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 Repurchase Price (upon
redemption at the option of the Company or repurchase at the option of the
Holder upon a Repurchase Event) 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 Repurchase Price (upon redemption at the
option of the Company or repurchase at the option of the Holder upon a
Repurchase Event) 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, Paying Agent or
conversion 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
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.
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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, 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 if no successor
depositary is appointed by the Company as set forth above.
PAYMENTS OF PRINCIPAL AND INTEREST
The Indenture will require that payments in respect of the Notes (including
principal, premium, if any, and interest) held of record by DTC (including Notes
evidenced by the Global Notes) be made in same day funds. Payments in respect of
the Notes held of record by holders other than DTC may, at the option of the
Company, be made by check and mailed on or before the due date to such holders
of record as are shown on the Register for the Notes.
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.
INFORMATION CONCERNING THE TRUSTEE
State Street Bank and Trust Company will be the Trustee under the
Indenture. A successor Trustee may be appointed in accordance with the terms of
the Indenture.
The Indenture and the provisions of the Trust Indenture Act, incorporated
by reference therein, will contain certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; provided, however, that if it acquires any conflicting
interest (within the meaning of the Trust Indenture Act) it must eliminate such
conflicting interest or resign.
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.
DESCRIPTION OF CAPITAL STOCK
The following summary of the Company's capital stock is qualified in its
entirety by reference to the Company's Certificate of Incorporation and Bylaws,
each of which is incorporated by reference into the Registration Statement of
which this Prospectus is a part. See "Incorporation of Certain Documents by
Reference."
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, $.01
par value per share. At September 30, 1997, there were 29,394,894 shares
outstanding. In addition, the Company has granted options to purchase up to
1,199,700 shares of Common Stock at an average exercise price of $8.32 per share
and has granted warrants to purchase up to 870,000 shares of Common Stock at
$22.50 per share in connection with the Medallion Acquisition. Holders of Common
Stock are entitled to one vote per share on all matters on
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which the holders of Common Stock are entitled to vote. Because holders of
Common Stock do not have cumulative voting rights, holders of a majority of the
shares voting for the election of directors can elect all of the members of the
Board of Directors. A majority vote is also sufficient for other actions that
require the vote or concurrence of stockholders. The Common Stock is not
redeemable and has no conversion or preemptive rights. In the event of the
liquidation or dissolution of the Company, subject to the rights of the holders
of any outstanding shares of the Company's Preferred Stock, the holders of
Common Stock are entitled to share pro rata in any balance of the corporate
assets available for distribution to them. The Company may pay dividends if,
when and as declared by the Board of Directors from funds legally available
therefor. Under the terms of the Senior Notes Indenture and Bank Credit
Facilities, however, the payment of dividends is limited to 50% of the Company's
consolidated net income commencing October 1, 1995. See "Dividend Policy."
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock, $.01 par value per share. No shares of Preferred Stock are currently
outstanding. The Company's Board of Directors is authorized to issue the
Preferred Stock in series and, with respect to each series, to determine the
number of shares in any such series, and fix the designations, preferences,
qualifications, limitations, restrictions and special or relative rights of
shares of any series of Preferred Stock. The Board of Directors could, without
stockholder approval, issue Preferred Stock with voting rights and other rights
that could adversely affect the voting power of holders of Common Stock and
could be used to prevent a third party from acquiring control of the Company.
The Company has no present plans to issue any shares of Preferred Stock.
SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
Limitation of Director Liability. Section 102(b)(7) of the Delaware General
Corporation Law ("Section 102(b)") authorizes corporations to limit or to
eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. Although Section 102(b) does not change directors' duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Certificate of Incorporation limits the liability
of directors to the Company or its stockholders to the full extent permitted by
Section 102(b). Specifically, directors of the Company will not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability: (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law,
or (iv) for any transaction from which the director derived an improper personal
benefit.
Indemnification. To the maximum extent permitted by law, the Bylaws provide
for mandatory indemnification of directors and officers of the Company against
all expense, liability and loss to which they may become subject, or which they
may incur as a result of being or having been a director or officer of the
Company. In addition, the Company must advance or reimburse directors and
officers for expenses incurred by them in connection with indemnification
claims.
Delaware Anti-Takeover Law. Section 203 of the Delaware General Corporation
Law ("Section 203") generally provides that a person who, together with
affiliates and associates owns, or within three years did own, at least 15% but
less than 85% of the outstanding voting stock of a corporation subject to the
statute(an "Interested Stockholder") may not engage in certain business
combinations with the corporation for a period of three years after the date on
which the person became an Interested Stockholder unless (i) prior to such date,
the corporation's board of directors approved either the business combination or
the transaction in which the stockholder became an Interested Stockholder or
(ii) subsequent to such date, the business combination is approved by the
corporation's board of directors and authorized at a stockholders' meeting by a
vote of at least two-thirds of the corporation's outstanding voting stock not
owned by the Interested Stockholder. Section 203 defines the term "business
combination" to encompass a wide variety of transactions with or caused by an
Interested Stockholder, including mergers, asset sales, and other transactions
in which the Interested Stockholder receives or could receive a benefit on other
than a pro rata basis with other stockholders.
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The provisions of Section 203, combined with the staggered election of
directors (which is provided for in the Company's Bylaws) and the Board's
authority to issue Preferred Stock without further stockholder action, could
delay or frustrate the removal of incumbent directors or a change in control of
the Company. The provisions also could discourage, impede or prevent a merger,
tender offer or proxy contest, even if such event would be favorable to the
interests of stockholders. The Company's stockholders, by adopting an amendment
to the Certificate of Incorporation, may elect not to be governed by Section 203
which election would be effective 12 months after such adoption. Neither the
Certificate of Incorporation nor the Bylaws exclude the Company from the
restrictions imposed by Section 203.
OUTSTANDING WARRANTS
The warrants to acquire 870,000 shares of Common Stock from the Company at
a price of $22.50 per share issued to MidAmerican Capital Company ("MidAmerican
Capital") in connection with the Medallion Acquisition carry certain rights with
respect to registration under the Securities Act of the shares of Common Stock
underlying such warrants. In general, MidAmerican Capital has one "demand"
registration under which the Company will be obligated to file, and use its best
efforts to cause to be declared effective, a registration statement with respect
to the resale by MidAmerican of shares of Common Stock acquired pursuant to the
warrants. In addition, MidAmerican Capital has rights to two "piggyback"
registrations in the event the Company proposes to register with the SEC an
underwritten public sale of any shares of Common Stock or other securities (such
as the Notes) convertible into Common Stock. These rights expire at such time as
MidAmerican Capital is able to sell its shares of Common Stock without
restriction under the Securities Act and are subject to certain conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares Medallion may include in a registration pursuant to its
piggyback rights. The Company is obligated to bear all expenses in connection
with the registration, except underwriting discount and commissions with respect
to the Common Stock being registered. MidAmerican Capital has elected not to
register any shares of Common Stock in connection with this Offering.
TRANSFER AGENT
The Company's transfer agent and registrar for the Common Stock is
Registrar and Transfer Company, Cranford, New Jersey.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain material United States
federal income tax considerations to initial holders of the Notes. This
discussion is based upon provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated thereunder, Internal
Revenue Service ("IRS") rulings, and judicial decisions now in effect, all of
which are subject to change (possibly with retroactive effect) or different
interpretations.
This discussion addresses the tax consequences to the holders of the Notes
that purchase the Notes in the initial offering at the initial offering price(s)
specified herein and does not address the tax consequences to subsequent or
other holders of the Notes. Furthermore, this discussion is for general
information only, and does not deal with all aspects of United States federal
income taxation that may be relevant to particular purchasers in light of their
personal circumstances, or to certain types of holders (such as certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities or persons who hold the Notes or Common Stock in connection with a
straddle) that may be subject to special rules. This discussion does not deal
with tax consequences arising under the laws of any foreign, state or local
jurisdiction. Also, this discussion assumes that each holder holds the Notes and
the shares of Common Stock received upon conversion thereof as capital assets.
For the purpose of this discussion, a "Non-U.S. Holder" refers to any
holder who is not a United States person. The term "United States person" means
a citizen or resident of the United States, a corporation or partnership created
or organized in or under the laws of the United States or any state thereof, an
estate, the income of which is includible in income for United States federal
income tax purposes regardless of its source,
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or a trust which is subject to the supervision of a court within the United
States and the control of a United States person.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL INCOME, FEDERAL ESTATE OR GIFT, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES OF THEIR PARTICIPATION IN THIS OFFERING, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING CONVERSION OF THE NOTES, AND THE EFFECT THAT
THEIR PARTICULAR CIRCUMSTANCES MAY HAVE ON SUCH TAX CONSEQUENCES.
OWNERSHIP OF THE NOTES
Interest on Notes. Interest paid on Notes will be taxable to a holder as
ordinary interest income in accordance with the holder's methods of tax
accounting at the time that such interest is accrued or (actually or
constructively) received. The Company expects that the Notes will not be issued
with original issue discount ("OID") within the meaning of the Code.
Constructive Dividend. Certain corporate transactions, such as
distributions of assets to holders of Common Stock, may cause a deemed
distribution to the holders of the Notes if the conversion price or conversion
ratio of the Notes is adjusted to reflect such corporate transaction. Such
deemed distributions will be taxable as a dividend, return of capital, or
capital gain in accordance with the earnings and profits rule discussed under
"Dividends on Shares of Common Stock."
Sale or Exchange of Notes or Shares of Common Stock. In general, a holder
of Notes will recognize gain or loss upon the sale, exchange, redemption,
retirement at maturity or other disposition of the Notes measured by the
difference between the amount of cash and the fair market value of all property
received (except to the extent attributable to the payment of accrued interest,
which is taxable as ordinary income) and the holder's adjusted tax basis in the
Notes. A holder's tax basis in Notes generally will equal the cost of the Notes
to the holder increased by the amount of market discount, if any, previously
taken into income by the holder or decreased by any bond premium theretofore
amortized by the holder with respect to the Notes. In general, each holder of
Common Stock into which the Notes have been converted will recognize gain or
loss upon the sale, exchange, redemption, or other disposition of the Common
Stock under rules similar to those applicable to the sale or exchange of the
Notes. Special rules may apply to certain redemptions of Common Stock which may
result in different tax treatment. Subject to the market discount rules
discussed below, the gain or loss on the disposition of the Notes or shares of
Common Stock will be capital gain or loss and will be long-term gain or loss if
the Notes or shares of Common Stock have been held for more than one year at the
time of such disposition. Under recently enacted legislation, capital gains of
individuals derived in respect of capital assets held for more than one year are
eligible for reduced rates of taxation which may vary depending upon the holding
period of such capital assets. Prospective investors should consult their own
tax advisors with respect to the tax consequences of the new legislation. The
deductibility of capital losses is subject to limitations. (For the basis and
holding period of shares of Common Stock, see "Conversion of Notes.")
Conversion of Notes. Generally, holder of Notes will not recognize gain or
loss on the conversion of the Notes into shares of Common Stock, except to the
extent such Common Stock so received is attributable to accrued interest on the
Notes. The holder's tax basis in the shares of Common Stock received upon
conversion of the Notes will be equal to the holder's aggregate basis in the
Notes exchanged therefor (less any portion thereof allocable to cash received in
lieu of a fractional share). The holding period of the shares of Common Stock
received by the holder upon conversion of Notes will generally include the
period during which the holder held the Notes prior to the conversion, except to
the extent such Common Stock so received is attributable to accrued interest on
the Notes.
Cash received in lieu of a fractional share of Common Stock should be
treated as a payment in exchange for such fractional share rather than as a
dividend. Gain or loss recognized on the receipt of cash paid in lieu of such
fractional shares generally will equal the difference between the amount of cash
received and the amount of tax basis allocable to the fractional shares.
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Market Discount. The resale of Notes may be affected by the "market
discount" provisions of the Code. For this purpose, the market discount on a
Note will generally be equal to the amount, if any, by which the stated
redemption price at maturity of the Note immediately after its acquisition
exceeds the holder's tax basis in the Note. Subject to a de minimis exception,
these provisions generally require a holder of a Note acquired at a market
discount to treat as ordinary income any gain recognized on the disposition of
such Note to the extent of the "accrued market discount" on such Note at the
time of disposition. In general, market discount on a Note will be treated as
accruing on a straight-line basis over the term of such Note, or, at the
election of the holder, under a constant yield method. A holder of a Note
acquired at a market discount may be required to defer the deduction of a
portion of the interest on any indebtedness incurred or maintained to purchase
or carry the Note until the Note is disposed of in a taxable transaction, unless
the holder elects to include accrued market discount in income currently. If a
holder acquires a Note at a market discount and receives Common Stock upon
conversion of the Note, the amount of accrued market discount with respect to
the converted Note through the date of conversion will be treated as ordinary
income upon the disposition of the Common Stock.
Dividends on Shares of Common Stock. Distributions on shares of Common
Stock will constitute dividends for United States federal income tax purposes to
the extent of current or accumulated earnings and profits of the Company as
determined under United States federal income tax principles. Dividends paid to
holders that are United States corporations may qualify for the
dividends-received deduction.
To the extent, if any, that a holder receives distributions on shares of
Common Stock that would otherwise constitute dividends for United States federal
income tax purposes but that exceed current and accumulated earnings and profits
of the Company, such distributions will be treated first as a non-taxable return
of capital reducing the holder's basis in the shares of Common Stock. Any such
distributions in excess of the holder's basis in the shares of Common Stock will
be treated as capital gain.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO NON-U.S. HOLDERS
Interest on Notes. Generally, interest paid on the Notes to a Non-U.S.
Holder will not be subject to United States federal income tax if: (i) such
interest is not effectively connected with the conduct of a trade or business
within the United States by such Non-U.S. Holder; (ii) the Non-U.S. Holder is
not a bank whose receipt of interest on a Note is described in Section
881(c)(3)(A) of the Code, (iii) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total voting power of all classes of stock
of the Company entitled to vote and is not a controlled foreign corporation with
respect to which the Company is a "related person" within the meaning of the
Code; and (iv) the beneficial owner, under penalty of perjury, certifies that
the owner is not a United States person and provides the owner's name and
address. If certain requirements are satisfied, the certification described in
clause (iv) above may be provided by a securities clearing organization, a bank,
or other financial institution that holds customers' securities in the ordinary
course of its trade or business. For this purpose, the holder of Notes would be
deemed to own constructively the Common Stock into which it could be converted.
A holder that is not exempt from tax under these rules will be subject to United
States federal income tax withholding at a rate of 30% unless the interest is
effectively connected with the conduct of a United States trade or business, in
which case the interest will be subject to the United States federal income tax
on net income that applies to United States persons generally. Non-U.S. Holders
should consult applicable income tax treaties, which may provide different
rules.
Sales or Exchange of Notes or Shares of Common Stock. A Non-U.S. Holder
generally will not be subject to United States federal income tax on gain
recognized upon the sale or other disposition of the Notes or shares of Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-U.S. Holder, or (ii) in the case
of a Non-U.S. Holder who is a nonresident alien individual and holds the Common
Stock as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year and certain other circumstances are present, or
(iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of the
United States tax law applicable to certain United States expatriates. If the
Company is a "United States real property holding corporation," a Non-U.S.
Holder may be subject to federal income tax with respect to gain realized on the
disposition of such Notes or shares of Common Stock as if it were effectively
connected with a United States trade or business and the
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amount realized will be subject to withholding at the rate of 10%. The amount
withheld pursuant to these rules will be credible against such Non-U.S. Holder's
United States federal income tax liability and may entitle such Non-U.S. Holder
to a refund upon furnishing the required information to the IRS. Non-U.S.
Holders should consult applicable income tax treaties, which may provide
different rules.
Conversion of Notes. A Non-U.S. Holder generally will not be subject to
United States federal income tax on the conversion of a Note into shares of
Common Stock. To the extent a Non-U.S. Holder receives cash in lieu of a
fractional share on conversion, such cash may give rise to gain that would be
subject to the rules described above with respect to the sale or exchange of a
Note or Common Stock.
Dividends on Shares of Common Stock. Generally, any distribution on shares
of Common Stock to a Non-U.S. Holder will be subject to United States federal
income tax withholding at a rate of 30% unless the dividend is effectively
connected with the conduct of trade or business within the United States by the
Non-U.S. Holders, in which case the dividend will be subject to the United
States federal income tax on net income that applies to United States persons
generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax). Non-U.S. Holders should consult any
applicable income tax treaties, which may provide for a lower rate of
withholding or other rules different from those described above. For purposes of
determining whether tax is to be withheld at a rate of 30% or at a reduced rate
as specified by an income tax trusty, under existing Treasury Regulations the
Company may presume that dividends paid to an address in a foreign country are
paid to a resident of such country absent definite knowledge that such
presumption is not warranted. However, a Non-U.S. Holder who wishes to claim the
benefits of an income tax treaty may be required to satisfy certain
certification requirements in order to claim a reduction of or exemption from
withholding under the foregoing rules.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. Holders. Information reporting and backup withholding may apply to
payments of interest or dividends on or the proceeds of the sale or other
disposition of the Notes or shares of Common Stock made by the Company with
respect to certain non-corporate U.S. holders. Such U.S. holders generally will
be subject to backup withholding at a rate of 31% unless the recipient of such
payment supplies a taxpayer identification number, certified under penalties of
perjury, as well as certain other information, or otherwise establishes, in the
manner prescribed by law, an exemption from backup withholding. Any amount
withheld under backup withholding is allowable as a credit against the U.S.
holder's federal income tax, upon furnishing the required information.
Non-U.S. Holders. Generally, information reporting and backup withholding
of United States federal income tax at a rate of 31% may apply to payments of
principal, interest and premium (if any) to Non-U.S. Holders if the payee fails
to certify that the holder is a Non-U.S. person or if the Company or its paying
agent has actual knowledge that the payee is a United States person. The 31%
backup withholding tax generally will not apply to dividends paid to foreign
holders outside the United States that are subject to 30% withholding as
discussed above or that are subject to a tax treaty that reduces such
withholding.
The payment of the proceeds on the disposition of Note or shares of Common
Stock to or through the United States office of a United States or foreign
broker will be subject to information reporting and backup withholding unless
the owner provides the certification described above or otherwise establishes an
exemption. The proceeds of the disposition by a Non-U.S. Holder of Notes or
shares of Common Stock to or through a foreign office of a broker will not be
subject to backup withholding. However, if such broker is a U.S. person, a
controlled foreign corporation for United States tax purposes, or a foreign
person 50% or more of whose gross income for all sources for certain periods is
from activities that are effectively connected with a United States trade or
business, information reporting will apply unless such broker has documentary
evidence in its records of the owner's foreign status and has no actual
knowledge to the contrary or unless the owner otherwise establishes an
exemption. Both backup withholding and information reporting will apply to the
proceeds from such dispositions if the broker has actual knowledge that the
payee is a U.S. Holder.
On October 7, 1997, the IRS issued final Treasury Regulations concerning
the withholding of tax and reporting for certain amounts paid to non-resident
individuals and foreign corporations. The Treasury
63
<PAGE> 67
Regulations will be effective for payments made after December 31, 1999. These
Treasury Regulations generally apply backup withholding and information
reporting to dividends paid on Common Stock to a Non-U.S. Holder at an address
outside of the U.S. unless such Non-U.S. Holder owner, under penalties of
perjury, certifies, among other things, its status as a Non-U.S. Holder or
otherwise establishes an exemption. Prospective purchasers should consult their
tax advisors concerning such Treasury Regulations and the potential effect on
their ownership of the Common Stock.
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>
Smith Barney Inc. .......................................... $
Salomon Brothers Inc .......................................
Prudential Securities Incorporated .........................
CIBC Oppenheimer Corp. .....................................
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.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to $18,750,000 principal amount
of additional Notes at the public offering price set forth on the cover page
hereof less underwriting discounts and commissions. The Underwriters may
exercise such option to purchase additional Notes solely for the purpose of
covering over-allotments, if any, incurred in connection with the sales of the
Notes offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional Notes as the principal amount of Notes
set forth opposite such Underwriter's name in the preceding Underwriters table
bears to the total principal amount of Notes in such table.
The Company and its directors and executive officers have agreed that, for
a period of 90 days from the date of this Prospectus, they will not, without the
prior written consent of Smith Barney Inc. and Salomon Brothers Inc, offer,
sell, contract to sell, or otherwise dispose of, any shares of Common Stock (or
any securities convertible into or exercisable or exchangeable for, Common
Stock) or grant any options or warrants to purchase Common Stock, except in
certain circumstances.
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, the Common Stock, or both 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
64
<PAGE> 68
of covering a syndicate short position or stabilizing the price of the Notes,
the Underwriters may place bids for the Notes, the Common Stock, or both or
effect purchases of the Notes, the Common Stock, or both 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 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. Smith Barney 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. Smith Barney Inc. will receive no separate fee for its services as
qualified independent underwriter.
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,
65
<PAGE> 69
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 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 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).
66
<PAGE> 70
GLOSSARY
The following are abbreviations and definitions of 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.
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<PAGE> 71
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.
68
<PAGE> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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 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
Yzaquirre 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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
======================================================
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.....................
Risk Factors...........................
Special Note on Forward-Looking
Statements...........................
Use of Proceeds........................
Capitalization.........................
Price Range of Common Stock............
Dividend Policy........................
Selected Historical Financial
Information..........................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...........................
Business and Properties................
Management.............................
Security Ownership by Certain
Beneficial Owners and Management.....
Description of the Notes...............
Description of Capital Stock...........
Certain United States Federal Income
Tax Consequences.....................
Underwriting...........................
Certain Legal Matters..................
Experts................................
Available Information..................
Incorporation of Certain Documents by
Reference............................
Glossary...............................
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
======================================================
======================================================
$125,000,000
[KCS LOGO]
KCS ENERGY, INC.
% CONVERTIBLE
SUBORDINATED NOTES
DUE 2004
------------
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
SALOMON BROTHERS INC
PRUDENTIAL SECURITIES INCORPORATED
CIBC OPPENHEIMER
MORGAN KEEGAN & COMPANY, INC.
======================================================
<PAGE> 98
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 shares of Common Stock being registered hereby, other than underwriting
discounts and commissions.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 43,561
NASD Filing Fee............................................. 14,875
Printing and Engraving Expenses............................. 150,000
Legal Fees and Expenses..................................... 225,000
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............................................... 199,564
------------
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> 99
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
4.4* -- Form of Guarantee Agreement (included as Exhibit B to
Exhibit 4.3)
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.
</TABLE>
II-2
<PAGE> 100
<TABLE>
<S> <C>
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 respecting the Indenture
25.2 -- Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 on Form T-1 of State Street
Bank and Trust Company respecting the Guarantee Agreement
</TABLE>
- ---------------
* Filed herewith.
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> 101
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 Houston, State of Texas, on the 17th day of November,
1997.
KCS ENERGY, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Senior Vice President, Chief
Financial
Officer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue
thereof.
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>
/s/ JAMES W. CHRISTMAS President, Chief Executive November 17, 1997
- ----------------------------------------------------- Officer and Director
James W. Christmas (Principal Executive
Officer)
/s/ HENRY A. JURAND Senior Vice President, November 17, 1997
- ----------------------------------------------------- Chief Financial Officer
Henry A. Jurand and Secretary (Principal
Financial Officer)
/s/ FREDERICK DWYER Vice President and November 17, 1997
- ----------------------------------------------------- Controller (Principal
Frederick Dwyer Accounting Officer)
/s/ G. STANTON GEARY Director November 17, 1997
- -----------------------------------------------------
G. Stanton Geary
/s/ STEWART B. KEAN Director and Chairman November 17, 1997
- ----------------------------------------------------- of the Board
Stewart B. Kean
/s/ JAMES E. MURPHY, JR. Director November 17, 1997
- -----------------------------------------------------
James E. Murphy, Jr.
/s/ ROBERT G. RAYNOLDS Director November 17, 1997
- -----------------------------------------------------
Robert G. Raynolds
/s/ JOEL D. SIEGEL Director November 17, 1997
- -----------------------------------------------------
Joel D. Siegel
/s/ CHRISTOPHER A. VIGGIANO Director November 17, 1997
- -----------------------------------------------------
Christopher A. Viggiano
</TABLE>
II-4
<PAGE> 102
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 17th day of November, 1997.
KCS RESOURCES, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 17th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS Chairman, CEO and Director November 17, 1997
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, CFO, November 17, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer)
/s/ GARY M. PEDLAR Vice President and November 17, 1997
- ----------------------------------------------------- Controller (Principal
Gary M. Pedlar Accounting Officer)
/s/ C. R. DEVINE President, COO and November 17, 1997
- ----------------------------------------------------- Director
C. R. Devine
</TABLE>
II-5
<PAGE> 103
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 17th day of November, 1997.
KCS MICHIGAN RESOURCES, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 17th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS Chairman, CEO and Director November 17, 1997
- -----------------------------------------------------
James W. Christmas
/s/ HARRY LEE STOUT President, COO (Principal November 17, 1997
- ----------------------------------------------------- Executive Officer)
Harry Lee Stout
/s/ HENRY A. JURAND Vice President, CFO and November 17, 1997
- ----------------------------------------------------- Secretary (Principal
Henry A. Jurand Financial Officer)
/s/ GARY M. PEDLAR Vice President and November 17, 1997
- ----------------------------------------------------- Controller (Principal
Gary M. Pedlar Accounting Officer)
/s/ C.R. DEVINE Director November 17, 1997
- -----------------------------------------------------
C.R. Devine
</TABLE>
II-6
<PAGE> 104
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 17th day of November, 1997.
KCS PIPELINE SYSTEMS, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 17th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS Chairman, CEO and Director November 17, 1997
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, CFO, November 17, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer)
/s/ GARY M. PEDLAR Vice President and November 17, 1997
- ----------------------------------------------------- Controller (Principal
Gary M. Pedlar Accounting Officer)
/s/ C. R. DEVINE President, COO and November 17, 1997
- ----------------------------------------------------- Director
C. R. Devine
</TABLE>
II-7
<PAGE> 105
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 17th day of November, 1997.
KCS ENERGY MARKETING, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 17th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS Chairman, CEO and Director November 17, 1997
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, CFO, November 17, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer and Principal
Accounting Officer)
/s/ HARRY LEE STOUT President, COO and November 17, 1997
- ----------------------------------------------------- Director
Harry Lee Stout
</TABLE>
II-8
<PAGE> 106
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 17th day of November, 1997.
ENERCORP GAS MARKETING, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 17th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS Chairman, CEO and Director November 17, 1997
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HARRY LEE STOUT President, COO and November 17, 1997
- ----------------------------------------------------- Director
Harry Lee Stout
/s/ HENRY A. JURAND Vice President, CFO, November 17, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer and Principal
Accounting Officer)
</TABLE>
II-9
<PAGE> 107
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 17th day of November, 1997.
KCS ENERGY SERVICES, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer
and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 17th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS Chairman, CEO and Director November 17, 1997
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, CFO, November 17, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer and Principal
Accounting Officer)
/s/ HARRY LEE STOUT President, COO and November 17, 1997
- ----------------------------------------------------- Director
Harry Lee Stout
</TABLE>
II-10
<PAGE> 108
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 17th day of November, 1997.
KCS MEDALLION RESOURCES, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 17th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS Chairman and Director November 17, 1997
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, Secretary November 17, 1997
- ----------------------------------------------------- and Director (Principal
Henry A. Jurand Financial Officer and
Principal Accounting
Officer)
</TABLE>
II-11
<PAGE> 109
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 17th day of November, 1997.
NATIONAL ENERDRILL CORPORATION
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer
and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 17th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS President, CEO and November 17, 1997
- ----------------------------------------------------- Director (Principal
James W. Christmas Executive Officer)
/s/ HENRY A. JURAND Vice President, CFO, November 17, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer and Principal
Accounting Officer)
/s/ C. R. DEVINE Director November 17, 1997
- -----------------------------------------------------
C. R. Devine
</TABLE>
II-12
<PAGE> 110
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 17th day of November, 1997.
PROLIQ, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President, Chief Financial
Officer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 17th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS President and Director November 17, 1997
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, CFO, November 17, 1997
- ----------------------------------------------------- Secretary and Director
Henry A. Jurand (Principal Financial
Officer and Principal
Accounting Officer)
</TABLE>
II-13
<PAGE> 111
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 17th day of November, 1997.
MEDALLION CALIFORNIA
PROPERTIES CO.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 17th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS Chairman and Director November 17, 1997
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, Secretary November 17, 1997
- ----------------------------------------------------- and Director (Principal
Henry A. Jurand Financial Officer and
Principal Accounting
Officer)
</TABLE>
II-14
<PAGE> 112
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 17th day of November, 1997.
MEDALLION GAS SERVICES, INC.
By: /s/ HENRY A. JURAND
----------------------------------
Henry A. Jurand
Vice President and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Christmas and Henry A. Jurand, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to the Registration Statement, and file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 17th day of November, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS President and Director November 17, 1997
- ----------------------------------------------------- (Principal Executive
James W. Christmas Officer)
/s/ HENRY A. JURAND Vice President, Secretary November 17, 1997
- ----------------------------------------------------- and Director (Principal
Henry A. Jurand Financial Officer and
Principal Accounting
Officer)
</TABLE>
II-15
<PAGE> 113
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement
4.3* -- Form of Indenture
4.4* -- Form of Guarantee Agreement (included as Exhibit B to
Exhibit 4.3)
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 respecting the Indenture
25.2 -- Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 on Form T-1 of State Street
Bank and Trust Company respecting the Guarantee Agreement
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 1.1
$125,000,000
KCS ENERGY, INC.
% Convertible Subordinated Notes due 2004
UNDERWRITING AGREEMENT
________, 1997
SMITH BARNEY INC.
SALOMON BROTHERS INC
PRUDENTIAL SECURITIES INC.
CIBC WOOD GUNDY SECURITIES CORP.
MORGAN KEEGAN & COMPANY, INC.
As Representatives of the Several Underwriters
c/o SMITH BARNEY 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 % Convertible Subordinated Notes due 2004
(the "Firm Notes") to the several Underwriters named in Schedule I hereto (the
"Underwriters"). The Company also proposes, upon the terms and conditions set
forth herein, to issue and sell to the several Underwriters up to an additional
$18,750,000 aggregate principal amount of its % Convertible Subordinated Notes
due 2004 (the "Additional Notes"). The Firm Notes and the Additional Notes are
hereinafter sometimes collectively referred to as the "Notes". The Notes will
be issued pursuant to the provisions of an Indenture to be dated as of , 1997
(the "Indenture"), between the Company and State Street Bank and Trust Company,
as Trustee (the "Trustee"). The Company's common stock, $0.01 par value, is
hereinafter referred to as the "Common Stock".
The Company wishes to confirm as follows its 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.
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
and the shares of Common Stock issuable upon conversion of the Notes. The term
"Registration Statement" as used in this Agreement means the registration
statement (including all financial schedules and exhibits),
-1-
<PAGE> 2
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 Company hereby agrees, 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 Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of % of the
principal amount thereof, the principal amount of Notes 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).
The Company also hereby agrees, subject to all the terms and
conditions set forth herein, to sell to the Underwriters, and, upon the basis
of the representations, warranties and agreements of the Company herein
contained and subject to all the terms and conditions set forth herein, the
Underwriters shall have the right to purchase from the Company, pursuant to an
option (the "over-allotment option") which may be exercised at any time and
from time to time prior to 9:00 P.M., New York City time, on the 30th day after
the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday
or a holiday, on the next business day thereafter when the New York Stock
Exchange is open for trading), up to $18,750,000 aggregate principal amount of
Additional Notes. The purchase price of any Additional Notes which the
Underwriters may elect to purchase shall be
-2-
<PAGE> 3
the same as the purchase price of the Firm Notes, plus accrued interest, if
any, from the date of issuance of the Firm Notes to the date of delivery of and
payment for the Additional Notes. Additional Notes may be purchased only for
the purpose of covering over-allotments made in connection with the offering of
the Firm Notes. Upon any exercise of the over-allotment option, each
Underwriter, severally and not jointly, agrees to purchase from the Company the
principal amount of Additional Notes which bears the same proportion to the
aggregate principal amount of Additional Notes to be purchased by the
Underwriters as the principal amount of Firm Notes set forth opposite the name
of such Underwriter in Schedule I hereto (or such principal amount of Firm
Notes increased as set forth in Section 10 hereof) bears to the aggregate
principal amount of the Firm Notes.
3. Terms of Public Offering. The Company has 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 Firm 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
Firm Notes and the Closing Date may be varied by agreement between you and the
Company.
Delivery to the Underwriters of and payment for any Additional Notes
to be purchased by the Underwriters shall be made at the aforementioned office
of Smith Barney Inc. at such time on such date (the "Option Closing Date"),
which may be the same as the Closing Date but shall in no event be earlier than
the Closing Date nor earlier than two nor later than ten business days after
the giving of the notice hereinafter referred to, as shall be specified in a
written notice from you on behalf of the Underwriters to the Company of the
Underwriters' determination to purchase a principal amount, specified in such
notice, of Additional Notes. The place of closing for any Additional Notes and
the Option Closing Date for such Notes may be varied by agreement between you
and the Company.
The Firm Notes and any Additional Notes which the Underwriters may
elect to purchase 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 and registered 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 or the Option Closing Date, as the case may be.
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 or the Option
Closing Date, as the case may be.
5. Agreements of the Company. The Company agrees with the several
Underwriters as follows:
-3-
<PAGE> 4
(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 Company 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 Company 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 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 Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Company 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 Company 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 Company has delivered to you, without charge, in such quantities as you
have requested, copies of each form of the Prepricing Prospectus. The Company
consents 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
-4-
<PAGE> 5
by the several Underwriters and by dealers, prior to the date of the
Prospectus, of each Prepricing Prospectus so furnished by the Company.
(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
Company 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 Company consents 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
Company 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 Company 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 document), and will
expeditiously furnish to the Underwriters and dealers a reasonable number of
copies thereof. In the event that the Company and you, as Representatives of
the several Underwriters, agree that the Prospectus should be amended or
supplemented, the Company, 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 Company will cooperate with you and with counsel for
the Underwriters in connection with the registration or qualification of the
Notes and the shares of Common Stock issuable upon conversion 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 Company be obligated to qualify to do business in
any jurisdiction where it is not now so qualified or to take any action which
would subject it to service of process in suits, other than those arising out
of the offering or sale of the Notes, in any jurisdiction where it is 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 Company
will furnish to you (i) as soon as available, a copy of each report of the
Company mailed to stockholders or filed with the
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<PAGE> 6
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 Company to comply with the terms or fulfill any of
the conditions of this Agreement, the Company agrees 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 Company 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 Company 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 a period of 90 days
after the date of the Prospectus, without the prior written consent of Smith
Barney Inc. and Salomon Brothers 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 Company has not taken, nor will it 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 Common Stock to facilitate the sale or resale of the Notes.
(p) The Company will use its best efforts: (i) to have the
Notes listed on the New York Stock Exchange concurrently with the effectiveness
of the registration statement; and (ii) to have the shares of Common Stock
issuable upon conversion of the Notes listed, subject to notice of issuance, on
the New York Stock Exchange prior to the Closing Date.
6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
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<PAGE> 7
(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 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 the Company and assuming due execution and
delivery by the Trustee, will be a valid and binding agreement of the Company,
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 have been duly authorized and, when executed by
the Company and 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 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
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<PAGE> 8
generally, and the Notes will conform to the description thereof in the
Registration Statement and the Prospectus.
(f) All the outstanding shares of Common 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; the shares of Common Stock
issuable upon conversion of the Notes have been duly authorized and reserved
for issuance and, when delivered upon conversion of the Notes, will have been
validly issued and fully paid and will be nonassessable and free of any
preemptive or similar rights; and the capital stock of the Company conforms to
the description thereof in the Registration Statement and the Prospectus.
(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 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.
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<PAGE> 9
(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 issuance
of Common Stock upon conversion of the Notes, the execution, delivery or
performance of this Agreement and the Indenture by the Company, nor the
consummation by the Company 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,
registration under the Act of the shares of Common Stock issuable upon
conversion of the Notes, 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 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
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 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
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<PAGE> 10
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 the
Company of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and legally binding
agreement of the Company, enforceable against the Company 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 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
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<PAGE> 11
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 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
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<PAGE> 12
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) The Company 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 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 ompany, such Underwriter or such
controlling person shall promptly notify the Company and the Company 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
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<PAGE> 13
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 Company has agreed in writing to pay such fees and expenses, (ii) the
Company has 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
Company and such Underwriter or such controlling person shall have been advised
by its counsel that representation of such indemnified party and the Company 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 Company 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 Company 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 Company shall 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 Company
agrees 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 Company, its directors, its officers who sign the
Registration Statement, and any person who controls the Company 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 Company 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 Company, any of its 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 Company by paragraph (b) above (except that if the Company 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 Company, its 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.
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<PAGE> 14
(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 Company 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 Company 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 Company 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 Company 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; provided that, in the event that the
Underwriters shall have purchased any Additional Notes hereunder, any
determination of the relative benefits received by the Company or the
Underwriters from the offering of the Notes shall include the net proceeds
(before deducting expenses) received by the Company and the underwriting
discounts and commissions received by the Underwriters, from the sale of such
Additional Notes, in each case computed on the basis of the respective amounts
set forth in the notes to the table on the cover page of the Prospectus. The
relative fault of the Company 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 Company 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 Company 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 Firm Notes set forth opposite their
names in Schedule I hereto (or such principal amounts of Firm Notes increased
as set forth in Section 10 hereof) and not joint.
-14-
<PAGE> 15
(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 Company 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 Company, its directors or officers or any person
controlling the Company, (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 the Company, its
directors or officers, or any person controlling the Company, 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 Firm Notes hereunder are subject to the
following conditions:
(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 Company 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
-15-
<PAGE> 16
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 of the Subsidiaries 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 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 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; and the authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof contained in
the Prospectus under the caption "Description of Capital Stock";
(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 has corporate power and
authority to enter into this Agreement and to issue, sell and deliver the Notes
to the Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company and is a valid, legal and
binding agreement of the Company, enforceable against the Company 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;
-16-
<PAGE> 17
(vi) The Indenture has been duly and validly
authorized, executed and delivered by the Company and, assuming due execution
and delivery by the Trustee, is a valid and binding agreement of the Company,
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 shares of Common Stock issuable upon
conversion of the Notes have been validly authorized and reserved for issuance
and, when delivered upon conversion of the Notes, will have been validly issued
and fully paid and will be non-assessable and free of preemptive or similar
rights;
(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 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 issuance of Common Stock upon conversion of the Notes, the
execution, delivery or performance of this Agreement and the Indenture,
compliance by the Company with the provisions hereof and thereof, nor
consummation by the Company 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;
-17-
<PAGE> 18
(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 Company (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 and the shares of Common Stock issuable upon conversion 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 Prop-
erties -- Regulation," "Description of the Notes" and "Certain United States
Federal Income Tax Consequences" 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;
(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
-18-
<PAGE> 19
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 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 the matters referred to in clauses (v) through (ix), clause (xiii) and the
paragraph immediately following clause (xvi) of the foregoing paragraph (c) and
such other related matters as you 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
-19-
<PAGE> 20
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 and the shares of Common Stock issuable upon
conversion of the Notes shall have been listed, subject to notice of issuance,
on the New York Stock Exchange.
(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 the Company and
delivered to you, as Representatives of the Underwriters, or to counsel for the
Underwriters, shall be deemed a representation and warranty by the Company to
each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase Additional
Notes hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 8, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (g) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (c), (d) and
(e) shall be revised to reflect the sale of Additional Notes.
9. Expenses. The Company agrees 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
-20-
<PAGE> 21
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 and the shares of
Common Stock issuable upon conversion of the Notes on the New York Stock
Exchange; (vi) the registration or qualification of the Notes and the shares of
Common Stock issuable upon conversion 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 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 Firm Notes set forth opposite its name in Schedule I hereto
bears to the aggregate principal amount of Firm 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.,
-21-
<PAGE> 22
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
Company for the purchase of such Notes by one or more non-defaulting
Underwriters or other party or parties approved by you and the Company 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 Company. 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
Company, 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 Company by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Notes), 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, 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 sixth 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.
-22-
<PAGE> 23
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 Company, 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 Company, its 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.
-23-
<PAGE> 24
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
KCS ENERGY, INC.
By:
--------------------------------
Name:
Title:
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
SMITH BARNEY INC.
SALOMON BROTHERS INC
PRUDENTIAL SECURITIES INC.
CIBC WOOD GUNDY SECURITIES CORP.
MORGAN KEEGAN & COMPANY, INC.
As Representatives of the Several Underwriters
By SMITH BARNEY INC.
By:
--------------------------
Managing Director
-24-
<PAGE> 25
SCHEDULE I
KCS ENERGY, INC.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF
UNDERWRITER NOTES
- ------------------------------------------------------------------------------------ -------------------
<S> <C>
Smith Barney Inc....................................................................
Salomon Brothers Inc................................................................
Prudential Securities Inc...........................................................
CIBC Wood Gundy Securities Corp.....................................................
Morgan Keegan & Company, Inc........................................................ -------------------
Total...................................................................... $ 125,000,000
===================
</TABLE>
-25-
<PAGE> 1
EXHIBIT 4.3
KCS ENERGY, INC.
and
STATE STREET BANK AND TRUST COMPANY,
as Trustee
-----------
INDENTURE
Dated as of December ___, 1997
-----------
$143,750,000
% Convertible Subordinated Notes due 2004
-------
<PAGE> 2
Certain Sections of this Indenture relating to
Sections 310 through 318 of the
Trust Indenture Act of 1939:
Section 310(a)(1) .................................... 609
(a)(2) .................................... 609
(a)(3) .................................... Not Applicable
(a)(4) .................................... Not Applicable
(a)(5) .................................... 609
(b) .................................... 608
Section 311(a) .................................... 613
(b) .................................... 613
Section 312(a) .................................... 701
.................................... 702(a)
(b) .................................... 702(b)
(c) .................................... 702(c)
Section 313(a) .................................... 703(a)
(b) .................................... 703(a)
(c) .................................... 703(a)
(d) .................................... 703(b)
Section 314(a) .................................... 704
(a)(4) .................................... 1005
(b) .................................... Not Applicable
(c)(1) .................................... 102
(c)(2) .................................... 102
(c)(3) .................................... Not Applicable
(d) .................................... Not Applicable
(e) .................................... 102
Section 315(a) .................................... 601
(b) .................................... 602
(c) .................................... 601
(d) .................................... 601
(e) .................................... 514
Section 316(a)(1) .................................... 502
(a)(1)(A) .................................... 512
(a)(1)(B) .................................... 513
(a)(2) .................................... Not Applicable
(b) .................................... 508
(c) .................................... 104(c)
Section 317(a)(1) .................................... 503
(a)(2) .................................... 504
(b) .................................... 1004
Section 318(a) .................................... 107
- ------------------------
Note: This reconciliation and tie shall not, for any purpose, be deemed
to be a part of the Indenture.
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TABLE OF CONTENTS
ARTICLE ONE
Definitions and Other Provisions
of General Application................................................1
SECTION 101. Definitions.........................................1
SECTION 102. Compliance Certificates and Opinions................8
SECTION 103. Form of Documents Delivered to Trustee..............9
SECTION 104. Acts of Holders; Record Dates......................10
SECTION 105. Notices, Etc., to Trustee and Company..............11
SECTION 106. Notice to Holders; Waiver..........................11
SECTION 107. Conflict with Trust Indenture Act..................12
SECTION 108. Effect of Headings and Table of Contents...........12
SECTION 109. Successors and Assigns.............................12
SECTION 110. Separability Clause................................12
SECTION 111. Benefits of Indenture..............................12
SECTION 112. Governing Law......................................13
SECTION 113. Legal Holidays.....................................13
SECTION 114. Limitation on Individual Liability.................13
ARTICLE TWO
Security Forms.......................................................14
SECTION 201. Forms Generally....................................14
SECTION 202. Form of Face of Security...........................14
SECTION 203. Form of Reverse of Security........................16
SECTION 204. Form of Trustee's Certificate
of Authentication.................................25
ARTICLE THREE
The Securities.......................................................25
SECTION 301. Title and Terms....................................25
SECTION 302. Denominations......................................26
SECTION 303. Execution, Authentication, Delivery
and Dating........................................26
SECTION 304. Temporary Securities...............................27
SECTION 305. Registration, Registration of Transfer
and Exchange......................................28
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities...31
SECTION 307. Payment of Interest; Interest Rights Preserved.....31
SECTION 308. Persons Deemed Owners..............................33
SECTION 309. Cancellation.......................................33
SECTION 310. Computation of Interest............................33
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ARTICLE FOUR
Satisfaction and Discharge...........................................34
SECTION 401. Satisfaction and Discharge of Indenture............34
SECTION 402. Application of Trust Money.........................35
SECTION 403. Reinstatement......................................35
ARTICLE FIVE
Remedies.............................................................36
SECTION 501. Events of Default..................................36
SECTION 502. Acceleration of Maturity; Rescission and
Annulment.........................................38
SECTION 503. Collection of Indebtedness and Suits for
Enforcement by Trustee............................39
SECTION 504. Trustee May File Proofs of Claim...................40
SECTION 505. Trustee May Enforce Claims Without Possession
of Securities.....................................41
SECTION 506. Application of Money Collected.....................41
SECTION 507. Limitation on Suits................................41
SECTION 508. Unconditional Right of Holders to Receive
Principal, Premium and Interest...................42
SECTION 509. Restoration of Rights and Remedies.................42
SECTION 510. Rights and Remedies Cumulative.....................42
SECTION 511. Delay or Omission Not Waiver.......................43
SECTION 512. Control by Holders. ...............................43
SECTION 513. Waiver of Past Defaults............................44
SECTION 514. Undertaking for Costs..............................44
ARTICLE SIX
The Trustee..........................................................44
SECTION 602. Notice of Defaults.................................45
SECTION 603. Certain Rights of Trustee..........................45
SECTION 604. Not Responsible for Recitals or Issuance of
Securities........................................47
SECTION 605. May Hold Securities................................47
SECTION 606. Money Held in Trust................................47
SECTION 607. Compensation and Reimbursement.....................47
SECTION 608. Disqualification; Conflicting Interests............48
SECTION 609. Corporate Trustee Required; Eligibility............49
SECTION 610. Resignation and Removal; Appointment of
Successor.........................................49
SECTION 611. Acceptance of Appointment by Successor.............50
SECTION 612. Merger, Conversion, Consolidation or
Succession to Business............................51
SECTION 613. Preferential Collection of Claims Against
Company...........................................51
SECTION 614. Appointment of Authenticating Agent................51
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ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company....................53
SECTION 701. Company to Furnish Trustee Names and Addresses
of Holders........................................53
SECTION 702. Preservation of Information; Communication
to Holders........................................53
SECTION 703. Reports by Trustee.................................54
SECTION 704. Reports by Company.................................54
ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease.................55
SECTION 801. Company May Consolidate, Etc., Only on
Certain Terms.....................................55
SECTION 802. Successor Substituted..............................55
ARTICLE NINE
Supplemental Indentures..............................................56
SECTION 901. Supplemental Indentures Without Consent
of Holders........................................56
SECTION 902. Supplemental Indentures with Consent of Holders....56
SECTION 903. Execution of Supplemental Indentures...............57
SECTION 904. Effect of Supplemental Indentures..................57
SECTION 905. Conformity with Trust Indenture Act................58
SECTION 906. Reference in Securities to Supplemental
Indentures........................................58
SECTION 907. Notice of Supplemental Indenture...................58
ARTICLE TEN
Covenants............................................................58
SECTION 1001. Payment of Principal, Premium and Interest.........58
SECTION 1002. Guarantees of Subsidiaries.........................58
SECTION 1003. Maintenance of Office or Agency....................58
SECTION 1004. Money for Security Payments to Be Held in Trust....59
SECTION 1005. Statement by Officers as to Default................60
SECTION 1006. Existence..........................................60
SECTION 1007. Waiver of Certain Covenants........................61
ARTICLE ELEVEN
Redemption of Securities.............................................61
SECTION 1101. Right of Redemption................................61
SECTION 1102. Applicability of Article...........................61
SECTION 1103. Election to Redeem; Notice to Trustee..............61
SECTION 1104. Selection by Trustee of Securities to be
Redeemed..........................................61
SECTION 1105. Notice of Redemption...............................62
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SECTION 1106. Deposit of Redemption Price........................63
SECTION 1107. Securities Payable on Redemption Date..............63
SECTION 1108. Securities Redeemed in Part........................64
ARTICLE TWELVE
Subordination of Securities..........................................64
SECTION 1201. Securities Subordinated to Senior
Indebtedness......................................64
SECTION 1202. Payment Over of Proceeds Upon Dissolution, Etc.....64
SECTION 1203. Prior Payment to Senior Indebtedness upon
Acceleration of Securities..........................
SECTION 1204. No Payment When Senior Indebtedness in Default.....66
SECTION 1205. Payment Permitted If No Default....................67
SECTION 1206. Subrogation to Rights of Holders of Senior
Indebtedness......................................67
SECTION 1207. Provisions Solely to Define Relative Rights........67
SECTION 1208. Trustee to Effectuate Subordination................68
SECTION 1209. No Waiver of Subordination Provisions..............68
SECTION 1210. Notice to Trustee..................................68
SECTION 1211. Reliance on Judicial Order or Certificate of
Liquidating Agent.................................69
SECTION 1212. Trustee Not Fiduciary for Holders of Senior
Indebtedness......................................69
SECTION 1213. Rights of Trustee as Holder of Senior
Indebtedness; Preservation of Trustee'............70
SECTION 1214. Article Applicable to Paying Agents................70
SECTION 1215. Certain Conversions Deemed Payment.................70
SECTION 1216. No Suspension of Remedies..........................70
ARTICLE THIRTEEN
Conversion of Securities.............................................71
SECTION 1301. Conversion Privilege and Conversion Price..........71
SECTION 1302. Exercise of Conversion Privilege...................71
SECTION 1303. Fractions of Shares................................72
SECTION 1304. Adjustment of Conversion Price.....................72
SECTION 1305. Notice of Adjustments of Conversion Price..........79
SECTION 1306. Notice of Certain Corporate Action.................79
SECTION 1307. Company to Reserve Common Stock....................80
SECTION 1308. Taxes on Conversions...............................80
SECTION 1309. Covenant as to Common Stock........................81
SECTION 1310. Cancellation of Converted Securities...............81
SECTION 1311. Provisions of Consolidation, Merger or Sale
of Assets.........................................81
SECTION 1312. Trustee's Disclaimer...............................82
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ARTICLE FOURTEEN
Right to Require Repurchase..........................................82
SECTION 1401. Right to Require Repurchase........................82
SECTION 1402. Notice; Method of Exercising Repurchase Right......82
SECTION 1403. Deposit of Repurchase Price........................83
SECTION 1404. Securities Not Repurchased on Repurchase Date......84
SECTION 1405. Securities Repurchased in Part.....................84
SECTION 1406. Certain Definitions................................84
ARTICLE FIFTEEN
Guarantees...........................................................85
SECTION 1501. Unconditional Guarantees...........................85
SECTION 1502. Addition of Guarantors.............................85
SECTION 1503. Subordination of Guarantees........................85
EXHIBIT A - Initial Guarantors
EXHIBIT B - Form of Guarantee Agreement
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<PAGE> 8
INDENTURE
THIS INDENTURE, dated as of December __, 1997, is between KCS ENERGY,
INC., a corporation duly organized and existing under the laws of the State of
Delaware (herein called the "Company"), having its principal executive offices
at 379 Thornall Street, Edison, New Jersey 08837, and State Street Bank and
Trust Company, as Trustee (herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of its ____%
Convertible Subordinated Notes due 2004 (herein called the "Securities") of
substantially the tenor and amount hereinafter set forth, and to provide
therefor the Company has duly authorized the execution and delivery of this
Indenture.
All things necessary to make the Securities, when executed by the
Company and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid agreement of the Company, in accordance with their and its terms, have
been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities, as follows:
ARTICLE ONE
Definitions and Other Provisions
of General Application
SECTION 101. Definitions.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;
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(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles in the United States of America, and, except as
otherwise herein expressly provided, the term "generally accepted
accounting principles" with respect to any computation required and
permitted hereunder shall mean such accounting principles as are
generally accepted at the date of such computation;
(4) 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;
(5) the term "merger" includes a statutory share exchange and
the term "merged" has a correlating meaning;
(6) the masculine gender includes the feminine and the neuter;
(7) references to agreements and other instruments include
subsequent amendments thereto; and
(8) a "day" means a calendar day.
Certain terms used in Articles Twelve and Thirteen are defined in such
Articles.
"Act," when used with respect to any Holder, has the meaning specified
in Section 104.
"Affiliate" of any specified Person means 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 specified Person means the possession,
directly or indirectly, of the power to direct the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 614 to act on behalf of the Trustee to authenticate
Securities.
The term "Beneficial Owner" shall be determined in accordance with Rule
13d-3, promulgated by the Commission under the Exchange Act.
"Board of Directors" means either the Board of Directors of the Company
or any duly authorized committee of that Board.
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"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
the Board of Directors and to be in full force and effect on the date of such
certification and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in Hartford, Connecticut
or New York, New York are authorized or obligated to close by law or executive
order.
"Change in Control" has the meaning specified in Section 1406.
"Commission" 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 instrument 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" means the common stock, $0.01 par value per share, of
the Company as constituted on the date of this Indenture and any shares of any
class or classes of capital stock of the Company resulting from any
reclassification or reclassifications thereof and which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company and which are
not subject to redemption by the Company; provided, however, that if at any time
there shall be more than one such resulting class, the shares of each such class
then so issuable on conversion of Securities shall be substantially in the
proportion which the total number of shares of such class resulting from all
such reclassifications bears to the total number of shares of all such classes
resulting from all such reclassifications.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument 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 of the Board, its President or
a Vice President, and by its Chief Financial Officer, Controller, Treasurer, its
Secretary or an Assistant Secretary, and delivered to the Trustee.
"Corporate Trust Office" means the office of the Trustee in Hartford,
Connecticut, which initially shall be 225 Asylum Street, 23rd Floor, Hartford,
Connecticut 06103, at which at any particular time its corporate trust business
shall principally be administered.
"Corporation" means a corporation, association, limited liability
company, joint-stock company or business trust.
"Current Market Price" has the meaning specified in Section 1304(h).
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"DTC" has the meaning specified in Section 305.
"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 307.
"Definitive Security" means a Security or Securities that are in the
form of the Security set forth in Sections 202, 203 and 204 hereof, but not
including the additional language referred to in footnote 1 or the additional
schedule referred to in footnote 2.
"Depositary" has the meaning specified in Section 305.
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Global Security" means a Security or Securities in the form of the
Security set forth in Sections 202, 203 and 204 hereof containing the legend
specified for a Global Security, the additional language referred to in footnote
1 and the additional schedule referred to in footnote 2.
"Guarantee" means each of the guarantees of the Securities by the
Guarantors made pursuant to the Guarantee Agreement.
"Guarantee Agreement" means that certain Guarantee Agreement of even
date herewith between the Trustee and the Guarantors.
"Guarantor" means each of the Wholly-owned Significant Subsidiaries set
forth on Exhibit A hereto and each other Person that hereafter becomes, or comes
into existence as, a Wholly-owned Significant Subsidiary (and in each case any
successor thereto) until it is no longer (i) a Significant Subsidiary (as
certified to the Trustee in an Officers' Certificate) or (ii) a member of an
affiliated group (within the meaning of Section 279(g) of the Internal Revenue
Code of 1986, as amended) which includes the Company, including, without
limitation, upon the sale or disposition (whether by merger, stock purchase,
asset sale or otherwise) of such Guarantor.
"Holder" means a Person in whose name a Security is registered in the
Security Register.
"Indenture" means this instrument as originally executed or 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,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument and any such supplemental indenture,
respectively.
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"Interest Payment Date" means the Stated Maturity of an instalment of
interest on the Securities.
"Maturity," when used with respect to any Security, means the date on
which the principal of such Security becomes due and payable as therein or
herein provided, whether at the Stated Maturity thereof or by declaration of
acceleration, redemption or otherwise.
"Officers' Certificate" means a certificate, in form reasonably
satisfactory to the Trustee, signed by the Chairman of the Board, the Chief
Executive Officer, the President or a Vice President, and by the Chief Financial
Officer, Controller, Treasurer, the Secretary or an Assistant Secretary of the
Company, and delivered to the Trustee. One of the officers signing an Officers'
Certificate given pursuant to Section 1005 shall be the principal executive,
financial or accounting officer of the Company.
"Opinion of Counsel" means a written opinion, in form reasonably
satisfactory to the Trustee, of counsel, who may be counsel for or an employee
of the Company, 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 canceled by the Trustee or
delivered to the Trustee for cancellation;
(ii) Securities, or portions thereof, for the payment or
redemption of which moneys in the necessary amount have 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, however, that if such Securities,
or portions thereof, 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; and
(iii) Securities which have been paid pursuant to Section 306
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 such Securities are valid
obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any
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such request, demand, authorization, direction, notice, consent 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 or any other obligor upon the Securities or any Affiliate of
the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of and premium, if any, or interest on any Securities on behalf of the
Company.
"Person" means any individual, Corporation, partnership, joint venture,
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 306 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Security shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Security.
"Record Date" means either a Regular Record Date or a Special Record
Date, as applicable.
"Redemption Date," when used with respect to any Security to be
redeemed, 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 on the applicable Redemption Date.
"Regular Record Date," for the interest payable on any Interest Payment
Date means the ____________ or____________ (whether or not a Business Day), as
the case may be, next preceding such Interest Payment Date.
"Repurchase Date" has the meaning specified in Section 1401.
"Repurchase Event" has the meaning specified in Section 1406.
"Repurchase Price" has the meaning specified in Section 1401.
"Responsible Officer" means, when used with respect to the Trustee, the
chairman of the board of directors, any vice chairman of the board of directors,
the chairman of the trust committee, the chairman of the executive committee,
any vice chairman of the executive committee, the president, any vice president
(whether or not designated by numbers or words added before or after the title
"vice president"), the cashier, the secretary, the treasurer, any trust officer,
any assistant trust officer, any assistant cashier, any assistant secretary, any
assistant treasurer, or any other officer or
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assistant officer of the Trustee customarily performing functions similar to
those performed by the Persons who at the time shall be such officers,
respectively, or to whom any corporate trust matter is referred because of his
or her knowledge of and familiarity with the particular subject.
"Securities Custodian" means the Trustee, as custodian with respect to
the Securities in global form, or any successor entity thereto.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 305(a).
"Senior Indebtedness" of a Person means all indebtedness of such Person
for money borrowed, whether outstanding on the date of the execution of this
Indenture or thereafter created, incurred or assumed, except any indebtedness
that by the terms of the instrument or instruments by which such indebtedness
was created or incurred expressly provides that it (i) is junior in right of
payment to the Securities or (ii) ranks pari passu in right of payment with the
Securities. For the purposes of this definition, "indebtedness for money
borrowed" when used with respect to such Person means (i) any obligation of, or
any obligation guaranteed by, such Person for the repayment of borrowed money,
whether or not evidenced by bonds, debentures, notes or other written
instruments, (ii) any deferred payment obligation of, or any such obligation
guaranteed by, such Person for the payment of the purchase price of property or
assets evidenced by a note or similar instrument, (iii) any obligation of, or
any such obligation guaranteed by, such Person for the payment of rent or other
amounts under a lease of property or assets which obligation is required to be
classified and accounted for as a capitalized lease on the balance sheet of such
Person under generally accepted accounting principles, (iv) any obligation of,
or any such obligation which is guaranteed by, such Person for the reimbursement
of any obligor of any letter of credit, banker's acceptance or similar credit
transaction, (v) any obligation of, or any such obligation which is guaranteed
by, such Person under interest rate swaps, caps, collars, options and similar
arrangements, (vi) any obligation of the Company under any foreign exchange
contract, currency or commodity swap agreement, futures contract, currency or
commodity option contract or other foreign currency or commodity hedge and (vii)
any interest, fees, penalties and other obligations in respect of any obligation
referred to in the foregoing clauses (i)-(vi).
"Significant Subsidiary" means each Subsidiary that has assets,
businesses, divisions, real property or equipment with a fair market value (as
determined in good faith by the Board of Directors) in excess of $1,000,000.
"Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 307.
"Stated Maturity," when used with respect to any Security or any
instalment of interest thereon, means the date specified in such Security as the
fixed date on which the principal of such Security or such instalment of
interest is due and payable.
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"Subsidiary" means (i) a corporation a majority of whose outstanding
Voting Stock is owned, directly or indirectly, by the Company or by one or more
other Subsidiaries or by the Company and one or more other Subsidiaries or (ii)
any other Person (other than a corporation), including, without limitation, a
joint venture, in which the Company, one or more other Subsidiaries or the
Company and one or more other Subsidiaries, directly or indirectly, have at
least a majority ownership interest entitled to vote in the election of
directors, managers or trustees thereof (or other Persons performing similar
functions).
"Termination of Trading" has the meaning specified in Section 1406.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force
at the date as of which this instrument was executed; provided, however, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Underwriters" means the underwriters named in Schedule I to the
Underwriting Agreement.
"Underwriting Agreement" means the Underwriting Agreement dated
December ___, 1997 between the Company and the Underwriters.
"Vice President," when used with respect to the Company means any vice
president, whether or not designated by a number or a word or words added before
or after the title "vice president".
"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 contingencies).
"Wholly-owned Significant Subsidiary" means a Significant Subsidiary
all the capital stock of which (other than director's qualifying shares) is
owned directly by the Company.
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee such certificates and opinions as may be required under the Trust
Indenture Act. Each such certificate or opinion shall be given in the form of an
Officers' Certificate, if to be given by an officer of the Company, or an
Opinion of
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Counsel, if to be given by counsel, and shall comply with the requirements of
the Trust Indenture Act and any other requirement set forth in 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 individual or firm 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 individual
or such firm, he has or they have made such examination or
investigation as is necessary to enable him or them 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
individual or such firm, such condition or covenant has been complied
with.
SECTION 103. 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 Person may certify to
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certification 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 certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate of public officials or upon a
certificate or opinion of, or representations by, an officer or officers of the
Company stating that the information with respect to such factual matters is in
the possession of the Company, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to such matters are erroneous.
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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 104. Acts of Holders; Record Dates.
(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 (subject to Section 601) 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 his authority.
(c) The Company may, in the circumstances permitted by the
Trust Indenture Act, fix any day as the record date for the purpose of
determining the Holders entitled to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action, or
to vote on any action, authorized or permitted to be given or taken by
Holders. If not set by the Company prior to the first solicitation of a
Holder made by any Person in respect of any such action, or, in the
case of any such vote, prior to such vote, the record date for any such
action or vote shall be the 30th day (or, if later, the date of the
most recent list of Holders required to be provided pursuant to Section
701) prior to such first solicitation or vote, as the case may be. With
regard to any record date, only the Holders on such date (or their duly
designated proxies) shall be entitled to give or take, or vote on, the
relevant action. Notwithstanding the foregoing, the Company shall not
set a record date for, and the provisions of this paragraph shall not
apply with respect to, any Act by the Holders pursuant to Section 501,
502 or 512.
(d) The ownership of Securities shall be proved by the
Security Register.
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<PAGE> 18
(e) Any 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 therefor 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.
(f) Without limiting the foregoing, a Holder entitled
hereunder to give or take any action hereunder with regard to any
particular Security may do so with regard to all or any part of the
principal amount of such Security or by one or more duly appointed
agents each of which may do so pursuant to such appointment with regard
to all or any different part of such principal amount.
SECTION 105. Notices, Etc., to Trustee and Company.
Any Act of Holders or other documents provided or permitted by this
Indenture to be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing (in the English language) to or with the Trustee at
its Corporate Trust Office, Attention: Corporate Trust Department, or
at any other address previously furnished in writing to the Holders and
the Company by the Trustee; or
(2) the Company 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 mailed,
registered or certified with postage prepaid, to the Company, addressed
to it at the address of its principal executive offices specified in
the first paragraph of this instrument or at any other address
previously furnished in writing to the Trustee by the Company.
All such notices and communications shall be deemed to have been duly given: at
the time delivered by hand, if personally delivered; five Business Days after
being deposited in the United States mail, registered or certified with postage
prepaid, if mailed; when receipt acknowledged, if telecopied; and the next
Business Day after timely delivery to the courier, if sent by nationally
recognized overnight air courier guaranteeing next day delivery.
SECTION 106. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if made, given, furnished or filed in writing (in the English language) to each
Holder affected by such event, at his address as it appears in the Security
Register, not later than the latest date (if any), and not earlier than the
earliest date (if any), prescribed for the giving of such notice. Where this
Indenture provides for notice in any
11
<PAGE> 19
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. All such notices and
communications shall be deemed to have been duly given: at the time delivered by
hand, if personally delivered; five Business Days after being deposited in the
mail, registered or certified with postage prepaid, if mailed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by nationally recognized overnight air courier guaranteeing
next day delivery.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
SECTION 107. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with a provision
of the Trust Indenture Act or another provision that would be required or deemed
under such Act to be a part of and govern this Indenture if this Indenture were
subject thereto, the latter provision shall control. If any provision of this
Indenture modifies or excludes any provision of the Trust Indenture Act that may
be so modified or excluded, the latter provision shall be deemed to apply to
this Indenture as so modified or to be excluded, as the case may be.
SECTION 108. 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 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company and the
Trustee shall bind each of their respective successors and assigns, whether so
expressed or not.
SECTION 110. Separability Clause.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied,
shall give to any Person, other than the parties hereto and their successors
hereunder, the Holders of Securities and, with
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<PAGE> 20
respect to Article Twelve, the holders of Senior Indebtedness, any benefit or
any legal or equitable right, remedy or claim under this Indenture.
SECTION 112. Governing Law.
This Indenture and the Securities shall be governed by and construed in
accordance with the laws of the State of New York.
SECTION 113. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Security or the last date on which a Holder has the right to
convert his Securities shall not be a Business Day, then (notwithstanding any
other provision of this Indenture or of the Securities) payment of interest or
principal and premium, if any, or conversion of the Securities 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 or Redemption Date, or
at the Stated Maturity, or on such last day for conversion; provided, however,
that no interest shall accrue for the period from and after such Interest
Payment Date, Redemption Date or Stated Maturity, as the case may be, to the
next succeeding Business Day.
SECTION 114. Limitation on Individual Liability.
No recourse under or upon any obligation, covenant or agreement
contained in this Indenture or in any Security, or for any claim based thereon
or otherwise in respect thereof, shall be had against any incorporator,
shareholder, officer or director, as such, past, present or future, of the
Company or of any successor Person, either directly or through the Company,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise; it being expressly
understood that this Indenture and the obligations issued hereunder are solely
corporate obligations, and that no such personal liability whatever shall attach
to, or is or shall be incurred by, the incorporators, shareholders, officers or
directors, as such, of the Company or of any successor Person, or any of them,
because of the creation of the indebtedness hereby authorized, or under or by
reason of the obligations, covenants or agreements contained in this Indenture
or in any Security or implied therefrom; and that any and all such personal
liability of every name and nature, either at common law or in equity or by
constitution or statute, of, and any and all such rights and claims against,
every such incorporator, shareholder, officer or director, as such, because of
the creation of the indebtedness hereby authorized, or under or by reason of the
obligations, covenants or agreements contained in this Indenture or in any
Security or implied therefrom, are hereby expressly waived and released as a
condition of, and as a consideration for, the execution of this Indenture and
the issuance of such Security.
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<PAGE> 21
ARTICLE TWO
Security Forms
SECTION 201. Forms Generally.
The Securities and the Trustee's certificate of authentication shall be
in substantially the forms 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, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with any organizational document, any applicable law or with
the rules of any securities exchange on which the Securities are listed or as
may, consistently herewith, be determined by the officers executing such
Securities, as evidenced by their execution of the Securities.
Unless issued in definitive form, Securities shall be issued in the
form of one or more Global Securities, the face of which shall be in the form
set forth in Section 202 hereof and the reverse of which shall be in the form
set forth in Section 203 hereof. Each Global Security shall be deposited on
behalf of the holders of the Securities represented thereby with the Trustee, as
custodian for the Depositary, and registered in the name of the nominee of the
Depositary, duly executed by the Company and authenticated as provided for
herein.
Each Global Security shall represent such of the Outstanding Securities
as shall be specified therein and each shall provide that it shall represent the
aggregate amount of Outstanding Securities from time to time endorsed thereon
and that the aggregate amount of Outstanding Securities represented thereby may
from time to time be reduced or increased, as appropriate, to reflect exchanges
and redemptions. Any endorsement of a Global Security to reflect the amount of
any increase or decrease in the amount of Outstanding Securities represented
thereby shall be made by the Trustee or the Securities Custodian, at the
direction of the Trustee, in accordance with instructions given by the Holder
thereof.
The Securities shall be printed, lithographed or engraved or produced
by any combination of these methods or may be produced in any other manner
permitted by the rules of any securities exchange on which the Securities may be
listed or by the Depositary, all as determined by the officers executing such
Securities, as evidenced by their execution of such Securities.
SECTION 202. Form of Face of Security.
LEGEND FOR GLOBAL SECURITY:
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN
DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE
DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO
THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
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<PAGE> 22
DEPOSITARY. UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR
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.
KCS ENERGY, INC.
CUSIP No. ___________
_____% Convertible Subordinated Note due 2004
No. ________ $___________
KCS Energy, Inc., a corporation duly organized and existing under the
laws of the State of Delaware (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 [or such greater or
lesser amount as indicated on the Schedule of Exchanges of Securities on the
reverse hereof]1 on ____________, 2004, and to pay interest thereon from
_____________, 1997 or from and including the most recent Interest Payment Date
to which interest has been paid or duly provided for, semi-annually on _________
and __________ in each year, commencing ____________, 1998 at the rate of _____%
per annum, until the principal hereof is paid or made available for payment. 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 at the
close of business on the Regular Record Date for such interest, which shall be
the _____________ or __________ (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 will forthwith cease to be payable to the
Holder on such Regular Record Date and may either 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 or 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. Notice of a Special
Record Date shall be given to Holders of Securities not less than 10 days prior
to such Special Record Date. Payment of the principal of and premium, if any,
and interest on this Security will be made (i) in respect of Securities held
- --------
1 This phrase should be included only if the Security is issued in global
form.
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<PAGE> 23
of record by the Depositary or its nominee in same day funds on or prior to the
respective payment dates and (ii) in respect of Securities held of record by
Holders other than the Depositary or its nominee at the office or agency of the
Company maintained for that purpose in The City of New York pursuant to Section
1003 of the Indenture, in each case in such coin or currency of the United
States of America as of the time of payment is legal tender for payment of
public and private debts; provided, however, that at the option of the Company
payment of interest in respect of Securities held of record by Holders other
than the Depositary or its nominee may be made by check mailed on or before the
due date to the address of the Person entitled thereto as such address shall
appear in the Security Register.
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 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.
Dated: _________________ KCS ENERGY, INC.
By _________________________
Attest:
- ------------------------
SECTION 203. Form of Reverse of Security.
This Security is one of a duly authorized issue of Securities of the
Company designated as its _____% Convertible Subordinated Notes due 2004 (herein
called the "Securities"), limited in aggregate principal amount to $143,750,000
(including Securities issuable pursuant to the Underwriters' over-allotment
option, as provided for in the Underwriting Agreement dated December ___, 1997
between the Company and the Underwriters named therein), issued and to be issued
under an Indenture, dated as of December ___, 1997 (herein called the
"Indenture"), between the Company and State Street Bank and Trust Company, as
Trustee (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 and immunities thereunder of the Company, the Trustee, the
holders of Senior
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<PAGE> 24
Indebtedness of the Company and the Holders of the Securities and of the terms
upon which the Securities are, and are to be, authenticated and delivered.
Subject to and upon compliance with the provisions of the Indenture,
the Holder of this Security is entitled, at his option, at any time on or before
the close of business on _________, 2004 or in case this Security or a portion
hereof is called for redemption or delivered for repurchase, then in respect of
this Security or such portion hereof until and including, but (unless the
Company defaults in making the payment due upon redemption) not after, the close
of business on the second Business Day preceding the Redemption Date or
Repurchase Date, to convert this Security (or any portion of the principal
amount hereof which is $1,000 or an integral multiple thereof), at the principal
amount hereof, or of such portion, into fully paid and non-assessable shares
(calculated as to each conversion to the nearest 1/100th of a share) of Common
Stock at a conversion price equal to $_____ principal amount for each share of
Common Stock (or at the current adjusted conversion price if an adjustment has
been made as provided in the Indenture) by surrender of this Security, duly
endorsed or assigned to the Company or in blank, to the Company at its office or
agency maintained for that purpose pursuant to Section 1003 of the Indenture,
accompanied by written notice to the Company and the Trustee in the form
provided in this Security (or such other notice as is acceptable to the Company)
that the Holder hereof elects to convert this Security, or if less than the
entire principal amount hereof is to be converted, the portion hereof to be
converted, and, in case such surrender shall be made during the period after the
close of business on any Regular Record Date next preceding any Interest Payment
Date to the close of business on such Interest Payment Date (unless this
Security or the portion thereof being converted has been called for redemption),
also accompanied by payment in New York Clearing House funds, or other funds
acceptable to the Company, of an amount equal to the interest payable on such
Interest Payment Date on the principal amount of this Security then being
converted. Subject to the aforesaid requirement for payment and, in the case of
a conversion after the Regular Record Date next preceding any Interest Payment
Date and on or before such Interest Payment Date, to the right of the Holder of
this Security (or any Predecessor Security) of record at such Regular Record
Date to receive an instalment of interest (with certain exceptions provided in
the Indenture), no payment or adjustment is to be made upon conversion on
account of any interest accrued hereon or on account of any dividends on the
Common Stock issued upon conversion. No fractional shares or scrip representing
fractions of shares will be issued on conversion, but instead of any fractional
share the Company shall pay a cash adjustment as provided in the Indenture. The
conversion price is subject to adjustment as provided in the Indenture. In
addition, the Indenture provides that in case of certain consolidations or
mergers to which the Company is a party or the sale or other transfer of all or
substantially all of the properties and assets of the Company, this Security, if
then outstanding, will be convertible thereafter, during the period this
Security shall be convertible as specified above, only into the kind and amount
of securities, cash and other property receivable upon the consolidation,
merger, sale or transfer by a holder of the number of shares of Common Stock
into which this Security might have been converted immediately prior to such
consolidation, merger, sale or transfer (assuming such holder of Common Stock
failed to exercise any rights of election and received per share the kind and
amount received per share by a plurality of non-electing shares).
17
<PAGE> 25
The Securities are subject to redemption upon not less than 30 and not
more than 60 days' notice by mail, at any time on or after ____________, 2000,
as a whole or in part, at the election of the Company, at the Redemption Prices
set forth below (expressed as percentages of the principal amount), plus accrued
and unpaid interest to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date).
If redeemed during the 12-month period beginning ___________ in the
year indicated, the Redemption Price shall be:
Year Redemption
----
Price
-----
2000............ %
2001............ %
2002............ %
2003............ %
In certain circumstances involving the occurrence of a Repurchase Event
(as defined in the Indenture), the Holder hereof shall have the right to require
the Company to repurchase this Security at 100% of the principal amount hereof,
together with accrued and unpaid interest to the Repurchase Date, but interest
installments whose Stated Maturity is on or prior to such Repurchase Date will
be payable to the Holders of such Securities, or one or more Predecessor
Securities, of record at the close of business on the relevant Record Dates
referred to on the face hereof, all as provided in the Indenture.
In the event of redemption, repurchase or conversion of this Security
in part only, a new Security or Securities for the unredeemed, unpurchased or
unconverted portion hereof will be issued in the name of the Holder hereof upon
the cancellation hereof.
The indebtedness evidenced by this Security is, in all respects,
subordinate and subject in right of payment to the prior payment in full of all
Senior Indebtedness of the Company, and this Security is issued subject to the
provisions of the Indenture with respect thereto. Each Holder of this Security,
by accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination so provided, and (c)
appoints the Trustee his attorney-in-fact for any and all such purposes.
If an Event of Default shall occur and be continuing, the unpaid
principal of and premium, if any, on all the Securities may be declared (or, in
the case of an Event of Default relating to the bankruptcy, insolvency or
reorganization of the Company or any Guarantor, shall become) due and payable in
the manner and with the effect provided in the Indenture.
18
<PAGE> 26
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 rights of the Holders of the Securities under the Indenture at
any time by the Company and the Trustee with the consent of the Holders of not
less than a majority in aggregate principal amount of the Securities at the time
Outstanding, and, under certain limited circumstances, by the Company and the
Trustee without the consent of the Holders. 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 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.
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, and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed or to convert this Security as provided in the
Indenture.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in any place where the principal of and any
premium and interest on this Security are payable, 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 fully 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,
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 such registration of transfer
or exchange except as provided in the Indenture, and the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
Prior to due presentment of this Security for registration of transfer,
the Company, 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, except as provided in this Security, whether or not this Security be
overdue, and neither the Company, the Trustee nor any such agent shall be
affected by notice to the contrary.
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<PAGE> 27
Each of the Company's Wholly-owned Significant Subsidiaries has
unconditionally guaranteed, jointly and severally, the Company's obligations
under the Securities pursuant to the Guarantee Agreement. The indebtedness
represented by such guarantees is subordinate and subject in right of payment to
the prior payment in full of all Senior Indebtedness of such Subsidiaries.
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.
20
<PAGE> 28
[FORM OF CONVERSION NOTICE]
TO: KCS ENERGY, INC.
The undersigned registered owner of this Security hereby irrevocably
exercises the option to convert this Security, or the portion hereof (which is
$1,000 or a multiple thereof) designated below, into shares of Common Stock in
accordance with the terms of the Indenture referred to in this Security, and
directs that the shares issuable and deliverable upon the conversion, together
with any check in payment for a fractional share and any Security representing
any unconverted principal amount hereof, be issued and delivered to the
registered owner hereof unless a different name has been provided below. If this
Notice is being delivered on a date after the close of business on a Regular
Record Date and prior to the close of business on the related Interest Payment
Date, this Notice is accompanied by payment in New York Clearing House funds, or
other funds acceptable to the Company, of an amount equal to the interest
payable on such Interest Payment Date on the principal of this Security to be
converted (unless this Security has been called for redemption). If shares or
any portion of this Security not converted are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto.
Dated:
------------------------ --------------------------------
--------------------------------
Signature(s)
Signature(s) must be guaranteed by an "eligible guarantor institution"
that is a bank, stockbroker, savings and loan association or credit union
meeting the requirements of the Trustee or agent responsible for conversion,
which requirements include the membership or participation in the Securities
Transfer Agents Medallion Program ("STAMP") or such "signature guarantee
program" as may be determined by the Trustee in addition to, or in substitution
for, STAMP, all in accordance with the Securities Exchange Act of 1934, as
amended, if shares of Common Stock are to be delivered, or Securities are to be
issued, other than to and in the name of the registered owner.
- ------------------------------
Signature Guarantee
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<PAGE> 29
Fill in for registration of shares of Common Stock if they are to be
delivered, or Securities if they are to be issued, other than to and in the name
of the registered owner:
- --------------------------------- ------------------------------------
(Name) Social Security or other Taxpayer
Identification Number of owner
- ------------------------------
(Street Address)
- ------------------------------
(City, State and zip code)
(Please print name and address)
Register: Common Stock
-----
Securities
-----
(Check appropriate line(s).)
Principal amount to be converted
(if less than all):
$__________,000
22
<PAGE> 30
[ASSIGNMENT FORM]
If you the holder want to assign this Security, fill in the form below and have
your signature guaranteed:
I or we assign and transfer this Security to
---------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
- ------------------------------------------------------------------------------
(Insert assignee's social security or tax ID number)
and irrevocably appoint
------------------------------------------------------
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for him.
Date: Your signature:
------------------ -----------------------
(Sign exactly as your name appears on
the face of this Security)
Signature Guarantee:
---------------------------------------------------------
Signature must be guaranteed by an "eligible guarantor
institution" that is a bank, stockbroker, savings and loan
association or credit union meeting the requirements of
the Trustee, which requirements include the membership or
participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such "signature guarantee program" as
may be determined by the Trustee in addition to, or in
substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
23
<PAGE> 31
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company pursuant to
Section 1401 of the Indenture, check the Box: [ ]
If you wish to have a portion of this Security (which is $1,000 or an
integral multiple thereof) purchased by the Company pursuant to Section 1401 of
the Indenture, state the amount you wish to have purchased:
$
--------------------
An election made pursuant to this notice is irrevocable.
Date: Your Signature(s):
------------------ --------------------
Tax Identification No.:
---------------
(Sign exactly as your name appears on the face of this Security.)
Signature Guarantee:
---------------------------------------------------------
Signature must be guaranteed by an "eligible guarantor institution"
that is a bank, stockbroker, savings and loan association or credit union
meeting the requirements of the Trustee, which requirements include the
membership or participation in the Securities Transfer Agents Medallion Program
("STAMP") or such "signature guarantee program" as may be determined by the
Trustee in addition to, or in substitution for, STAMP, all in accordance with
the Securities Exchange Act of 1934, as amended.
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<PAGE> 32
[FORM OF SCHEDULE OF EXCHANGES OF DEFINITIVE SECURITIES2]
The following exchanges of a part of this Global Security for
Definitive Securities have been made:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF SIGNATURE OF AUTHORIZED
AMOUNT OF DECREASE AMOUNT OF INCREASE THIS GLOBAL SECURITY OFFICER
DATE OF IN PRINCIPAL AMOUNT IN PRINCIPAL AMOUNT FOLLOWING SUCH OF TRUSTEE OR SECURITIES
EXCHANGE OF THIS GLOBAL SECURITY OF THIS GLOBAL SECURITY DECREASE (OR INCREASE) CUSTODIAN
-------- ------------------------ ----------------------- ---------------------- ---------
<S> <C> <C> <C> <C>
</TABLE>
SECTION 204. Form of Trustee's Certificate of Authentication.
The Trustee's certificate of authentication shall be in substantially
the following form:
This is one of the Securities referred to in the within-mentioned
Indenture.
STATE STREET BANK AND TRUST COMPANY,
as Trustee
By
------------------------------------
Authorized Signatory
ARTICLE THREE
The Securities
SECTION 301. Title and Terms.
- ----------
(2) This Schedule should be included only if the Security is issued in
global form.
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<PAGE> 33
The aggregate principal amount of Securities which may be authenticated
and delivered under this Indenture is limited to $143,750,000 (including
$18,750,000 aggregate principal amount of Securities that may be sold to the
Underwriters by the Company upon exercise of the over-allotment option granted
pursuant to the Underwriting Agreement), except for Securities authenticated and
delivered upon registration of transfer of, or in exchange for, or in lieu of,
other Securities pursuant to Section 304, 305, 306, 906, 1108, 1302 or 1405.
The Securities shall be known and designated as the "_____% Convertible
Subordinated Notes due 2004" of the Company. Their Stated Maturity shall be
_____________, 2004 and they shall bear interest at the rate of _____% per
annum, from _____________, 1997 or from the most recent Interest Payment Date to
which interest has been paid or duly provided for, as the case may be, payable
semi-annually on ___________ and _____________, commencing ___________, 1998,
until the principal thereof is paid or made available for payment.
The principal of and premium, if any, and interest on the Securities
shall be payable (i) in respect of Securities held of record by the Depositary
or its nominee in same day funds on or prior to the respective payment dates and
(ii) in respect of Securities held of record by Holders other than the
Depositary or its nominee at the office or agency of the Company maintained for
such purpose in The City of New York pursuant to Section 1003; provided,
however, that, at the option of the Company, payment of interest to Holders of
record other than the Depositary may be made by check mailed on or before the
due date to the address of the Person entitled thereto as such address shall
appear in the Security Register.
The Securities shall be redeemable as provided in Article Eleven.
The Securities shall be subordinated in right of payment to Senior
Indebtedness of the Company as provided in Article Twelve.
The Securities shall be convertible as provided in Article Thirteen.
The Securities shall be subject to repurchase at the option of the
Holder as provided in Article Fourteen.
The Securities shall be guaranteed by the Company's Wholly-owned
Significant Subsidiaries as provided in Article Fifteen and the Guarantee
Agreement.
SECTION 302. Denominations.
The Securities shall be issuable only in fully registered form without
coupons and only in denominations of $1,000 and any integral multiple thereof.
SECTION 303. Execution, Authentication, Delivery and Dating.
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<PAGE> 34
The Securities shall be executed on behalf of the Company by its
Chairman of the Board, its Chief Executive Officer, its President, its Chief
Financial Officer or one of its Vice Presidents, under its corporate seal or a
facsimile thereof reproduced thereon attested by its Secretary or one of its
Assistant Secretaries. The signature of any of these officers on the Securities
may be manual or facsimile.
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 and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities executed by the Company 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 either at one time or from time to time pursuant
to such instructions as may be described therein authenticate and deliver such
Securities as in this Indenture provided and not otherwise. Such Company Order
shall specify the amount of Securities to be authenticated and each date on
which the original issue of Securities is to be authenticated, and shall certify
that all conditions precedent to the issuance of such Securities contained in
this Indenture have been complied with. The aggregate principal amount of
Securities Outstanding at any time may not exceed the amount set forth above
except as provided in Section 306.
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 on behalf of the Trustee by manual signature, 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 the Indenture. The Trustee may appoint an Authenticating Agent
pursuant to the terms of Section 614.
SECTION 304. 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 with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as evidenced by their
execution of such Securities. Every such temporary Security shall be executed by
the Company and shall be authenticated and delivered by the Trustee upon the
same conditions and in substantially the same manner, and with the same effect,
as the Definitive Security or Securities in lieu of which it is issued.
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<PAGE> 35
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 any office
or agency of the Company designated pursuant to Section 1003, 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 one or more Definitive Securities of a like
principal amount of authorized denominations. Until so exchanged the temporary
Securities shall in all respects be entitled to the same benefits under this
Indenture as Definitive Securities.
SECTION 305. Registration, Registration of Transfer and Exchange.
(a) The Company shall cause to be kept at the Corporate
Trust Office of the Trustee a register (the register maintained in such
office and in any other office or agency designated pursuant to Section
1003 being herein sometimes collectively referred to as 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 Trustee is hereby appointed
"Security Registrar" for the purpose of registering Securities and
transfers of Securities as herein provided. At all reasonable times the
Security Register shall be open for inspection by the Company.
The Company initially appoints The Depository Trust Company
("DTC") to act as depositary (the "Depositary") with respect to each
Global Security.
The Company initially appoints the Trustee to act as
Securities Custodian with respect to each Global Security.
(b) With respect to the transfer and exchange of
Definitive Securities, when Definitive Securities are presented to the
Security Registrar with the request (x) to register the transfer of the
Definitive Securities or (y) to exchange such Definitive Securities for
an equal principal amount of Definitive Securities of other authorized
denominations, the Security Registrar shall register the transfer or
make the exchange as requested if its requirements for such
transactions are met; provided, however, that the Definitive Securities
presented or surrendered for register of transfer or exchange shall be
duly endorsed or accompanied by a written instruction of transfer in
form satisfactory to the Security Registrar duly executed by the Holder
thereof or by its attorney, duly authorized in writing.
(c) The following restrictions apply to any transfer of a
Definitive Security for a beneficial interest in a Global Security. A
Definitive Security may not be exchanged for a beneficial interest in a
Global Security except until and upon satisfaction of the requirements
set forth below. Upon receipt by the Trustee of a Definitive Security,
duly endorsed or accompanied by appropriate instruments of transfer, in
form satisfactory to the Trustee, together with written instructions
directing the Trustee to make, or to direct the
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<PAGE> 36
Securities Custodian to make, an endorsement on the Global Security to
reflect an increase in the aggregate principal amount of the
Securities represented by the Global Security, then the Trustee shall
cancel such Definitive Security and cause, or direct the Securities
Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Securities
Custodian, the aggregate principal amount of Securities represented by
the Global Security to be increased accordingly. If no Global
Securities are then outstanding, the Company shall execute and, upon
receipt of an authentication order in the form of a Company Order in
accordance with Section 303, the Trustee shall authenticate a new
Global Security in the appropriate principal amount.
(d) The transfer and exchange of Global Securities or
beneficial interests therein shall be effected through the Depositary,
in accordance with this Indenture (including the restrictions on
transfer set forth herein) and the procedures of the Depositary
therefor.
(e) With respect to the transfer of a beneficial interest
in a Global Security for a Definitive Security:
(i) Any Person having a beneficial interest in a
Global Security may upon request exchange such beneficial
interest for a Definitive Security. Upon receipt by the
Trustee of written instructions (or such other form of
instructions as is customary for the Depositary) from the
Depositary or its nominee on behalf of any Person having a
beneficial interest in a Global Security, then the Trustee or
the Securities Custodian, at the direction of the Trustee,
will cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Securities
Custodian, the aggregate principal amount of the Global
Security to be reduced and, following such reduction, the
Company will execute and, upon receipt of an authentication
order in the form of a Company Order in accordance with
Section 303, the Trustee will authenticate and deliver to the
transferee a Definitive Security.
(ii) Definitive Securities issued in exchange for
a beneficial interest in a Global Security pursuant to this
Section 305 shall be registered in such names and in such
authorized denominations as the Depositary, pursuant to
instructions from its direct or indirect participants or
otherwise, shall instruct the Trustee. The Trustee shall
deliver such Definitive Securities to the Persons in whose
names such Securities are so registered.
(f) Notwithstanding any other provisions of this
Indenture (other than the provisions set forth in subsection (g) of
this Section 305), a Global Security may not be transferred as a whole
except by the Depositary to a nominee of the Depositary or by a nominee
of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary or any such nominee to a successor
Depositary or a nominee of such successor Depositary.
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<PAGE> 37
(g) If at any time the Depositary for the Securities
notifies the Company that the Depositary is unwilling or unable to
continue as Depositary for the Global Securities and a successor
Depositary for the Global Securities is not appointed by the Company
within 90 days after delivery of such notice, then the Company will
execute, and the Trustee, upon receipt of a Company Order in accordance
with Section 303 requesting the authentication and delivery of
Definitive Securities, will authenticate and deliver Definitive
Securities, in an aggregate principal amount equal to the principal
amount of the Global Securities, in exchange for such Global
Securities.
(h) At such time as all beneficial interests in a Global
Security have either been exchanged for Definitive Securities,
redeemed, repurchased or cancelled, such Global Security shall be
returned to or retained and cancelled by the Trustee. At any time prior
to such cancellation, if any beneficial interest in a Global Security
is exchanged for Definitive Securities, redeemed, repurchased or
cancelled, the principal amount of Securities represented by such
Global Security shall be reduced and an endorsement shall be made on
such Global Security, by the Trustee or the Securities Custodian, at
the direction of the Trustee, to reflect such reduction.
(i) All Definitive Securities and Global Securities
issued upon any registration of transfer or exchange of Definitive
Securities or Global Securities shall be the valid obligations of the
Company, evidencing the same debt, and entitled to the same benefits
under this Indenture, as the Definitive Securities or Global Securities
surrendered upon such registration of transfer or exchange.
To permit registrations of transfer and exchanges, the Company shall
execute and the Trustee shall authenticate Definitive Securities and Global
Securities at the Security Registrar's request.
No service charge to a Holder shall be made for any registration of
transfer or exchange of Securities except as provided in Section 306. The
Company may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed, and any other expenses (including the
fees and expenses of the Security Registrar and the Trustee) that may be
payable, in connection with any registration of transfer or exchange of
Securities, other than exchanges pursuant to Section 304, 906, 1108 or 1302 not
involving any transfer.
The Company or the Security Registrar shall not be required (i) to
issue, register the transfer of or exchange any Security during a period
beginning at the opening of business 15 days before the day of the mailing of a
notice of redemption of Securities selected for redemption under Section 1104
and ending at the close of business on the day of such mailing or (ii) to
register the transfer of or exchange any Definitive Security or beneficial
interest in any Global Security so selected for redemption in whole or in part,
except the unredeemed portion of any Definitive Security being redeemed in part.
30
<PAGE> 38
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee, the Company
shall execute and the Trustee shall authenticate and deliver in exchange
therefor a new Security of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence
to their satisfaction of the destruction, loss or theft of any Security and (ii)
such security or indemnity as may be required by them to save each of them and
any agent of either 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 and the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of like tenor and principal amount and bearing a number not contemporaneously
outstanding. The Trustee may charge the Company for the Trustee's expenses in
replacing such Security.
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
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the 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 307. 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 that Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest. Payment
of interest will be made (i) in respect of Securities held by the Depositary or
its nominee, in same day funds on or prior to the respective Interest Payment
Dates and (ii) in respect of Securities held of record by Holders other than the
Depositary or its nominee, at such office or agency of the Company in The City
of New York as it shall maintain for that purpose pursuant to
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<PAGE> 39
Section 1003; provided, however, that, at the option of the Company, interest on
any Security held of record by Holders other than the Depositary or its nominee
may be paid by mailing checks on or before the relevant Interest Payment Date to
the addresses of the Holders thereof as such addresses appear in the Securities
Register.
Any interest on any Security which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder on the
relevant Regular Record Date by virtue of having been such Holder, and such
Defaulted Interest may be paid by the Company, at its election in each case, as
provided in clause (1) or (2) below:
(1) 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 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, such money when deposited to 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
mailed, first-class postage prepaid, to each Holder at his address as
it appears in the Security Register, 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
mailed, 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 (2).
(2) 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
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<PAGE> 40
carry the rights to interest accrued and unpaid, and to accrue, which were
carried by such other Security.
In the case of any Security which is surrendered for conversion during
the period after the close of business on any Regular Record Date to the close
of business on the next succeeding Interest Payment Date, interest whose Stated
Maturity is on such Interest Payment Date shall be payable on such Interest
Payment Date notwithstanding such conversion, and such interest (whether or not
punctually paid or duly provided for) shall be paid to the Person in whose name
that Security (or one or more Predecessor Securities) is registered at the close
of business on such Regular Record Date; provided, however, that Securities so
surrendered for conversion shall (except in the case of Securities or portions
thereof called for redemption) be accompanied by payment in New York Clearing
House funds or other funds acceptable to the Company of an amount equal to the
interest payable on such Interest Payment Date on the principal amount being
surrendered for conversion. Except as otherwise expressly provided in the
immediately preceding sentence, in the case of any Security which is converted,
interest whose Stated Maturity is after the date of conversion of such Security
shall not be payable.
SECTION 308. Persons Deemed Owners.
Prior to due presentment of a Security for registration of transfer,
the Company, the Trustee and any agent of the Company 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, and (subject to Section 307) interest on such Security and for all other
purposes whatsoever, whether or not such Security be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.
SECTION 309. Cancellation.
All Securities surrendered for payment, redemption, registration of
transfer, exchange or conversion shall, if surrendered to any Person other than
the Trustee, be delivered to the Trustee and shall be promptly canceled 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 canceled by the Trustee. No Securities shall be authenticated
in lieu of or in exchange for any Securities canceled as provided in this
Section, except as expressly permitted by this Indenture. All canceled
Securities held by the Trustee shall be disposed of as directed by a Company
Order.
SECTION 310. Computation of Interest.
Interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months.
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<PAGE> 41
ARTICLE FOUR
Satisfaction and Discharge
SECTION 401. Satisfaction and Discharge of Indenture.
This Indenture shall upon Company Request cease to be of further effect
(except as expressly provided for in this Article Four), and the Trustee, at the
expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when
(1) either
(A) 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 306 and (ii) Securities for whose
payment money has 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, as
provided in Section 1004) have been delivered to the Trustee
for cancellation; or
(B) 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,
and the Company, in the case of clause (i), (ii) or (iii)
above, has irrevocably deposited or caused to be deposited
with the Trustee as trust funds in trust for the purpose an
amount in cash sufficient (without consideration of any
investment of such cash) 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, provided that
the Trustee shall have been irrevocably instructed to apply
such amount to said payments with respect to the Securities;
(2) the Company has paid or caused to be paid all other
sums payable hereunder by the Company; and
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<PAGE> 42
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
following rights or obligations under the Securities and this Indenture shall
survive until otherwise terminated or discharged hereunder: (a) Article
Thirteen, Article Fourteen and the Company's obligations under Sections 304,
305, 306, 1002, 1003 and 1004, in each case with respect to any Securities
described in subclause (B) of clause (1) of this Section, (b) this Article Four,
(c) the rights, powers, trusts, duties and immunities of the Trustee hereunder,
including the obligations of the Company to the Trustee under Section 607, and
the obligations of the Trustee to any Authenticating Agent under Section 614 and
(d) if money shall have been deposited with the Trustee pursuant to subclause
(B) of clause (1) of this Section, the rights of Holders of any Securities
described in subclause (B) of clause (1) of this Section to receive, solely from
the trust fund described in such subclause (B), payments in respect of the
principal of, and premium (if any) and interest on, such Securities when such
payment are due.
SECTION 402. Application of Trust Money.
Subject to the provisions of Section 506 and the last paragraph of
Section 1004, all money deposited with the Trustee pursuant to Section 401 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. All money deposited with the Trustee pursuant to Section 401
(and held by it or any Paying Agent) for the payment of Securities subsequently
converted shall be returned to the Company upon Company Request.
SECTION 403. Reinstatement.
If the Trustee or the Paying Agent is unable to apply any money in
accordance with this Article Four by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, then the Company's obligations under this Indenture and the
Securities shall be revived and reinstated as though no deposit had occurred
pursuant to this Article Four until such time as the Trustee or Paying Agent is
permitted to apply all money held in trust with respect to the Securities;
provided, however, that if the Company makes any payment of principal of or any
premium or interest on any Security following the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of the
Securities to receive such payment from the money so held in trust.
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<PAGE> 43
ARTICLE FIVE
Remedies
SECTION 501. 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 Twelve 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):
(1) default in the payment of the principal of or
premium, if any, on any Security at its Maturity, whether or not such
payment is prohibited by the provisions of Article Twelve; or
(2) default in the payment of any interest upon any
Security when it becomes due and payable, whether or not such payment
is prohibited by the provisions of Article Twelve, and continuance of
such default for a period of 30 days; or
(3) default in the payment of the Redemption Price in
respect of any Security on the Redemption Date therefor in accordance
with the provisions of Article Eleven, whether or not such payment is
prohibited by the provisions of Article Twelve; or
(4) failure to provide timely notice of a Repurchase
Event as required in accordance with the provisions of Article
Fourteen; or
(5) default in the payment of the Repurchase Price in
respect of any Security on the Repurchase Date therefor in accordance
with the provisions of Article Fourteen, whether or not such payment is
prohibited by the provisions of Article Twelve; or
(6) default in the performance, or breach, of any
covenant of the Company in this Indenture (other than a covenant a
default in whose performance or whose breach is elsewhere in this
Section specifically dealt with), and continuance of such default or
breach for a period of 60 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Outstanding Securities a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder; or
(7) default under one or more bonds, debentures, notes or
other evidences of indebtedness for money borrowed by the Company or
any Subsidiary or under one or more mortgages, indentures or
instruments under which there may be issued or by which there may
36
<PAGE> 44
be secured or evidenced any indebtedness for money borrowed by the
Company or any Subsidiary, whether such indebtedness exists on the date
of this Indenture or shall hereafter be created, which default
individually or in the aggregate shall constitute a failure to pay the
principal of indebtedness in excess of $10,000,000 when due and payable
after the expiration of any applicable grace period with respect
thereto or shall have resulted in indebtedness in excess of $10,000,000
becoming or being declared due and payable prior to the date on which
it would otherwise have become due and payable, without such
indebtedness having been discharged, or such acceleration having been
rescinded or annulled, within a period of 30 days after there shall
have been given, by registered or certified mail, to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least
25% in aggregate principal amount of the Outstanding Securities a
written notice specifying such default and requiring the Company to
cause such indebtedness to be discharged or cause such acceleration to
be rescinded or annulled and stating that such notice is a "Notice of
Default" hereunder; or
(8) the entry by a court having jurisdiction in the
premises of (A) a decree or order for relief in respect of the Company
or any Guarantor in an involuntary case or proceeding under any
applicable Federal or State bankruptcy, insolvency, reorganization or
other similar law or (B) a decree or order adjudging the Company or any
Guarantor a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company or any Guarantor under any applicable
Federal or State law, or appointing a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the
Company or any Guarantor or of any substantial part of its property, 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 90 consecutive
days; or
(9) the commencement by the Company or any Guarantor of a
voluntary case or proceeding under any applicable Federal or State
bankruptcy, insolvency, reorganization or other similar law or of any
other case or proceeding to be adjudicated a bankrupt or insolvent, or
the consent by it to the entry of a decree or order for relief in
respect of the Company or any Guarantor 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 it of a petition or answer or consent seeking reorganization
or relief under any applicable Federal or State law, or the consent by
it to the filing of such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Guarantor
or of any substantial part of its property, or the making by it of a
general assignment for the benefit of creditors, or the admission by it
in writing of its inability to pay its debts generally as they become
due, or the taking of corporate action by the Company or any Guarantor
in furtherance of any such action.
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Upon receipt by the Trustee of any Notice of Default pursuant to this
Section 501, a record date shall automatically and without any other action by
any Person be set for the purpose of determining the Holders of Outstanding
Securities entitled to join in such Notice of Default, which record date shall
be the close of business on the Business Day the Trustee receives such Notice of
Default. The Holders of Outstanding Securities on such record date (or their
duly appointed agents), and only such Persons, shall be entitled to join in such
Notice of Default, whether or not such Holders remain Holders after such record
date; provided, however, that unless such Notice of Default shall have become
effective by virtue of the Holders of the requisite aggregate principal amount
of Outstanding Securities on such record date (or their duly appointed agents)
having joined therein on or prior to the 90th day after such record date, such
Notice of Default shall automatically and without any action by any Person be
canceled and of no further force or effect.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than as specified in subparagraph (8) or
(9) of Section 501) occurs and is continuing, then and in every such case the
Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Securities may declare all unpaid principal of and premium, if any,
on all the Securities to be due and payable immediately, by a notice in writing
to the Company (and to the Trustee if given by Holders), and upon any such
declaration such principal and premium plus any interest accrued and unpaid on
the Securities to the date of declaration shall become immediately due and
payable. If an Event of Default specified in subparagraph (8) or (9) of Section
501 occurs and is continuing, then the principal of, premium, if any, and
accrued and unpaid interest, if any, on all of the Securities shall become and
be immediately due and payable without any declaration or other act on the part
of the Trustee or any Holder of Securities.
At any time after such 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 Outstanding Securities, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if
(1) the Company has paid or deposited with the Trustee a
sum sufficient to pay
(A) all overdue interest on all Securities,
(B) the principal of and premium, if any, on any
Securities which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate
borne by the Securities,
(C) to the extent that payment of such interest
is lawful, interest upon overdue interest at the rate borne by
the Securities, and
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(D) all sums paid or advanced by the Trustee and
each predecessor Trustee, their respective agents and counsel
hereunder and the reasonable compensation, expenses,
disbursements and advances of the Trustee and each predecessor
Trustee, their respective agents and counsel;
and
(2) all Events of Default, other than the nonpayment of
the principal of, premium, if any, and interest on the Securities that
have become due solely by such declaration of acceleration, have been
cured or waived as provided in Section 513.
No such rescission and waiver shall affect any subsequent default or
impair any right consequent thereon.
Upon receipt by the Trustee of any declaration of acceleration, or any
rescission and annulment of any such declaration, pursuant to this Section 502,
a record date shall automatically and without any other action by any Person be
set for the purpose of determining the Holders of Outstanding Securities
entitled to join in such declaration, or rescission and annulment, as the case
may be, which record date shall be the close of business on the Business Day the
Trustee receives such declaration, or rescission and annulment, as the case may
be. The Holders of Outstanding Securities on such record date (or their duly
appointed agents), and only such Persons, shall be entitled to join in such
declaration, or rescission and annulment, as the case may be, whether or not
such Holders remain Holders after such record date; provided, however, that
unless such declaration, or rescission and annulment, as the case may be, shall
have become effective by virtue of Holders of the requisite aggregate principal
amount of Outstanding Securities on such record date (or their duly appointed
agents) having joined therein on or prior to the 90th day after such record
date, such declaration, or rescission and annulment, as the case may be, shall
automatically and without any action by any Person be canceled and of no further
force or effect.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that if:
(1) default is made in the payment of any interest on any
Security when such interest becomes due and payable and such default
continues for a period of 30 days, or
(2) default is made in the payment of the principal of or
premium, if any, on any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to it, 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, to the extent
that payment of such interest shall be legally enforceable, interest on any
overdue principal and premium, if any, and on any overdue interest, at the rate
borne
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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 and
each predecessor Trustee, their respective agents and counsel, and any other
amounts due the Trustee or any predecessor Trustee under Section 607.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid and may
prosecute any 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 504. Trustee May File Proofs of Claim.
In case of any judicial proceeding relative to the Company (or any
other obligor upon the Securities), its property or its creditors, the Trustee
shall be entitled and empowered, by intervention in such proceeding or
otherwise, to take any and all actions authorized under the Trust Indenture Act
in order to have the claims of the Holders and the Trustee allowed in any such
proceeding. In particular, the Trustee shall be authorized to collect and
receive any moneys or other property payable or deliverable on any such claims
and to distribute the same; and any custodian, receiver, assignee, trustee,
liquidator, sequestrator or other 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 to the Trustee any amount due it and
each predecessor Trustee for the reasonable compensation, expenses,
disbursements and advances of the Trustee and each predecessor Trustee and their
respective agents and counsel, and any other amounts due the Trustee under
Section 607.
No provision of this Indenture 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 rights of any Holder thereof or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding; provided,
however, that the Trustee may, on behalf of the Holders, vote for the election
of a trustee in bankruptcy or similar official and may be a member of the
Creditors' Committee.
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SECTION 505. Trustee May Enforce Claims Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities
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
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 and each predecessor Trustee and their
respective agents and counsel, be for the ratable benefit of the Holders of the
Securities in respect of which such judgment has been recovered.
SECTION 506. 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 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:
FIRST: Subject to Article Twelve, to the holders of Senior
Indebtedness of the Company;
SECOND: To payment of all amounts due the Trustee under
Section 607;
THIRD: To the payment of the amounts then due and unpaid for
principal of and premium, if any, 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
FOURTH: The balance, if any, to the Company for the benefit of
the Company or any other Person or Persons determined to be entitled
thereto.
SECTION 507. Limitation on Suits.
No Holder of any Security 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
(1) such Holder has previously given written notice to
the Trustee of a continuing Event of Default;
(2) 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;
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(3) such Holder or Holders have offered to the Trustee
reasonable indemnity satisfactory to it against the costs, expenses and
liabilities to be incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request
has been given to the Trustee during such 60-day period by the Holders
of a majority 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 508. Unconditional Right of Holders to Receive Principal, Premium
and Interest and to Convert.
Notwithstanding any other provision in this Indenture, the Holder of
any Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of and premium, if any, and (subject to Section
307) interest on such Security on the respective Stated Maturities expressed in
such Security (or, in the case of redemption, on the Redemption Date or, in the
case of a repurchase pursuant to Article Fourteen, on the Repurchase Date) and
to convert such Security in accordance with Article Thirteen and to institute
suit for the enforcement of any such payment and right to convert, and such
rights shall not be impaired without the consent of such Holder.
SECTION 509. 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 Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
SECTION 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Securities in Section 306, 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.
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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 511. 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 512. Control by Holders.
The Holders of 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, however, that:
(1) such direction shall not be in conflict with any rule
of law or with this Indenture; and
(2) the Trustee may take any other action deemed proper
by the Trustee which is not inconsistent with such direction; and
(3) subject to the provisions of Section 601, the Trustee
shall have the right to decline to follow any such direction if the
Trustee in good faith shall determine that the action so directed would
involve the Trustee in personal liability or would be unduly
prejudicial to Holders not joining in such direction.
Upon receipt by the Trustee of any such direction, a record date shall
automatically and without any other action by any Person be set for the purpose
of determining the Holders of Outstanding Securities entitled to join in such
direction, which record date shall be the close of business on the day the
Trustee receives such direction. The Holders of Outstanding Securities on such
record date (or their duly appointed agents), and only such Persons, shall be
entitled to join in such direction, whether or not such Holders remain Holders
after such record date; provided, however, that unless such direction shall have
become effective by virtue of Holders of the requisite aggregate principal
amount of Outstanding Securities on such record date (or their duly appointed
agents) having joined therein on or prior to the 90th day after such record
date, such direction shall automatically and without any action by any Person be
canceled and of no further force or effect.
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SECTION 513. 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 past default hereunder and its consequences, except a default
(1) in the payment of the principal of or premium, if
any, or interest on any Security, or
(2) in respect of a covenant or provision hereof which
under Article Nine cannot be modified or amended without the consent of
the Holder of each Outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
SECTION 514. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture, or in any suit against the Trustee for any action taken, suffered or
omitted by it as Trustee, a court may require any party litigant in such suit to
file an undertaking to pay the costs of such suit, and may assess costs against
any such party litigant, in the manner and to the extent provided in the Trust
Indenture Act; provided, however, that neither this Section nor the Trust
Indenture Act shall be deemed to authorize any court to require such an
undertaking or to make such an assessment in any suit instituted by the Company,
in any suit instituted by the Trustee, a suit by a Holder pursuant to Section
508, or a suit by a Holder or Holders of more than 10% in aggregate principal
amount of the Outstanding Securities.
ARTICLE SIX
The Trustee
SECTION 601. Certain Duties and Responsibilities.
The duties and responsibilities of the Trustee shall be as provided by
this Indenture and the Trust Indenture Act for securities issued pursuant to
indentures qualified thereunder. Except as otherwise provided herein,
notwithstanding the foregoing, no provision of this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur any financial
liability or risk 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 satisfactory to it
against such risk or liability is not reasonably assured to it. Whether or not
herein
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expressly so provided, every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section. The Trustee shall not be liable (x)
for any error of judgment made in good faith by a Responsible Officer or
Responsible Officers of the Trustee, unless it shall be proved that the Trustee
was negligent in ascertaining the pertinent facts or (y) with respect to any
action taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of not less than a majority in aggregate principal
amount of the Securities at the time Outstanding relating to the time, method
and place of conducting any proceeding or any remedy available to the Trustee,
or exercising any trust or power conferred upon the Trustee, under this
Indenture. Prior to the occurrence of an Event of Default and after the curing
or waiving of all Events of Default which may have occurred: (i) the duties and
obligations of the Trustee shall be determined solely by the express provisions
of this Indenture and in the Trust Indenture Act, and the Trustee shall not be
liable except for the performance of such duties and obligations as are
specifically set forth in this Indenture and in the Trust Indenture Act, and no
implied covenants or obligations shall be read in to this Indenture against the
Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions therein, upon any statements, certificates or
opinions furnished to the Trustee and conforming to the requirements of this
Indenture and believed by the Trustee to be genuine and to have been signed or
presented by the proper party or parties; but in the case of any such
statements, certificates or opinions which by any provisions hereof are
specifically required to be furnished to the Trustee, the Trustee shall be under
a duty to examine the same to determine whether or not they conform on their
face to the requirements of this Indenture. If a default or 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 its
exercise thereof as a prudent person would exercise or use under the
circumstances in the conduct of his own affairs.
SECTION 602. Notice of Defaults.
The Trustee shall give the Holders notice of any default hereunder
known to it as and to the extent provided by the Trust Indenture Act; provided,
however, that, except in the case of a default in payment of principal of,
premium, if any, or interest on any Securities, the Trustee may withhold notice
if and so long as a committee of its Responsible Officers in good faith
determines that withholding the notice is in the interests of the Holders of
Securities. For the purpose of this Section, the term "default" means any event
which is, or after notice or lapse of time or both would become, an Event of
Default.
SECTION 603. Certain Rights of Trustee.
Subject to the provisions of Section 601:
(a) the Trustee may 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
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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;
(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 satisfactory to it against the costs, expenses
and liabilities which might be incurred by it in compliance with such
request or direction;
(f) before the Trustee acts or refrains from acting with
respect to any matter contemplated by this Indenture, it may require an
Officers' Certificate or an Opinion of Counsel, which shall conform to
the provisions of Section 102, and the Trustee shall be protected and
shall not be liable for any action it takes or omits to take in good
faith and without gross negligence in reliance on such certificate or
opinion;
(g) the Trustee shall not be required to give any bond or
surety in respect of the performance of its power and duties hereunder;
(h) 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 see fit, and, if the Trustee shall determine
to make such further inquiry or investigation, it shall be entitled to
examine the books, records and premises of the Company, personally or
by agent or attorney; and
(i) 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.
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SECTION 604. Not Responsible for Recitals or Issuance of Securities.
The statements and recitals contained herein and in the Securities and
in any other document in connection with the sale of the Securities, except the
Trustee's certificate of authentication, shall be taken as the statements of the
Company, and the Trustee and any Authenticating Agent assume no responsibility
for their correctness. The Trustee makes no representations as to the validity
or sufficiency of this Indenture or of the Securities. The Trustee and any
Authenticating Agent shall not be accountable for the use or application by the
Company of Securities or the proceeds thereof.
SECTION 605. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Security
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Securities and, subject to Sections
608 and 613, may otherwise deal with the Company or any Affiliate of the Company
with the same rights it would have if it were not Trustee, Authenticating Agent,
Paying Agent, Security Registrar or such other agent.
SECTION 606. Money Held in Trust.
Money held by the Trustee or any Paying Agent in trust hereunder need
not be segregated from other funds except to the extent required by law. The
Trustee or any Paying Agent shall be under no liability for interest on any
money received by it hereunder except as otherwise agreed with the Company.
SECTION 607. Compensation and Reimbursement.
The Company agrees:
(1) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder (including its
services as Security Registrar or Paying Agent, if so appointed by the
Company) as may be mutually agreed upon in writing by the Company and
the Trustee (which compensation shall not be limited by any provision
of law in regard to the compensation of a trustee of an express trust);
(2) except as otherwise expressly provided herein, to
reimburse the Trustee and each predecessor Trustee promptly upon its
request for all reasonable expenses, disbursements and advances
incurred or made by or on behalf of it in connection with the
performance of its duties under any provision of this Indenture
(including the reasonable compensation and the expenses and
disbursements of its agents and counsel and all other persons not
regularly in its employ) except to the extent any such expense,
disbursement or advance may be attributable to its negligence or bad
faith; and
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(3) to indemnify the Trustee and each predecessor Trustee
(each an "indemnitee") for, and to hold it harmless against, any loss,
liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or
administration of this Indenture or the trusts hereunder and its duties
hereunder (including its services as Security Registrar or Paying
Agent, if so appointed by the Company), including enforcement of this
Indenture (including Section 607) and including the costs and expenses
of defending itself against or investigating any claim or liability in
connection with the exercise or performance of any of its powers or
duties hereunder. The Company shall defend any claim or threatened
claim asserted against an indemnitee for which it may seek indemnity,
and the indemnitee shall cooperate in the defense unless, in the
reasonable opinion of the indemnitee's counsel, the indemnitee has an
interest adverse to the Issuer or a potential conflict of interest
exists between the indemnitee and the Company, in which case the
indemnitee may have separate counsel and the Company shall pay the
reasonable fees and expenses of such counsel; provided, however, that
the Company shall only be responsible for the reasonable fees and
expenses of one law firm (in addition to local counsel) in any one
action or separate substantially similar actions in the same
jurisdiction arising out of the same general allegations or
circumstances, such law firm to be designated by the indemnitee.
As security for the performance of the obligations of the Company under
this Section 607, the Trustee shall have a lien prior to the Securities upon all
property and funds held or collected by the Trustee as such, except funds held
in trust for the benefit of the Holders of particular Securities, and the
Securities are hereby subordinated to such prior lien. The obligations of the
Company under this Section to compensate and indemnify the Trustee and any
predecessor Trustee and to pay or reimburse the Trustee and any predecessor
Trustee for expenses, disbursements and advances, and any other amounts due the
Trustee or any predecessor Trustee under Section 607, shall constitute an
additional obligation hereunder and shall survive the satisfaction and discharge
of this Indenture.
When the Trustee or any predecessor Trustee incurs expenses or renders
services in connection with the performance of its obligations hereunder
(including its services as Security Registrar or Paying Agent, if so appointed
by the Company) after an Event of Default specified in Section 501(8) or (9)
occurs, the expenses and the compensation for the services are intended to
constitute expenses of administration under any applicable bankruptcy,
insolvency or other similar federal or state law to the extent provided in
Section 503(b)(5) of Title 11 of the United States Code, as now or hereafter in
effect.
SECTION 608. Disqualification; Conflicting Interests.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and this Indenture.
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SECTION 609. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a Person
that (i) is eligible pursuant to the Trust Indenture Act to act as such and (ii)
has (or, in the case of a corporation included in a bank holding company system,
whose related bank holding company has) a combined capital and surplus of at
least $50,000,000. If such Person publishes reports of conditions at least
annually, pursuant to law or to the requirements of a Federal or state
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such Person 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 610. 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 611.
(b) The Trustee may resign at any time by giving written
notice thereof to the Company. If an instrument of acceptance by a
successor Trustee required by Section 611 shall not have been delivered
to the resigning 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.
(c) The Trustee may be removed at any time by an Act of
the Holders of 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
Section 608 after written request therefor by the Company or
by any Holder who has been a bona fide Holder of a Security
for the last six months, or
(2) the Trustee shall cease to be eligible under
Section 609 and shall fail to resign after written request
therefor by the Company or by any such Holder, 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,
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then, in any such case, (i) the Company by a Board Resolution may
remove the Trustee, or (ii) subject to Section 514, 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 and such successor Trustee shall
comply with the applicable requirements of Section 611. 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 in accordance with the applicable requirements of
Section 611 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 required by Section 611, 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.
(f) The Company shall give notice of each resignation and
each removal of the Trustee and each appointment of a successor Trustee
to all Holders in the manner provided in Section 106. Each notice shall
include the name of the successor Trustee and the address of its
Corporate Trust Office.
SECTION 611. 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 its charges,
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 property and money 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.
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SECTION 612. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or
with 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 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. Such successor Trustee shall promptly notify the
Company of its succession. 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.
SECTION 613. Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company
(or any other obligor upon 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).
SECTION 614. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents acceptable to
and at the expense of the Company which shall be authorized to act on behalf of
the Trustee to authenticate Securities issued upon original issue and upon
exchange, registration of transfer, partial conversion or partial redemption or
pursuant to Section 306, and Securities so authenticated shall be entitled to
the benefits of this Indenture and shall be valid and obligatory for all
purposes as if authenticated by the Trustee hereunder. Wherever reference is
made in this Indenture to the authentication and delivery of Securities by the
Trustee or the Trustee's certificate of authentication, such reference shall be
deemed to include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a Person organized and doing
business under the laws of the United States of America, any State thereof or
the District of Columbia, authorized under such laws to act as Authenticating
Agent, having a combined capital and surplus of not less than $50,000,000 and
subject to supervision or examination by Federal or State authority. If such
Authenticating Agent publishes reports of condition at least annually, pursuant
to law or to the requirements of said supervising or examining authority, then
for the purposes of this Section, the combined capital and surplus of such
Authenticating Agent 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 an
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, such Authenticating Agent shall resign immediately
in the manner and with the effect specified in this Section.
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Any Person into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any Person resulting from any
merger, conversion or consolidation to which such Authenticating Agent shall be
a party, or any Person succeeding to the corporate agency or corporate trust
business of an Authenticating Agent, shall continue to be an Authenticating
Agent, provided such Person shall be otherwise eligible under this Section,
without the execution or filing of any paper or any further act on the part of
the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall mail notice of such
appointment by first-class mail, postage prepaid, to all Holders as their names
and addresses appear in the Security Register. Any successor Authenticating
Agent upon acceptance of its appointment under this Section shall become vested
with all the rights, powers and duties of its predecessor hereunder, with like
effect as if originally named as an Authenticating Agent. No successor
Authenticating Agent shall be appointed unless eligible to act as such under the
provisions of this Section.
Any Authenticating Agent by the acceptance of its appointment shall be
deemed to have represented to the Trustee that it is eligible for appointment as
Authenticating Agent under this Section and to have agreed with the Trustee
that: it will perform and carry out the duties of an Authenticating Agent as
herein set forth, including among other things the duties to authenticate
Securities when presented to it in connection with the original issuance and
with exchanges, registrations of transfer or redemptions or conversions thereof
or pursuant to Section 306; it will keep and maintain, and furnish to the
Trustee from time to time as requested by the Trustee, appropriate records of
all transactions carried out by it as Authenticating Agent and will furnish the
Trustee such other information and reports as the Trustee may reasonably
require; and it will notify the Trustee promptly if it shall cease to be
eligible to act as Authenticating Agent in accordance with the provisions of
this Section. Any Authenticating Agent by the acceptance of its appointment
shall be deemed to have agreed with the Trustee to indemnify the Trustee against
any loss, liability or expense incurred by the Trustee and to defend any claim
asserted against the Trustee by reason of any acts or failures to act of such
Authenticating Agent, but such Authenticating Agent shall have no liability for
any action taken by it in accordance with the specific written direction of the
Trustee.
The Trustee shall not be liable for any act or any failure of the
Authenticating Agent to perform any duty either required herein or authorized
herein to be performed by such person in accordance with this Indenture.
The Company agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section.
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If an appointment is made pursuant to this Section, the Securities may
have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternative certificate of authentication in the following
form:
This is one of the Securities described in the within-mentioned
Indenture.
STATE STREET BANK AND TRUST COMPANY,
As Trustee
By
------------------------------------
As Authenticating Agent
By
------------------------------------
Authorized Signatory
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee
(a) semi-annually, not more than 15 days after each
Regular Record Date, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders as of such Regular
Record Date, and
(b) at such other times as the Trustee may request in
writing, within 30 days after the receipt by the Company of any such
request, a list of similar form and content as of a date not more than
15 days prior to the time such list is furnished.
Notwithstanding the foregoing, so long as the Trustee is the Security Registrar,
no such list shall be required to be furnished.
SECTION 702. Preservation of Information; Communication to Holders.
(a) The Trustee shall preserve, in as current a form as
is reasonably practicable, the names and addresses of Holders contained
in the most recent list furnished to the Trustee as provided in Section
701 and the names and addresses of Holders received by the Trustee in
its capacity as Security Registrar. The Trustee may destroy any list
furnished to it as provided in Section 701 upon receipt of a new list
so furnished.
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(b) The rights of Holders to communicate with other
Holders with respect to their rights under this Indenture or under the
Securities, and the corresponding rights and duties of the Trustee,
shall be as provided by the Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding
the same, agrees with the Company and the Trustee that neither the
Company nor the Trustee nor any agent of either of them shall be held
accountable by reason of any disclosure of information as to names and
addresses of Holders made pursuant to the Trust Indenture Act or
otherwise in accordance with this Indenture.
SECTION 703. Reports by Trustee.
(a) Not later than 60 days following each May 15, the
Trustee shall transmit to Holders such reports concerning the Trustee
and its actions under this Indenture as may be required pursuant to the
Trust Indenture Act at the times and in the manner provided pursuant
thereto.
(b) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock
exchange upon which the Securities are listed, with the Commission and
with the Company. The Company will notify the Trustee when the
Securities are listed on any stock exchange.
SECTION 704. Reports by Company.
(a) The Company shall file with the Trustee and the
Commission, and transmit to Holders, such information, documents and
other reports, and such summaries thereof, as may be required pursuant
to the Trust Indenture Act at the times and in the manner provided
pursuant to such Act; provided, however, that any such information,
documents or reports required to be filed with the Commission pursuant
to Section 13 or 15(d) of the Exchange Act shall be filed with the
Trustee within 15 days after the same is so required to be filed with
the Commission.
(b) Whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall deliver to the Trustee and to each Holder, within 15 days
after it is or would have been required to file such with the
Commission, annual and quarterly consolidated financial statements
substantially equivalent to financial statements that would have been
included in reports filed with the Commission if the Company was
subject to the requirements of Section 13 or 15(d) of the Exchange Act,
including, with respect to annual information only, a report thereon by
the Company's certified independent public accountants as such would be
required in such reports to the Commission and, in each case, together
with a management's discussion and analysis of operations and financial
condition as such would be so required.
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ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge into any other Person
or convey, transfer or lease all or substantially all of its properties and
assets to any Person, and the Company shall not permit any Person to consolidate
with or merge into the Company, unless:
(1) in case the Company shall consolidate with or merge
into another Person or convey, transfer or lease all or substantially
all of its properties and assets to any Person, the Person formed by
such consolidation or into which the Company is merged or the Person
which acquires by conveyance or transfer, or which leases, all or
substantially all of the properties and assets of the Company shall be
a corporation, shall be organized and validly existing under the laws
of the United States of America, any State thereof or the District of
Columbia and shall expressly assume, by an indenture supplemental
hereto, executed and delivered to the Trustee, in form reasonably
satisfactory to the Trustee, the due and punctual payment of the
principal of and premium, if any, and interest on all the Securities
and the performance or observance of every covenant of this Indenture
on the part of the Company to be performed or observed and such
supplemental indenture shall also provide for conversion rights in
accordance with Section 1311;
(2) immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing;
and
(3) the Company or the successor Person, if the Company
is not the continuing obligor under this Indenture, has delivered to
the Trustee an Officers' Certificate stating that such consolidation,
merger, conveyance, transfer or lease and, if a supplemental indenture
is required in connection with such transaction, such supplemental
indenture comply with this Article and an Opinion of Counsel stating
that the requirements of clause (1) of this Section 801 have been
satisfied.
SECTION 802. Successor Substituted.
Upon any consolidation of the Company with, or merger of the Company
into, any other Person or any conveyance, transfer or lease of all or
substantially all of the properties and assets of the Company in accordance with
Section 801, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, transfer or lease is made 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 successor
Person had been named as the Company herein, and thereafter, except in the case
of a transfer by lease, the predecessor Person shall be relieved of all
obligations and covenants under this Indenture and the Securities.
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ARTICLE NINE
Supplemental Indentures
SECTION 901. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a
Board Resolution, and the Trustee, 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:
(1) to cause this Indenture to be qualified under the
Trust Indenture Act; or
(2) to evidence the succession of another Person to the
Company and the assumption by any such successor of the covenants of
the Company herein and in the Securities; or
(3) to add to the covenants of the Company for the
benefit of the Holders or an additional Event of Default, or to
surrender any right or power conferred herein or in the Securities upon
the Company; or
(4) to secure the Securities; or
(5) to make provision with respect to the conversion
rights of Holders pursuant to the requirements of Section 1311; or
(6) to evidence and provide for the acceptance of
appointment hereunder by a successor Trustee with respect to the
Securities; or
(7) to cure any ambiguity, to correct or supplement any
provision herein or in the Securities which may be defective or
inconsistent with any other provision herein or in the Securities, or
to make any other provisions with respect to matters or questions
arising under this Indenture which shall not adversely affect the
interests of the Holders in any material respect.
SECTION 902. 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, and the Trustee 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
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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,
(1) 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 payable
upon the redemption thereof, or change the place of payment where, or
the coin or currency in which, any Security or any premium or interest
thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity thereof
(or, in the case of redemption, on or after the Redemption Date), or
modify the provisions of Article Twelve, Article Thirteen (except as
permitted by Section 901(5)) or Article Fourteen, in any case in a
manner adverse to the Holders, or
(2) reduce the percentage in aggregate principal amount
of the Outstanding Securities, the consent of whose Holders is required
for any such supplemental indenture, or
(3) modify any of the provisions of Section 513 or
Section 1007, except to increase any percentage in aggregate principal
amount of the Outstanding Securities required for any waiver 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.
It shall not be necessary for any Act of 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 903. 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 (subject to Section 601) shall be fully protected in relying upon, an
Officers' Certificate and 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 adversely affects the Trustee's own rights, duties or immunities
under this Indenture or otherwise.
SECTION 904. 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.
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SECTION 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act.
SECTION 906. 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
Company, to any such supplemental indenture may be prepared and executed by the
Company and (at the specific direction of the Company) authenticated and
delivered by the Trustee in exchange for Outstanding Securities.
SECTION 907. Notice of Supplemental Indenture.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to Section 902, the Company shall transmit to
the Holders a notice setting forth the substance of such supplemental indenture.
ARTICLE TEN
Covenants
SECTION 1001. Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of and premium,
if any, and interest on the Securities in accordance with the terms of the
Securities and this Indenture.
SECTION 1002. Guarantees of Subsidiaries.
The Company will cause each Wholly-owned Significant Subsidiary to
enter into the Guarantee Agreement, in accordance with Article Fifteen of this
Indenture.
SECTION 1003. Maintenance of Office or Agency.
The Company will maintain an office or agency where Securities may be
presented or surrendered for payment, where Securities may be surrendered for
registration of transfer, where Securities may be surrendered for exchange or
conversion and where notices and demands to or upon the Company in respect of
the Securities and this Indenture may be served, which office shall initially be
the office of the Trustee located at 225 Asylum Street, 23rd Floor, Hartford,
Connecticut
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06103. The Company will give prompt written notice to the Trustee of the
location, and 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
Corporate Trust 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 such designations.
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 of any change in the location of any
such other office or agency.
SECTION 1004. Money for Security Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of and premium, if any, 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 sums 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, it will, on
or prior to 11:00 a.m. (New York City time) on each due date of the principal of
and premium, if any, or interest on any Securities, deposit with a Paying Agent
a sum in same day funds sufficient to pay the principal and any premium and
interest so becoming due, such sum to be held as provided by the Trust Indenture
Act, and (unless such Paying Agent is the Trustee) the Company will promptly
notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee or the
Company 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 (i) comply with the provisions of the Trust
Indenture Act and this Indenture applicable to it as a Paying Agent and hold all
sums held by it for the payment of principal of or any premium or interest on
the 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, (ii) give the Trustee notice of any default by the Company (or any
other obligor upon the Securities) in the making of any payment in respect of
the Securities; and (iii) at any time during the continuance of any default by
the Company (or any other obligor upon the Securities) in the making of any
payment in respect of the Securities, upon the written
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request of the Trustee, forthwith pay to the Trustee all sums held in trust by
such Paying Agent for payment in respect of the Securities, and account for any
funds disbursed.
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 money.
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, 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, 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 New York, 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 1005. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the end
of each fiscal year of the Company ending after the date hereof, an Officers'
Certificate stating whether or not to the best knowledge of the signers thereof
the Company is in default in the performance and observance of any of the terms,
provisions and conditions of this Indenture (without regard to any period of
grace or requirement of notice provided hereunder) and, if the Company shall be
in default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.
SECTION 1006. Existence.
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its existence,
rights (charter and statutory) and franchises; provided, however, that the
Company shall not be required to preserve any such right or franchise if the
Board of Directors shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company and that the loss
thereof is not disadvantageous in any material respect to the Holders.
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SECTION 1007. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any
covenant or condition set forth in Section 704(b) or 1006, if before the time
for such compliance the Holders of at least a majority in aggregate principal
amount of the Outstanding Securities shall, by Act of such Holders, either waive
such compliance in such instance or generally waive compliance with such
covenant or condition, but no such waiver shall extend to or affect such
covenant 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 covenant or condition shall remain in full
force and effect.
ARTICLE ELEVEN
Redemption of Securities
SECTION 1101. Right of Redemption.
The Securities may be redeemed at the election of the Company, in whole
or from time to time in part, at any time on or after _______________, 2000, at
the Redemption Prices specified in the form of Security hereinbefore set forth,
together with accrued and unpaid interest thereon to the Redemption Date.
SECTION 1102. Applicability of Article.
Redemption of Securities at the election of the Company as permitted by
any provision of this Indenture shall be made in accordance with such provision
and this Article.
SECTION 1103. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities pursuant to
Section 1101 shall be evidenced by a Board Resolution. In case of any redemption
at the election of the Company of less than all the Securities, the Company
shall, at least 60 days prior to the Redemption Date fixed by the Company
(unless a shorter period shall be satisfactory to the Trustee), notify the
Trustee of such Redemption Date and of the principal amount of Securities to be
redeemed. In case of any redemption at the election of the Company of all of the
Securities, the Company shall, at least 45 days prior to the Redemption Date
fixed by the Company (unless a shorter period shall be satisfactory to the
Trustee), notify the Trustee of such Redemption Date.
SECTION 1104. 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 more than 60 days prior to the
Redemption Date by the Trustee, from the Outstanding
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Securities not previously called for redemption, by lot or pro rata or by such
other method as the Trustee shall deem fair and appropriate and which may
provide for the selection for redemption of portions (equal to $1,000 or any
integral multiple thereof) of the principal amount of Securities of a
denomination larger than $1,000.
If any Security selected for partial redemption is converted in part
before termination of the conversion right with respect to the portion of the
Security so selected, the converted portion of such Security shall be deemed (so
far as may be) to be the portion selected for redemption. Securities which have
been converted during a selection of Securities to be redeemed shall be treated
by the Trustee as Outstanding for the purpose of such selection. In any case
where more than one Security is registered in the same name, the Trustee in its
discretion may treat the aggregate principal amount so registered as if it were
represented by one Security.
The Trustee shall promptly notify the Company and each Security
Registrar 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.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Securities which has been or is to be
redeemed.
SECTION 1105. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption
Date, to the Trustee and to each Holder of Securities to be redeemed, at his
address appearing in the Security Register.
All notices of redemption shall state:
(a) the Redemption Date,
(b) the Redemption Price,
(c) if less than all the Outstanding Securities are to be
redeemed, the identification (and, in the case of partial redemption of
any Securities, the principal amounts) of the particular Securities to
be redeemed,
(d) that on the Redemption Date the Redemption Price will
become due and payable upon each such Security to be redeemed and that
(unless the Company shall default in payment of the Redemption Price)
interest thereon will cease to accrue on and after said date,
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(e) the conversion price, the date on which the right to
convert the Securities to be redeemed will terminate and the place or
places where such Securities may be surrendered for conversion, and
(f) the place or places where such Securities are to be
surrendered for payment of the Redemption Price.
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.
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 received by the Trustee at least 40 days prior to the
Redemption Date, by the Trustee in the name and at the expense of the
Company.
SECTION 1106. Deposit of Redemption Price.
At or prior to 11:00 a.m. (New York City 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 1004) an amount of money in same day funds sufficient to pay
the Redemption Price of, and (except if the Redemption Date shall be an Interest
Payment Date) accrued and unpaid interest on, all the Securities or portions
thereof which are to be redeemed on that date other than any Securities called
for redemption on that date which have been converted prior to the date of such
deposit.
If any Security called for redemption is converted, any money deposited
with the Trustee or with any Paying Agent or so segregated and held in trust for
the redemption of such Security shall (subject to any right of the Holder of
such Security or any Predecessor Security to receive interest as provided in the
last paragraph of Section 307) be paid to the Company upon Company Request or,
if then held by the Company, shall be discharged from such trust.
SECTION 1107. 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, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
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 thereon to the Redemption Date; provided, however, that installments of
interest whose Maturity is on or prior to the Redemption Date shall be payable
to the Holders of such Securities, or one or more Predecessor Securities,
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registered as such at the close of business on the relevant Record Dates
according to their terms and the provisions of Section 307.
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
Security.
SECTION 1108. Securities Redeemed in Part.
Any Security which is to be redeemed only in part shall be surrendered
at an office or agency of the Company maintained for that purpose pursuant to
Section 1003 (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 his 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 of the Security so surrendered.
ARTICLE TWELVE
Subordination of Securities
SECTION 1201. Securities Subordinated to Senior Indebtedness.
The Company covenants and agrees, and each Holder of a Security, by his
acceptance thereof, likewise covenants and agrees, that, at all times and in all
respects, the indebtedness represented by the Securities and the payment of the
principal of and premium, if any, and interest on each and all of the Securities
are hereby expressly made subordinate and subject in right of payment to the
prior payment in full of all Senior Indebtedness. All references in this Article
Twelve to "Senior Indebtedness" are to Senior Indebtedness of the Company.
SECTION 1202. Payment Over of Proceeds Upon Dissolution, Etc.
In the event of (a) any insolvency or bankruptcy case or proceeding, or
any receivership, liquidation, reorganization or other similar case or
proceeding, relative to the Company or to its creditors, as such, or to a
substantial part of its assets, or (b) any proceeding for the liquidation,
dissolution or other winding up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or (c) any general
assignment for the benefits of creditors or any other marshalling of assets and
liabilities of the Company, then and in any such event the holders of Senior
Indebtedness shall be entitled to receive payment in full of all amounts due or
to become due on or in respect of all Senior Indebtedness or provision shall be
made for such payment in money or money's worth, before the Holders of the
Securities are entitled to receive any payment
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or distribution of any kind or character, whether in cash, property or
securities, on account of principal of or premium, if any, or interest on the
Securities, and to that end the holders of Senior Indebtedness shall be entitled
to receive, for application to the payment thereof, any payment or distribution
of any kind or character, whether in cash, property or securities, including any
such payment or distribution which may be payable or deliverable by reason of
the payment of any other indebtedness of the Company being subordinated to the
payment of the Securities, which may be payable or deliverable in respect of the
Securities in any such case, proceeding, dissolution, liquidation or other
winding up or event.
In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Security shall have received any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, including any such payment or distribu
tion which may be payable or deliverable by reason of the payment of any other
indebtedness of the Company being subordinated to the payment of the Securities,
before all Senior Indebtedness is paid in full or payment thereof provided for,
and if such fact shall, at or prior to the time of such payment or distribution,
have been made known to the Trustee or such Holder, as the case may be, then and
in such event such payment or distribution shall be paid over or delivered
forthwith to the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee, agent or other Person making payment or distribution of
assets of the Company for application to the payment of all Senior Indebtedness
remaining unpaid, to the extent necessary to pay all Senior Indebtedness in
full, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Indebtedness.
For purposes of this Article only, the words "cash, property or
securities" shall not be deemed to include securities of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, which are subordinated
in right of payment to all Senior Indebtedness which may at the time be
outstanding to substantially the same extent as, or to a greater extent than,
the Securities are so subordinated as provided in this Article. The
consolidation of the Company with, or the merger of the Company into, another
Person or the liquidation or dissolution of the Company following the conveyance
or transfer of all or substantially all of its properties and assets to another
Person upon the terms and conditions set forth in Article Eight shall not be
deemed a dissolution, winding up, liquidation, reorganization, general
assignment for the benefit of creditors or marshalling of assets and liabilities
of the Company for the purposes of this Section if the Person formed by such
consolidation or into which the Company is merged or which acquires by
conveyance or transfer all or substantially all of such properties and assets,
as the case may be, shall, as a part of such consolidation, merger, conveyance
or transfer, comply with the conditions set forth in Article Eight.
SECTION 1203. Prior Payment to Senior Indebtedness upon Acceleration of
Securities.
In the event that any Securities are declared due and payable before
their Stated Maturity, then and in such event the holders of Senior Indebtedness
outstanding at the time such Securities so become due and payable shall be
entitled to receive payment in full in cash of all amounts due on or in respect
of such Senior Indebtedness, or provision shall be made for such payment in
money or
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money's worth, before the Holders of the Securities are entitled to receive any
payment (including any payment which may be payable by reason of the payment of
any other indebtedness of the Company being subordinated to the payment of the
Securities) by the Company on account of the principal of or premium, if any, or
interest on the Securities or on account of the purchase or other acquisition of
Securities.
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section, and if such fact shall, at or prior to the
time of such payment, have been made known to the Trustee or such Holder, as the
case may be, then and in such event such payment shall be paid over the
delivered forthwith to the Company.
The provisions of this Section shall not apply to any payment with
respect to which Section 1202 would be applicable.
SECTION 1204. No Payment When Senior Indebtedness in Default.
(a) In the event and during the continuation of any default in the
payment of principal of or premium, if any, or interest on any Senior
Indebtedness beyond any applicable grace period with respect thereto, or in the
event that any event of default with respect to any Senior Indebtedness shall
have occurred and be continuing and shall have resulted in such Senior
Indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable, unless and until such
event of default shall have been cured or waived or shall have ceased to exist
and such acceleration shall have been rescinded or annulled, or (b) in the event
any judicial proceeding shall be pending with respect to any such default in
payment or event of default, then no payment (including any payment which may be
payable by reason of the payment of any other indebtedness of the Company being
subordinated to the payment of the Securities) shall be made by the Company on
account of the principal of or premium, if any, or interest on the Securities or
on account of the purchase or other acquisition of Securities.
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section, and if such fact shall, at or prior to the
time of such payment, have been made known to the Trustee or such Holder, as the
case may be, then and in such event such payment shall be paid over and
delivered forthwith to the Company.
The provisions of this Section shall not apply to any payment with
respect to which Section 1202 would be applicable.
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SECTION 1205. Payment Permitted If No Default.
Nothing contained in this Article or elsewhere in this Indenture or in
any of the Securities shall prevent (a) the Company, at any time except during
the pendency of any case, proceeding, dissolution, liquidation or other winding
up, general assignment for the benefit of creditors or other marshalling of
assets and liabilities of the Company referred to in Section 1202 or under the
conditions described in Section 1203 or 1204, from making payments at any time
of principal of and premium, if any, or interest on the Securities, or (b) the
application by the Trustee of any money deposited with it hereunder to the
payment of or on account of the principal of and premium, if any, or interest on
the Securities or the retention of such payment by the Holders, if, at the time
of such application by the Trustee, it did not have knowledge that such payment
would have been prohibited by the provisions of this Article.
SECTION 1206. Subrogation to Rights of Holders of Senior Indebtedness.
Subject to the payment in full of all amounts due on or in respect of
Senior Indebtedness, the Holders of the Securities shall be subrogated to the
extent of the payments or distributions made to the holders of such Senior
Indebtedness pursuant to the provisions of this Article (equally and ratably
with the holders of all indebtedness of the Company which by its express terms
is subordinated to other indebtedness of the Company to substantially the same
extent as the Securities are subordinated and is entitled to like rights of
subrogation) to the rights of the holders of such Senior Indebtedness to receive
payments and distributions of cash, property and securities applicable to the
Senior Indebtedness until the principal of and premium, if any, and Interest on
the Securities shall be paid in full. For purposes of such subrogation, no
payments or distributions to the holders of the Senior Indebtedness of any cash,
property or securities to which the Holders of the Securities or the Trustee
would otherwise be entitled except for the provisions of this Article, and no
payments over pursuant to the provisions of this Article to the holders of
Senior Indebtedness by Holders of the Securities or the Trustee, shall, as among
the Company, its creditors other than holders of Senior Indebtedness and the
Holders of the Securities, be deemed to be a payment or distribution by the
Company to or on account of the Senior Indebtedness.
SECTION 1207. Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for the
purpose of defining the relative rights of the Holders of the Securities on the
one hand and the holders of Senior Indebtedness on the other hand. Nothing
contained in this Article or elsewhere in this Indenture or in the Securities is
intended to or shall (a) impair, as among the Company, its creditors other than
holders of Senior Indebtedness and the Holders of the Securities, the obligation
of the Company, which is absolute and unconditional, to pay to the Holders of
the Securities the principal of and premium, if any, and interest on the
Securities as and when the same shall become due and payable in accordance with
their terms, or (b) affect the relative rights against the Company or the
Holders of the Securities and creditors of the Company other than the holders of
Senior Indebtedness, or (c) prevent the Trustee or the Holder of any Security
from exercising all remedies otherwise
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permitted by applicable law upon default under this Indenture, subject to the
rights, if any, under this Article of the holders of Senior Indebtedness to
receive cash, property and securities otherwise payable or deliverable to the
Trustee or such Holder.
SECTION 1208. Trustee to Effectuate Subordination.
Each Holder of a Security by his acceptance thereof authorizes and
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article and
appoints the Trustee his attorney-in-fact for any and all such purposes.
SECTION 1209. No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall 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, provisions and covenants of this
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph,
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 of the
Securities, without incurring responsibility to the Holders of the Securities
and without impairing or releasing the subordination provided in this Article or
the obligations hereunder of the Holders of the Securities to the holders of
Senior Indebtedness, do any one or more of the following: (i) change the manner,
place or terms of payment or extend the time of payment of, or renew or alter,
Senior Indebtedness, or otherwise amend or supplement in any manner Senior
Indebtedness or any instrument evidencing the same or any agreement under which
Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise
deal with any property pledged, mortgaged or otherwise securing Senior
Indebtedness; (iii) release any Person liable in any manner for the collection
of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights
against the Company and any other Person.
SECTION 1210. Notice to Trustee.
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment to or by the
Trustee in respect of the Securities. Notwithstanding the provisions of this
Article or any other provision of this Indenture, the Trustee shall not be
charged with knowledge of the existence of any facts which would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until the Trustee shall have received written notice thereof from the
Company or a holder of Senior Indebtedness or from any trustee therefor; and,
prior to the receipt of any such written notice, the Trustee, subject to the
provisions of Section 601, shall be entitled in all respects to assume that no
such facts exist; provided, however, that if the Trustee shall not have received
the notice provided for in this Section at least four Business Days prior to the
date upon which by the terms hereof any
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money may become payable for any purpose (including, without limitation, the
payment of the principal of and premium, if any, or interest on any Security),
then, anything herein contained to the contrary notwithstanding, the Trustee
shall have full power and authority to receive such money and to apply the same
to the purpose for which such money was received and shall not be affected by
any notice to the contrary which may be received by it within four Business Days
prior to such date.
Subject to the provisions of Section 601, the Trustee shall be entitled
to rely on the delivery to it of a written notice by a Person representing
himself to be a holder of Senior Indebtedness (or a trustee therefor) to
establish that such notice has been given by a holder of Senior Indebtedness (or
a trustee therefor). In the event that the Trustee determines in good faith that
further evidence is required with respect to the right of any Person as a holder
of Senior Indebtedness to participate in any payment or distribution pursuant to
this Article, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such Person, the extent to which such Person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
such Person under this Article, and if such evidence is not furnished, the
Trustee may defer any payment to such Person pending judicial determination as
to the right of such Person to receive such payment.
SECTION 1211. Reliance on Judicial Order or Certificate of Liquidating
Agent.
Upon any payment or distribution of assets of the Company referred to
in this Article, the Trustee, subject to the provisions of Section 601, and the
Holders of the Securities shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding up
or similar case or proceeding is pending, or a certificate of the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit
of creditors, agent or other person making such payment or distribution,
delivered to the Trustee or to the Holders of Securities, for the purpose of
ascertaining the Persons entitled to participate in such payment or
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.
SECTION 1212. Trustee Not Fiduciary for Holders of Senior Indebtedness.
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 it
shall in good faith mistakenly pay over or distribute to Holders of Securities
or to the Company or to any other Person cash, property or securities to which
holders of Senior Indebtedness shall be entitled by virtue of this Article or
otherwise. With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform or to observe only such of its covenants and obligations
as are specifically set forth in this Article, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Article against the Trustee.
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SECTION 1213. Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article with respect to any Senior Indebtedness which
may at any time be held by it, to the same extent as any other holder of Senior
Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of
its rights as such holder.
Nothing in this Article shall apply to claims of, or payments to, the
Trustee under or pursuant to Section 607.
SECTION 1214. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article shall in such case (unless the context otherwise
requires) be construed as extending to and including such Paying Agent within
its meaning as fully for all intents and purposes as if such Paying Agent were
named in this Article in addition to or in place of the Trustee; provided,
however, that Section 1213 shall not apply to the Company or any Affiliate of
the Company if it or such Affiliate acts as Paying Agent.
SECTION 1215. Certain Conversions Deemed Payment.
For the purposes of this Article only, (1) the issuance and delivery of
junior securities upon conversion of Securities in accordance with Article
Thirteen shall not be deemed to constitute a payment or distribution on account
of the principal of or premium or interest on Securities or on account of the
purchase or other acquisition of Securities, and (2) the payment, issuance or
delivery of cash, property or securities (other than junior securities) upon
conversion of a Security shall be deemed to constitute payment on account of the
principal of such Security. For the purposes of this Section, the term "junior
securities" means (a) shares of any class of capital stock of the Company and
(b) securities of the Company which are subordinated in right of payment to all
Senior Indebtedness which may be outstanding at the time of issuance or delivery
of such securities to substantially the same extent as, or to a greater extent
than, the Securities are so subordinated as provided in this Article. Nothing
contained in this Article or elsewhere in this Indenture or in the Securities is
intended to or shall impair, as among the Company, its creditors other than
holders of Senior Indebtedness and the Holders of the Securities, the right,
which is absolute and unconditional, of the Holder of any Security to convert
such Security in accordance with Article Thirteen.
SECTION 1216. No Suspension of Remedies.
Nothing contained in this Article shall limit the right of the Trustee
or the Holders of the Securities to take any action to accelerate the maturity
of the Securities pursuant to the provisions described under Article Five and as
set forth in this Indenture or to pursue any rights or remedies
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hereunder or under applicable law, subject to the rights, if any, under this
Article of the holders, from time to time, of Senior Indebtedness to receive the
cash, property or securities receivable upon the exercise of such rights or
remedies.
ARTICLE THIRTEEN
Conversion of Securities
SECTION 1301. Conversion Privilege and Conversion Price.
Subject to and upon compliance with the provisions of this Article, at
the option of the Holder thereof, any Security or any portion of the principal
amount thereof which equals $1,000 or any integral multiple thereof may be
converted at any time at the principal amount thereof, or of such portion
thereof, into fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100 of a share) of Common Stock, at the conversion
price, determined as hereinafter provided, in effect at the time of conversion.
Such conversion right shall expire at the close of business on __________, 2004.
In case a Security or portion thereof is called for redemption or delivered for
repurchase , such conversion right in respect of the Security or portion so
called shall expire at the close of business on the second business day
preceding the applicable Redemption Date or Repurchase Date, unless the Company
defaults in making the payment due upon redemption or repurchase.
The price at which shares of Common Stock shall be delivered upon
conversion (herein called the "conversion price") shall be initially $______ per
share of Common Stock. The conversion price shall be adjusted in certain
instances as provided in Section 1304.
SECTION 1302. Exercise of Conversion Privilege.
In order to exercise the conversion privilege, the Holder of any
Security shall surrender such Security, duly endorsed or assigned to the Company
or in blank, at any office or agency of the Company maintained pursuant to
Section 1003, accompanied by written notice to the Company in the form provided
in the Security (or such other notice as is acceptable to the Company) at such
office or agency that the Holder elects to convert such Security or, if less
than the entire principal amount thereof is to be converted, the portion thereof
to be converted. Securities surrendered for conversion during the period after
the close of business on any Regular Record Date next preceding any Interest
Payment Date to the close of business on such Interest Payment Date shall
(except in the case of Securities or portions thereof which have been called for
redemption) be accompanied by payment in New York Clearing House funds or other
funds acceptable to the Company of an amount equal to the interest payable on
such Interest Payment Date on the principal amount being surrendered for
conversion. Except as provided in the immediately preceding sentence and subject
to the last paragraph of Section 307, no payment or adjustment shall be made
upon any conversion
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on account of any interest accrued on the Securities surrendered for conversion
or on account of any dividends on the Common Stock issued upon conversion.
Securities shall be deemed to have been converted immediately prior to
the close of business on the day of surrender of such Securities for conversion
in accordance with the foregoing provisions, and at such time the rights of the
Holders of such Securities as Holders shall cease, and the Person or Persons
entitled to receive the Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such Common Stock as and
after such time. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver at such office or agency a certificate or
certificates for the number of full shares of Common Stock issuable upon
conversion, together with payment in lieu of any fraction of a share, as
provided in Section 1303.
In the case of any Security which is converted in part only, upon such
conversion the Company shall execute and the Trustee shall authenticate and
deliver to the Holder thereof, at the expense of the Company, a new Security or
Securities of authorized denominations in aggregate principal amount equal to
the unconverted portion of the principal amount of such Security.
SECTION 1303. Fractions of Shares.
No fractional share of Common Stock shall be issued upon conversion of
Securities. If more than one Security shall be surrendered for conversion at one
time by the same Holder, the number of full shares which shall be issuable upon
conversion thereof shall be computed on the basis of the aggregate principal
amount of the Securities (or specified portions thereof) so surrendered. Instead
of any fractional share of such Common Stock which would otherwise be issuable
upon conversion of any Security or Securities (or specified portions thereof),
the Company shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction of the Closing Price (as hereinafter defined) at the
close of business on the day of conversion (or, if such day is not a Trading Day
(as hereafter defined), on the Trading Day immediately preceding such day).
SECTION 1304. Adjustment of Conversion Price.
(a) In case the Company shall pay or make a dividend or
other distribution on Common Stock exclusively in Common Stock or shall
pay or make a dividend or other distribution on any other class of
capital stock of the Company which dividend or distribution includes
Common Stock, the conversion price in effect at the opening of business
on the day following the date fixed for the determination of
shareholders entitled to receive such dividend or other distribution
shall be reduced by multiplying such conversion price by a fraction of
which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such
determination and the denominator shall be the sum of such number of
shares and the total number of shares constituting such dividend or
other distribution, such reduction to become effective immediately
after the opening of business on the day following the date fixed for
such
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determination. For the purpose of this paragraph (a), the number of
shares of Common Stock at any time outstanding shall not include shares
held in the treasury of the Company. The Company shall not pay any
dividend or make any distribution on shares of Common Stock held in the
treasury of the Company.
(b) Subject to paragraph (g) of this Section, in case the
Company shall pay or make a dividend or other distribution on Common
Stock consisting exclusively of, or shall otherwise issue to all
holders of Common Stock, rights or warrants entitling the holders
thereof to subscribe for or purchase shares of Common Stock at a price
per share less than the Current Market Price (determined as provided in
paragraph (h) of this Section) on the date fixed for the determination
of shareholders entitled to receive such rights or warrants, the
conversion price in effect at the opening of business on the day
following the date fixed for such determination shall be reduced by
multiplying such conversion price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination plus the number of
shares of Common Stock which the aggregate of the offering price of the
total number of shares of Common Stock so offered for subscription or
purchase would purchase at such Current Market Price and the
denominator shall be the number of shares of Common Stock outstanding
at the close of business on the date fixed for such determination plus
the number of shares of Common Stock so offered for subscription or
purchase, such reduction to become effective immediately after the
opening of business on the day following the date fixed for such
determination. For the purposes of this paragraph (b), the number of
shares of Common Stock at any time outstanding shall not include shares
held in the treasury of the Company. The Company shall not issue any
rights or warrants in respect of shares of Common Stock held in the
treasury of the Company.
(c) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the
conversion price in effect at the opening of business on the day
following the day upon which such subdivision becomes effective shall
be proportionately reduced, and, conversely, in case outstanding shares
of Common Stock shall be combined into a smaller number of shares of
Common Stock, the conversion price in effect at the opening of business
on the day following the day upon which such combination becomes
effective shall be proportionately increased, such reduction or
increase, as the case may be, to become effective immediately after the
opening of business on the day following the day upon which subdivision
or combination becomes effective.
(d) Subject to the last sentence of this paragraph (d)
and to paragraph (g) of this Section, in case the Company shall, by
dividend or otherwise, distribute to all holders of Common Stock
evidences of its indebtedness, shares of any class of its capital stock
other than Common Stock, cash or other assets (including securities,
but excluding any rights or warrants referred to in paragraph (b) of
this Section, excluding any dividend or distribution paid exclusively
in cash and excluding any dividend or distribution referred to in
paragraph (a) of this Section), the conversion price shall be reduced
by multiplying the conversion price
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in effect immediately prior to the close of business on the date fixed
for the determination of shareholders entitled to such distribution by
a fraction of which the numerator shall be the Current Market Price
(determined as provided in paragraph (h) of this Section) on such date
less the fair market value (as determined by the Board of Directors,
whose determination shall be conclusive and described in a Board
Resolution) on such date of the portion of the evidences of
indebtedness, shares of capital stock, cash and other assets to be
distributed applicable to one share of Common Stock and the denominator
shall be such Current Market Price, such reduction to become effective
immediately prior to the opening of business on the day following such
date. If the Board of Directors determines the fair market value of any
distribution for purposes of this paragraph (d) by reference to the
actual or when-issued trading market for any securities comprising part
or all of such distribution, it must in doing so consider the prices in
such market over the same period used in computing the Current Market
Price pursuant to paragraph (h) of this Section, to the extent
possible. For purposes of this paragraph (d), any dividend or
distribution that includes shares of Common Stock, rights or warrants
to subscribe for or purchase shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock shall be
deemed to be (x) a dividend or distribution of the evidences of
indebtedness, cash, assets or shares of capital stock other than such
shares of Common Stock, such rights or warrants or such convertible or
exchangeable securities (making any conversion price reduction required
by this paragraph (d)) immediately followed by (y) in the case of such
shares of Common Stock or such rights or warrants, a dividend or
distribution thereof (making any further conversion price reduction
required by paragraph (a) and (b) of this Section, except any shares of
Common Stock included in such dividend or distribution shall not be
deemed "outstanding at the close of business on the date fixed for such
determination" within the meaning of paragraph (a) of this Section), or
(z) in the case of such convertible or exchangeable securities, a
dividend or distribution of the number of shares of Common Stock as
would then be issuable upon the conversion or exchange thereof, whether
or not the conversion or exchange of such securities is subject to any
conditions (making any further conversion price reduction required by
paragraph (a) of this Section, except the shares deemed to constitute
such dividend or distribution shall not be deemed "outstanding at the
close of business on the date fixed for such determination" within the
meaning of paragraph (a) of this Section).
(e) In case the Company shall, by dividend or otherwise,
at any time distribute to all holders of Common Stock cash (excluding
any cash that is distributed as part of a distribution referred to in
paragraph (d) of this Section or in connection with a transaction to
which Section 1311 applies) in an aggregate amount that, together with
(A) the aggregate amount of any other distributions to all holders of
Common Stock made exclusively in cash (excluding any cash that is
distributed in connection with a transaction to which Section 1311
applies) within the 12 months preceding the date fixed for the
determination of shareholders entitled to such distribution and in
respect of which no conversion price adjustment pursuant to this
paragraph (e) has been made previously and (B) the aggregate of any
cash plus the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a
Board Resolution) as of such date of determination of
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consideration payable in respect of any tender offer by the Company or
a Subsidiary for all or any portion of Common Stock consummated within
the 12 months preceding such date of determination and in respect of
which no conversion price adjustment pursuant to paragraph (f) of this
Section has been made previously, exceeds 15% of the product of the
Current Market Price (determined as provided in paragraph (h) of this
Section) on such date of determination times the number of shares of
Common Stock outstanding on such date, the conversion price shall be
reduced by multiplying the conversion price in effect immediately prior
to the close of business on such date of determination by a fraction of
which the numerator shall be the Current Market Price (determined as
provided in paragraph (h) of this Section) on such date less the amount
of cash to be distributed at such time applicable to one share of
Common Stock and the denominator shall be such Current Market Price,
such reduction to become effective immediately prior to the opening of
business on the day after such date.
(f) In case a tender offer made by the Company or any
Subsidiary for all or any portion of Common Stock shall be consummated
and such tender offer shall involve an aggregate consideration having a
fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution)
as of the last time (the "Expiration Time") that tenders may be made
pursuant to such tender offer (as it shall have been amended) that,
together with (A) the aggregate of the cash plus the fair market value
(as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) as of the Expiration
Time of the other consideration paid in respect of any other tender
offer by the Company or a Subsidiary for all or any portion of Common
Stock consummated within the 12 months preceding the Expiration Time
and in respect of which no conversion price adjustment pursuant to this
paragraph (f) has been made previously and (B) the aggregate amount of
any distributions to all holders of Common Stock made exclusively in
cash within the 12 months preceding the Expiration Time and in respect
of which no conversion price adjustment pursuant to paragraph (e) of
this Section has been made previously, exceeds 15% of the product of
the Current Market Price (determined as provided in paragraph (h) of
this Section) immediately prior to the Expiration Time times the number
of shares of Common Stock outstanding (including any tendered shares)
at the Expiration Time, the conversion price shall be reduced by
multiplying the conversion price in effect immediately prior to the
Expiration Time by a fraction of which the numerator shall be (x) the
product of the Current Market Price (determined as provided in
paragraph (h) of this Section) immediately prior to the Expiration Time
times the number of shares of Common Stock outstanding (including any
tendered shares at the Expiration Time) minus (y) the fair market value
(determined as aforesaid) of the aggregate consideration payable to
shareholders upon consummation of such tender offer and the denominator
shall be the product of (A) such Current Market Price times (B) such
number of outstanding shares at the Expiration Time minus the number of
shares accepted for payment in such tender offer (the "Purchased
Shares"), such reduction to become effective immediately prior to the
opening of business on the day following the Expiration Time; provided,
however, that if the number of Purchased Shares or the aggregate
consideration
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payable therefor have not been finally determined by such opening of
business, the adjustment required by this paragraph (f) shall, pending
such final determination, be made based upon the preliminarily
announced results of such tender offer, and, after such final
determination shall have been made, the adjustment required by this
paragraph (f) shall be made based upon the number of Purchased Shares
and the aggregate consideration payable therefor as so finally
determined.
(g) The reclassification of Common Stock into securities
which include securities other than Common Stock (other than any
reclassification upon a consolidation or merger to which Section 1311
applies) shall be deemed to involve (i) a distribution of such
securities other than Common Stock to all holders of Common Stock (and
the effective date of such reclassification shall be deemed to be "the
date fixed for the determination of shareholders entitled to such
distribution" within the meaning of paragraph (d) of this Section), and
(ii) a subdivision or combination, as the case may be, of the number of
shares of Common Stock outstanding immediately prior to such
reclassification into the number of shares of Common Stock outstanding
immediately thereafter (and the effective date of such reclassification
shall be deemed to be "the day upon which such subdivision becomes
effective" or "the day upon which such combination becomes effective,"
as the case may be, and "the day upon which such subdivision or
combination becomes effective" within the meaning of paragraph (c) of
this Section).
Rights or warrants issued by the Company to all holders of
Common Stock entitling the holders thereof to subscribe for or purchase
shares of Common Stock (either initially or under certain
circumstances), which rights or warrants (i) are deemed to be
transferred with such shares of Common Stock, (ii) are not exercisable
and (iii) are also issued in respect of future issuances of Common
Stock, in each case in clauses (i) through (iii) until the occurrence
of a specified event or events ("Trigger Event"), shall for purposes of
this Section 1304 not be deemed issued until the occurrence of the
earliest Trigger Event. If any such rights or warrants, including any
such existing rights or warrants distributed prior to the date of this
Indenture are subject to subsequent events, upon the occurrence of each
of which such rights or warrants shall become exercisable to purchase
different securities, evidences of indebtedness or other assets, then
the occurrence of each such event shall be deemed to be such date of
issuance and record date with respect to new rights or warrants (and a
termination or expiration of the existing rights or warrants without
exercise by the holder thereof). In addition, in the event of any
distribution (or deemed distribution) of rights or warrants, or any
Trigger Event with respect thereto, that was counted for purposes of
calculating a distribution amount for which an adjustment to the
conversion price under this Section 1304 was made, (1) in the case of
any such rights or warrants which shall all have been redeemed or
repurchased without exercise by any holders thereof, the conversion
price shall be readjusted upon such final redemption or repurchase to
give effect to such distribution or Trigger Event, as the case may be,
as though it were a cash distribution, equal to the per share
redemption or repurchase price received by a holder or holders of
Common Stock with respect to such rights or warrants (assuming such
holder had retained such rights
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or warrants), made to all holders of Common Stock as of the date of
such redemption or repurchase, and (2) in the case of such rights or
warrants which shall have expired or been terminated without exercise
by any holders thereof, the conversion price shall be readjusted as if
such rights and warrants had not been issued.
(h) For the purpose of any computation under this
paragraph and paragraphs (b), (d) and (e) of this Section, the current
market price per share of Common Stock (the "Current Market Price") on
any date shall be deemed to be the average of the daily Closing Prices
for the five consecutive Trading Days selected by the Company
commencing not more than 20 Trading Days before, and ending not later
than, the date in question; provided, however, that (i) if the "ex"
date for any event (other than the issuance or distribution requiring
such computation) that requires an adjustment to the conversion price
pursuant to paragraph (a), (b), (c), (d), (e) or (f) above occurs on or
after the 20th Trading Day prior to the date in question and prior to
the "ex" date for the issuance or distribution requiring such
computation, the Closing Price for each Trading Day prior to the "ex"
date for such other event shall be adjusted by multiplying such Closing
Price by the same fraction by which the conversion price is so required
to be adjusted as a result of such other event, (ii) if the "ex" date
for any event (other than the issuance or distribution requiring such
computation) that requires an adjustment to the conversion price
pursuant to paragraph (a), (b), (c), (d), (e) or (f) above occurs on or
after the "ex" date for the issuance or distribution requiring such
computation and on or prior to the date in question, the Closing Price
for each Trading Day on and after the "ex" date for such other event
shall be adjusted by multiplying such Closing Price by the reciprocal
of the fraction by which the conversion price is so required to be
adjusted as a result of such other event, and (iii) if the "ex" date
for the issuance or distribution requiring such computation is on or
prior to the date in question, after taking into account any adjustment
required pursuant to clause (ii) of this proviso, the Closing Price for
each Trading Day on or after such "ex" date shall be adjusted by adding
thereto the amount of any cash and the fair market value on the date in
question (as determined by the Board of Directors in a manner
consistent with any determination of such value for purposes of
paragraph (d) or (e) of this Section, whose determination shall be
conclusive and described in a Board Resolution) of the evidences of
indebtedness, shares of capital stock or assets being distributed
applicable to one share of Common Stock as of the close of business on
the day before such "ex" date. For the purpose of any computation under
paragraph (f) of this Section, the Current Market Price on any date
shall be deemed to be the average of the daily Closing Prices for the
five consecutive Trading Days selected by the Company commencing on or
after the latest (the "Commencement Date") of (i) the date 20 Trading
Days before the date in question, (ii) the date of commencement of the
tender offer requiring such computation and (iii) the date of the last
amendment, if any, of such tender offer involving a change in the
maximum number of shares for which tenders are sought or a change in
the consideration offered, and ending not later than the Expiration
Time of such tender offer; provided, however, that if the "ex" date for
any event (other than the tender offer requiring such computation) that
requires an adjustment to the conversion price pursuant to paragraph
(a), (b), (c), (d), (e) or (f) above occurs on or after the
Commencement Date and prior to the
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Expiration Time for the tender offer requiring such computation, the
Closing Price for each Trading Day prior to the "ex" date for such
other event shall be adjusted by multiplying such Closing Price by the
same fraction by which the conversion price is so required to be
adjusted as a result of such other event. The closing price for any
Trading Day (the "Closing Price") shall be the last reported sales
price regular way or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices regular
way, in either case on the New York Stock Exchange or, if the Common
Stock is not listed or admitted to trading on such exchange, on the
principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if not listed or admitted to trading
on any national securities exchange, on the Nasdaq Stock Market's
National Market or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or quoted on such National
Market, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange
member firm selected from time to time by the Company for that purpose.
For purposes of this paragraph, the term "Trading Day" means each
Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on
which securities are generally not traded on the applicable securities
exchange or in the applicable securities market and the term "'ex'
date," (i) when used with respect to any issuance or distribution,
means the first date on which the Common Stock trades regular way on
the relevant exchange or in the relevant market from which the Closing
Prices were obtained without the right to receive such issuance or
distribution, (ii) when used with respect to any subdivision or
combination of shares of Common Stock, means the first date on which
the Common Stock trades regular way on such exchange or in such market
after the time at which such subdivision or combination becomes
effective, and (iii) when used with respect to any tender offer means
the first date on which the Common Stock trades regular way on such
exchange or in such market after the last time that tenders may be made
pursuant to such tender offer (as it shall have been amended).
(i) The Company may make such reductions in the
conversion price, in addition to those required by paragraphs (a), (b),
(c), (d), (e) and (f) of this Section, (i) to the extent permitted by
law, by any amount for any period of at least 20 days or (ii) as it
considers to be advisable (as evidenced by a Board Resolution) in order
that any event treated for federal income tax purposes as a dividend of
stock or stock rights shall not be taxable to the holders of Common
Stock or, if that is not possible, to diminish any income taxes that
are otherwise payable because of such event.
(j) No adjustment in the conversion price shall be
required unless such adjustment (plus any other adjustments not
previously made by reason of this paragraph (j)) would require an
increase or decrease of at least 1% in the conversion price; provided,
however, that any adjustments which by reason of this paragraph (j) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment.
(k) Notwithstanding any other provision of this Section
1304, no adjustment to the conversion price shall reduce the conversion
price below the then par value per share of
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the Common Stock, and any such purported adjustment shall instead
reduce the conversion price to such par value. The Company hereby
covenants not to take any action to increase the par value per share of
the Common Stock.
SECTION 1305. Notice of Adjustments of Conversion Price.
Whenever the conversion price is adjusted as herein provided:
(a) the Company shall compute the adjusted conversion
price in accordance with Section 1304 and shall prepare an Officers'
Certificate signed by the Chief Financial Officer or Treasurer of the
Company setting forth the adjusted conversion price and showing in
reasonable detail the facts upon which such adjustment is based, and
such certificate shall forthwith be filed (with a copy to the Trustee)
at each office or agency maintained for the purpose of conversion of
Securities pursuant to Section 1003; and
(b) a notice stating that the conversion price has been
adjusted and setting forth the adjusted conversion price shall
forthwith be prepared, and as soon as practicable after it is prepared,
such notice shall be mailed by the Company to all Holders at their last
addresses as they shall appear in the Security Register. In the case of
any adjustment pursuant to Section 1304(i)(i), such notice shall be
mailed at least 15 days before the date the reduced conversion price
shall take effect and shall state the reduced conversion price and the
period it will be in effect.
SECTION 1306. Notice of Certain Corporate Action.
In case:
(a) the Company shall declare a dividend (or any other
distribution) on Common Stock payable (i) otherwise than exclusively in
cash or (ii) exclusively in cash in an amount that would require a
conversion price adjustment pursuant to paragraph (e) of Section 1304;
or
(b) the Company shall authorize the granting to the
holders of Common Stock rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any other rights
(excluding shares of capital stock or options for capital stock issued
pursuant to a benefit plan for employees, officers or directors of the
Company); or
(c) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding shares of Common Stock),
or of any consolidation or merger to which the Company is a party and
for which approval of any stockholders of the Company is required, or
of the sale or transfer of all or substantially all of the properties
and assets of the Company; or
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(d) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(e) the Company or any Subsidiary shall commence a tender
offer for all or a portion of outstanding shares of Common Stock (or
shall amend any such tender offer to change the maximum number of
shares being sought or the amount or type of consideration being
offered therefor);
then the Company shall cause to be filed at each office or agency maintained
pursuant to Section 1003, and shall cause to be mailed to all Holders at their
last addresses as they shall appear in the Security Register, at least 21 days
(or 11 days in any case specified in clause (a), (b) or (e) above) prior to the
applicable record, effective or expiration date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution or granting of rights or warrants, or, if a record is not
to be taken, the date as of which the holders of Common Stock of record who will
be entitled to such dividend, distribution, rights or warrants are to be
determined, (y) the date on which such reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up,
or (z) the date on which such tender offer commenced, the date on which such
tender offer is scheduled to expire unless extended, the consideration offered
and the other material terms thereof (or the material terms of any amendment
thereto). Neither the failure to give any such notice nor any defect therein
shall affect the legality or validity of any action described in clauses (a)
through (e) of this Section 1306.
SECTION 1307. Company to Reserve Common Stock.
The Company shall at all times reserve and keep available, free from
preemptive rights, out of the authorized but unissued Common Stock or out of the
Common Stock held in treasury, for the purpose of effecting the conversion of
Securities, the full number of shares of Common Stock then issuable upon the
conversion of all outstanding Securities.
SECTION 1308. Taxes on Conversions.
The Company will pay any and all taxes that may be payable in respect
of the issue or delivery of shares of Common Stock on conversion of Securities
pursuant hereto. The Company shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that of the Holder of
the Security or Securities to be converted, and no such issue or delivery shall
be made unless and until the Person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax has been paid.
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SECTION 1309. Covenant as to Common Stock.
The Company covenants that all shares of Common Stock which may be
issued upon conversion of Securities will upon issue be fully paid and
nonassessable and, except as provided in Section 1308, the Company will pay all
taxes, liens and charges with respect to the issue thereof.
SECTION 1310. Cancellation of Converted Securities.
All Securities delivered for conversion shall be delivered to the
Trustee to be canceled by or at the direction of the Trustee, which shall
dispose of the same as provided in Section 309.
SECTION 1311. Provisions of Consolidation, Merger or Sale of Assets.
In case of any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock) or any sale or
other transfer of all or substantially all of the properties and assets of the
Company, the Person formed by such consolidation or resulting from such merger
or which acquires such properties and assets, as the case may be, shall execute
and deliver to the Trustee a supplemental indenture providing that the Holder of
each Security then Outstanding shall have the right thereafter, during the
period such Security shall be convertible as specified in Section 1301, to
convert such Security only into the kind and amount of securities, cash and
other property, if any, receivable upon such consolidation, merger, sale or
transfer by a holder of the number of shares of Common Stock into which such
Security might have been converted immediately prior to such consolidation,
merger, sale or transfer, assuming such holder of Common Stock (i) is not a
Person with which the Company consolidated or into which the Company merged or
which merged into the Company or to which such sale or transfer was made, as the
case may be (a "Constituent Person"), or an Affiliate of a Constituent Person
and (ii) failed to exercise his rights of election, if any, as to the kind or
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer (provided that if the kind or amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer is not the same for each share of Common Stock held immediately
prior to such consolidation, merger, sale or transfer by other than a
Constituent Person or an Affiliate thereof and in respect of which such rights
of election shall not have been exercised ("nonelecting share"), then for the
purpose of this Section the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by each
nonelecting share shall be deemed to be the kind and amount so receivable per
share by a plurality of the nonelecting shares). Such supplemental indenture
shall provide for adjustments which, for events subsequent to the effective date
of such supplemental indenture, shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article. The above
provisions of this Section shall similarly apply to successive consolidations,
mergers, sales or transfers.
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SECTION 1312. Trustee's Disclaimer.
The Trustee has no duty to determine when an adjustment under this
Article Thirteen should be made, how it should be made or what such adjustment
should be, but may accept as conclusive evidence of the correctness of any such
adjustment, and shall be protected in relying upon, the Officers' Certificate
with respect thereto which the Company is obligated to file with the Trustee
pursuant to Section 1305. The Trustee makes no representation as to the validity
or value of any securities or assets issued upon conversion of Securities, and
the Trustee shall not be responsible for the Company's failure to comply with
any provisions of this Article Thirteen.
ARTICLE FOURTEEN
Right to Require Repurchase
SECTION 1401. Right to Require Repurchase.
In the event that there shall occur a Repurchase Event (as defined in
Section 1406), then each Holder shall have the right, at such Holder's option,
to require the Company to purchase, and upon the exercise of such right, the
Company shall, subject to the provisions of Sections 1203 and 1204, purchase,
all or any part of such Holder's Securities on the date (the "Repurchase Date")
that is no more than 30 days after the date the Company gives notice of the
Repurchase Event as contemplated in Section 1402(a) at a price (the "Repurchase
Price") equal to 100% of the principal amount thereof, together with accrued and
unpaid interest thereon to the Repurchase Date.
SECTION 1402. Notice; Method of Exercising Repurchase Right.
(a) On or before the 30th day after the occurrence of a
Repurchase Event, the Company, or at the request of the Company
received by the Trustee at least 40 days prior to the Repurchase Date,
the Trustee (in the name and at the expense of the Company), shall give
notice of the occurrence of the Repurchase Event and of the repurchase
right set forth herein arising as a result thereof by first-class mail,
postage prepaid, to the Trustee and to each Holder of the Securities at
such Holder's address appearing in the Security Register. The Company
shall also deliver a copy of such notice of a repurchase right to the
Trustee.
Each notice of a repurchase right shall state:
(1) the event constituting the Repurchase Event
and the date thereof,
(2) the Repurchase Date,
(3) the date by which the repurchase right must
be exercised,
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(4) the Repurchase Price, and
(5) the procedures a Holder must follow to
exercise a repurchase right.
If any of the Securities subject to a repurchase offer 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 thereto.
No failure of the Company to give the foregoing notice shall
limit any Holder's right to exercise a repurchase right. The Trustee
shall have no affirmative obligation to determine if there shall have
occurred a Repurchase Event.
(b) To exercise a repurchase right, a Holder shall
deliver to the Company (or an agent designated by the Company for such
purpose in the notice referred to in (a) above) and to the Trustee on
or before the close of business on the Repurchase Date (i) written
notice of the Holder's exercise of such right, which notice shall set
forth the name of the Holder, the principal amount of the Security or
Securities (or portion of a Security) to be repurchased, and a
statement that an election to exercise the repurchased right is being
made thereby, and (ii) any Definitive Security with respect to which
the repurchase right is being exercised, duly endorsed for transfer to
the Company. Such written notice shall be irrevocable. If the
Repurchase Date falls between any Regular Record Date and the next
succeeding Interest Payment Date, Securities to be repurchased must be
accompanied by payment from the Holder of an amount equal to the
interest thereon which the registered Holder thereof is to receive on
such Interest Payment Date.
In the event a repurchase right shall be exercised in
accordance with the terms hereof, the Company shall on the Repurchase
Date pay or cause to be paid in cash to the Holder thereof the
Repurchase Price of the Security or Securities as to which the
repurchase right has been exercised, together with accrued and unpaid
interest thereon to the Repurchase Date. In the event that a repurchase
right is exercised with respect to less than the entire principal
amount of a surrendered Security, the Company shall execute and deliver
to the Trustee and the Trustee shall authenticate for issuance in the
name of the Holder a new Security or Securities in the aggregate
principal amount of the unrepurchased portion of such surrendered
security.
SECTION 1403. Deposit of Repurchase Price.
On or prior to 11:00 a.m. (New York time) on the Repurchase 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 1004) an amount of money in same day funds sufficient to pay
the Repurchase Price of, and (except if the Repurchase Date shall be an Interest
Date) accrued interest on, all the Securities which are to be repaid on the
Repurchase Date.
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SECTION 1404. Securities Not Repurchased on Repurchase Date.
If any Security surrendered for repurchase shall not be so paid on the
Repurchase Date, the principal shall, until paid, continue to bear interest from
the Repurchase Date at the rate per annum borne by such Security.
SECTION 1405. Securities Repurchased in Part.
Any Security which is to be repurchased only in part shall be
surrendered at any office or agency of the Company designated for that purpose
pursuant to Section 1003 (with, if the Company or the Trustee so requires, due
endorsement by, or written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his 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
unrepurchased portion of the principal of the Security so surrendered.
SECTION 1406. Certain Definitions.
For purposes of this Article:
(a) A "Repurchase Event" shall have occurred upon the
occurrence of a Change in Control or Termination of Trading after the
date of this Indenture and on or prior to ____________, 2004.
(b) A "Change in Control" shall occur when :
(i) all or substantially all of the properties
and assets of the Company and its Subsidiaries, taken as a
whole, are sold, assigned, conveyed, transferred, leased or
otherwise disposed of either in one transaction or a series of
related transactions, to any Person;
(ii) there shall be consummated any consolidation
or merger of the Company pursuant to which Common Stock would
be converted into cash, securities or other property, in each
case other than a consolidation or merger of the Company in
which the holders of the Voting Stock of the Company
immediately prior to the consolidation or merger own, directly
or indirectly, at least a majority of the Voting Stock of the
continuing or surviving corporation immediately after such
consolidation or merger;
(iii) any person, or any persons acting together
which would constitute a "group" for purposes of Section 13(d)
of the Exchange Act, shall beneficially own (as
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defined in Rule 13d-3 under the Exchange Act) more than 50% of
the Voting Stock of the Company;
(iv) at any time 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 662/3% 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
(v) the Company is liquidated or dissolved.
(c) A "Termination of Trading" shall occur if the Common
Stock (or other common stock into which the Securities are then
convertible) is neither listed for trading on a U.S. national
securities exchange nor approved for trading on an established
automated over-the-counter trading market in the United States.
ARTICLE FIFTEEN
Guarantees
SECTION 1501. Unconditional Guarantees.
The Company shall cause each Wholly-owned Subsidiary Significant to
enter the Guarantee Agreement (which Guarantee Agreement shall be substantially
in the form attached hereto as Exhibit B).
SECTION 1502. Addition of Guarantors.
For as long as any Securities are outstanding, promptly but in no event
later than 30 days following the acquisition or creation of any Wholly-owned
Significant Subsidiary after the date of this Indenture, the Company shall cause
such Subsidiary to execute and deliver to the Trustee an amendment to the
Guarantee Agreement to add such Subsidiary as a Guarantor.
SECTION 1503. Subordination of Guarantees.
Each Holder of a Security, by his acceptance thereof, covenants and
agrees, that, to the extent and in the manner set forth in the Guarantee
Agreement, the payment of the principal of (and premium, if any) and interest on
the Securities as guaranteed by each Guarantor pursuant to its
85
<PAGE> 93
Guarantee is hereby expressly made subordinate and subject in right of payment
to the prior payment in full of all Senior Indebtedness of such Guarantor.
-----------------------------
This instrument may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
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<PAGE> 94
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, all as of the day and year first above written.
KCS ENERGY, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
STATE STREET BANK AND TRUST COMPANY
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
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<PAGE> 95
EXHIBIT A
INITIAL GUARANTORS
<TABLE>
<CAPTION>
NAME JURISDICTION OF ORGANIZATION
---- ----------------------------
<S> <C>
</TABLE>
A-1
<PAGE> 96
EXHIBIT B
GUARANTEE AGREEMENT
THIS GUARANTEE AGREEMENT, dated as of December ___, 1997, is
among the entities listed on the signature pages hereof (collectively, the
"Guarantors") and State Street Bank and Trust Company, as Trustee (the
"Trustee").
WHEREAS KCS Energy, Inc. (the "Company") and the Trustee, have
entered into an Indenture dated as of even date thereof regarding up to
$143,750,000 in aggregate principal amount of _____% Convertible Subordinated
Notes due 2004 of the Company (the "Securities");
NOW, THEREFORE, in accordance with Article Fifteen of the
Indenture and for value received, each of the undersigned Guarantors jointly and
severally guarantees to the Trustee and to the holders of the Securities (the
"Holders") the punctual payment and performance of the obligations of the
Company under the Indenture, as the direct and primary obligation of each
Guarantor, waiving all demands and suretyship defenses.
Any term used herein and not otherwise defined herein shall
have the meaning assigned to such term in the Indenture.
ARTICLE I
The Guarantees
SECTION 101. Unconditional Guarantees. (a) For value received,
the Guarantors, jointly and severally, hereby fully, unconditionally and
absolutely guarantee (the "Guarantees") to the Holders and to the Trustee the
complete and punctual payment and performance by the Company of the obligations
of the Company under the Indenture (the "Obligations"), and further agree to pay
any and all reasonable expenses (including, without limitation, all reasonable
fees and disbursements of counsel) which may be paid or incurred by the Trustee
or the Holders in enforcing their rights under the Guarantees.
(b) Failing payment or performance by the Company when due of
any Obligation guaranteed pursuant to the Guarantees, for whatever reason, the
Guarantors, jointly and severally, will be obligated to pay or perform the same
immediately. Each of the Guarantors hereby agrees that its obligations hereunder
shall be full, unconditional and absolute, irrespective of the validity or
enforceability of the Securities, the Guarantees or the Indenture, the absence
of any action to enforce the same, any waiver or consent by any Holder with
respect to any provisions hereof or thereof, any release of any other Guarantor,
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 of the Guarantors hereby agrees that
in the event of a default in payment of the principal of, or premium, if any, or
interest on the Securities, whether at
<PAGE> 97
the Stated Maturity or by declaration of acceleration, call for redemption or
otherwise, legal proceedings may be instituted by the Trustee on behalf of the
Holders or, subject to Section 507 of the Indenture, by the Holders, on the
terms and conditions set forth in the Indenture, directly against each of the
Guarantors to enforce the Guarantees without first proceeding against the
Company.
(c) The obligations of each Guarantor herein shall be as
aforesaid full, unconditional and absolute and shall not be impaired, modified,
released or limited by any occurrence or condition whatsoever, including,
without limitation, (i) any compromise, settlement, release, waiver, renewal,
extension, indulgence or modification of, or any change in, any of the
obligations and liabilities of the Company or any Guarantor contained in the
Securities or the Indenture, (ii) any impairment, modification, release or
limitation of the liability of the Company, any Guarantor or any of their
estates in bankruptcy, or any remedy for the enforcement thereof, resulting from
the operation of any present or future provision of Title 11, U.S. Code or any
similar federal or state law for the relief of debtors, as amended, or other
statute or from the decision of any court, (iii) the assertion or exercise by
the Company, any Guarantor or the Trustee of any rights or remedies, (iv) the
assignment or the purported assignment of any property as security for the
Securities, including all or any part of the rights of the Company under the
Indenture, (v) the extension of the time for payment by the Company or any
Guarantor of any payments or other sums or any part thereof owing or payable
under any of the terms and provisions of the Securities or the Indenture or of
the time for performance by the Company or any Guarantor of any other
obligations under or arising out of any such terms and provisions or the
extension or the renewal of any thereof, (vi) the modification or amendment
(whether material or otherwise) of any duty, agreement or obligation of the
Company or any Guarantor set forth herein or in the Indenture or (vii) the
voluntary or involuntary liquidation, dissolution, sale or other disposition of
all or substantially all of the assets, marshalling of assets and liabilities,
receivership, insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization of, or other similar proceeding affecting, the Company or any of
the Guarantors or any of their respective assets.
(d) Each Guarantor hereby (i) waives diligence, presentment,
demand of payment, filing of claims with a court in the event of the merger,
insolvency or bankruptcy of the Company or a Guarantor, and all demands
whatsoever, (ii) acknowledges that any agreement, instrument or document
evidencing the Guarantees may be transferred and that the benefit of its
obligations hereunder shall extend to each holder of any agreement, instrument
or document evidencing the Guarantees without notice to them and (iii) covenants
that its Guarantee will not be discharged except by complete performance of the
Guarantees or upon payment, performance and satisfaction in full by the Company
of its Obligations. Each Guarantor further agrees that if at any time all or any
part of any payment theretofore applied by any Person to any Guarantee is, or
must be, rescinded or returned for any reasons whatsoever, including without
limitation, the insolvency, bankruptcy or reorganization of the Company or any
Guarantor, such Guarantee shall, to the extent that such payment is or must be
rescinded or returned, be deemed to have continued in existence notwithstanding
such application, and the Guarantees shall continue to be effective or be
reinstated as though such application had not been made.
(e) Each Guarantor shall be subrogated to all rights of the
Holders and the Trustee against the Company in respect of any amounts paid by
such Guarantor pursuant to the provisions of the Indenture, provided, however,
that no Guarantor shall be entitled to enforce or to receive any
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<PAGE> 98
payments arising out of, or based upon, such right of subrogation until all of
the Securities and the Guarantees shall have been paid in full or discharged.
SECTION 102. Limitation of Guarantor's Liability. Each
Guarantor and by its acceptance hereof each Holder confirms that it is the
intention of all such parties that the guarantee by such Guarantor pursuant to
its Guarantee not constitute a fraudulent transfer or conveyance for purposes of
any federal, state or foreign law. To effectuate the foregoing intention, the
Holders and each Guarantor hereby irrevocably agree that the obligations of each
Guarantor under its Guarantee shall be limited to the maximum amount as will,
after giving effect to all other contingent and fixed liabilities of such
Guarantor and after giving effect to any collections from payments made by or on
behalf of any other Guarantor in respect of the obligations of such other
Guarantor under its Guarantee or pursuant to Section 103, result in the
obligations of such Guarantor under its Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal, state or foreign law.
SECTION 103. Contribution. In order to provide for just and
equitable contribution among the Guarantors, the Guarantors agree, inter se,
that, in the event any payment or distribution is made by any Guarantor (a
"Funding Guarantor") under its Guarantee, such Funding Guarantor shall be
entitled to a contribution from each other Guarantor in a pro rata amount based
on the Adjusted Net Assets (defined below) of each Guarantor (including the
Funding Guarantor) for all payments, damages and expenses incurred by the
Funding Guarantor in discharging the Company's obligations with respect to the
Securities or any other Guarantor's obligations with respect to its Guarantee.
For purposes of this Section, Adjusted Net Assets of a Guarantor at any date
shall mean the lesser of: (x) the amount by which the fair value of the property
of such Guarantor at such date exceeds the total amount of liabilities,
including, without limitation, the probable amount of contingent liabilities
(after giving effect to all other fixed and contingent liabilities incurred or
assumed on such date) of such Guarantor at such date, but excluding liabilities
under the Guarantee of such Guarantor, and (y) the amount by which the present
fair saleable value of the assets of such Guarantor at such date exceeds the
amount that will be required to pay the probable liability of such Guarantor on
its debts (after giving effect to all fixed and contingent liabilities incurred
or assumed on such date), excluding debt in respect of the Guarantee of such
Guarantor, as they become absolute and matured.
SECTION 104. Addition of Guarantors. For as long as any
Guarantees are required to remain in effect pursuant to the terms of the
Indenture, promptly but in no event later than 30 days following the acquisition
or creation of any Wholly-owned Significant Subsidiary after the date of the
Indenture, this Guaranty Agreement shall be amended to add such Subsidiary as a
Guarantor.
SECTION 105. Release of Guarantee. Notwithstanding anything to
the contrary contained in this Article I, in the event that any of the
Guarantors (i) shall no longer be a member of an affiliated group (within the
meaning of Section 279(g) of the Internal Revenue Code of 1986, as amended)
which includes the Company, including, without limitation, upon the sale or
disposition (whether by merger, stock purchase, asset sale or otherwise of such
Guarantor), or (ii) shall no longer be a Significant Subsidiary (as certified to
the Trustee by the Company in an Officers' Certificate), such Guarantor shall be
released from all liability hereunder and the Guarantee
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<PAGE> 99
of such Guarantor shall be of no further force or effect. In any such case,
upon a Company Request the Trustee shall execute and deliver, at the Company's
expense, an instrument evidencing such release.
ARTICLE II
Subordination of Guarantees
SECTION 201. Guarantees Subordinate to Senior Indebtedness.
Each Guarantor covenants and agrees, and pursuant to the Indenture each Holder,
by his acceptance thereof, likewise covenants and agrees, that the payment of
the principal of (and premium, if any) and interest on the Securities as
guaranteed by each Guarantor pursuant to its Guarantee are hereby expressly made
subordinate and, to the same extent and in the same manner as the payment of the
principal of (and premium, if any) and interest on the Securities is subject in
right of payment to the prior payment in full of all Senior Indebtedness of the
Company, subject in right of payment to the prior payment in full of all Senior
Indebtedness of such Guarantor.
ARTICLE III
Trust Indenture Act
SECTION 301. Trust Indenture Act; Application. This Guarantee
Agreement is subject to the provisions of the Trust Indenture Act that are
required to be part of this Guarantee Agreement and shall, to the extent
applicable, be governed by such provisions; and if and to the extent that any
provision of this Guarantee Agreement limits, qualifies or conflicts with the
duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act,
such imposed duties shall control.
SECTION 302. List of Holders of Securities. (a) The Guarantors
shall provide or shall cause to be provided to the Trustee (unless the Trustee
is otherwise the registrar of the Securities) a list, in such form as the
Trustee may reasonably require, of the names and addresses of the Holders of the
Securities ("List of Holders"), (i) semi-annually, not more than 15 days after
each Regular Record Date, as of such Regular Record Date, and (ii) at any other
time within 30 days of receipt by the Guarantors of a written request for a List
of Holders as of a date no more than 15 days before such List of Holders is
given to the Trustee; provided, however, that the Guarantors shall not be
obligated to provide such List of Holders at any time the List of Holders does
not differ from the most recent List of Holders given to the Trustee by the
Guarantors of the Company.
(b) The Trustee shall comply with its obligations under
Sections 311(a), 311(b) and Section 312(b) of the Trust Indenture Act.
SECTION 303. Reports by the Trustee. Within 60 days after May
15 of each year, the Trustee shall provide to the Holders of the Securities such
reports as are required by Section 313 of the Trust Indenture Act, if any, in
the form and in the manner provided by Section 313 of the Trust Indenture Act.
The Trustee shall also comply with the requirements of Section 313(d) of the
Trust Indenture Act.
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<PAGE> 100
SECTION 304. Periodic Reports to Trustee. The Guarantors shall
provide or shall cause to be provided to the Trustee such documents, reports and
information as required by Section 314 (if any) and the compliance certificate
required by Section 314 of the Trust Indenture Act in the form, in the manner
and at the times required by Section 314 of the Trust Indenture Act. Delivery of
such reports, information and documents to the Trustee is for informational
purposes only and the Trustee's receipt of such shall not constitute
constructive notice of any information contained therein or determinable from
information contained therein, including the Guarantors' compliance with any of
their covenants hereunder (as to which the Trustee is entitled to rely
exclusively on Officers' Certificates).
SECTION 305. Evidence of Compliance with Conditions Precedent.
The Guarantors shall provide to the Trustee such evidence of compliance with any
conditions precedent, if any, provided for in this Guarantee Agreement that
relate to any of the matters set forth in Section 314(c) of the Trust Indenture
Act. Any certificate or opinion required to be given by an officer pursuant to
Section 314(c)(1) may be given in the form of an Officers' Certificate.
SECTION 306. Events of Default; Waiver. The Holders of not
less than a majority in principal amount of Outstanding Securities may, on
behalf of the Holders of all of the Securities, waive any past default hereunder
and its consequences. Upon such waiver, any such default shall cease to exist,
and any default arising therefrom shall be deemed to have been cured, for every
purpose of this Guarantee Agreement, but no such waiver shall extent to any
subsequent or other default or impair any right consequent thereon.
SECTION 307. Event of Default; Notice. The Trustee shall give
the Holders notice of any default hereunder known to it as and to the extent
provided by the Trust Indenture Act; provided, however, that, except in the case
of default in any payment pursuant to the Guarantees, the Trustee shall be
protected in withholding such notice if and so long as a committee of
Responsible Officers in good faith determines that the withholding of such
notice is in the interests of the holders of the Securities.
SECTION 308. Conflicting Interests. If the Trustee has or
shall acquire a conflicting interest within the meaning of the Trust Indenture
Act, the Trustee shall either eliminate such interest or resign, to the extent
and in the manner provided by, and subject to the provisions of, the Trust
Indenture Act and the Indenture.
ARTICLE IV
Miscellaneous
SECTION 401. Conditions of Effectiveness. This Guarantee
Agreement shall become effective as of the date of this Guarantee Agreement when
and if this Guarantee Agreement has been duly executed by each of the Guarantors
and the Trustee.
SECTION 402. Reference to and Effect on the Indenture. The
execution, delivery and effectiveness of this Guarantee Agreement shall not
operate as a waiver of any right,
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<PAGE> 101
power or remedy of the Trustee under the Indenture, nor constitute a waiver of
any provision of the Indenture, and the Indenture shall remain in full force and
effect and are hereby ratified and confirmed.
SECTION 403. Governing Law. This Guarantee Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 404. Headings. Section headings in this Guarantee
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Guarantee Agreement for any other purpose.
SECTION 405. Counterparts. This Guarantee Agreement may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument, and any party hereto may execute this
Guarantee Agreement by signing any such counterpart.
SECTION 406. Notices. Any notice or communication shall be in
writing and delivered in person or mailed by first class mail addressed as
follows:
if to any Guarantor or all Guarantors:
c/o KCS Energy, Inc.
379 Thornall Street
Edison, New Jersey 08837
Attention: Chief Financial Officer
if to the Trustee:
State Street Bank and Trust Company
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
SECTION 407. Rights of Holders. The Guarantors expressly
acknowledge that any Holder may institute a legal proceeding directly against
the Guarantor to enforce its rights under this Guarantee Agreement, without
first instituting a legal proceeding against the Company or any other Person and
the Holders and the Trustee shall, with respect to this Guarantee Agreement,
have all of the rights and the obligations of the Holders and the Trustee set
forth in the Indenture with respect to the Securities and the Indenture, all as
though this Guarantee Agreement were included therein and made a part thereof.
SECTION 408. Amendments and Waivers. The provisions of this
Guarantee may be amended, modified or supplemented by the Trustee and the
Guarantors, provided that, without the consent of the Holders of at least a
majority in aggregate principal amount of the Outstanding Securities, no
amendment, modification or supplement to this Guarantee Agreement shall be made
which adversely affects the rights of the Holders hereunder in any material
respect. The foregoing notwithstanding, no consent of any Holders shall be
required to (i) reflect the release of any Guarantor from its Guarantee, or the
addition of any Wholly-owned Significant Subsidiary of the Company as a
Guarantor, in the manner provided by the Indenture and this Guarantee Agreement
or (ii) 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
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<PAGE> 102
provisions with respect to matters or questions arising under this Guarantee
Agreement, provided that such action pursuant to this clause (ii) shall not
adversely affect the rights of Holders hereunder in any material respect.
SECTION 409. Severability. In the event that any one or more
of the provisions contained herein, or the application thereof in any
circumstance, is held invalid, illegal or unenforceable, the validity, legality
and enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired thereby.
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<PAGE> 103
IN WITNESS WHEREOF, the parties hereto have caused this
Guarantee Agreement to be duly executed, all as of the day and year first above
written.
GUARANTORS
[TO COME]
STATE STREET BANK AND TRUST
COMPANY, AS TRUSTEE
By:
-----------------------------------
Name:
-----------------------------
Title:
----------------------------
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<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
November 13, 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
November 14, 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
November 14, 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
November 14, 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
November 14, 1997
