<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -------------------
Commission file number 1-11698
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KCS ENERGY, INC.
---------------
(Exact name of registrant as specified in its charter)
Delaware 22-2889587
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5555 San Felipe Road, Houston, TX 77056
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 877-8006
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
(1) X Yes (2) No
------- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value: 29,268,310 shares outstanding as of
----------
November 1, 1999.
- ----------------
<PAGE> 2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Amounts in thousands except ------------------------ ------------------------
per share data) Unaudited 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Oil and gas revenue $ 33,230 $ 30,446 $ 96,906 $ 92,309
Other revenue, net 2,375 1,831 5,059 4,940
--------- --------- --------- ---------
Total revenue 35,605 32,277 101,965 97,249
Operating costs and expenses
Lease operating expenses 6,900 8,075 20,525 22,993
Production taxes 910 961 2,487 3,019
General and administrative expenses 1,683 2,873 7,313 8,465
Depreciation, depletion and amortization 11,434 15,567 38,982 43,942
Writedown of oil and gas properties -- -- -- 57,631
--------- --------- --------- ---------
Total operating costs and expenses 20,927 27,476 69,307 136,050
--------- --------- --------- ---------
Operating income (loss) 14,678 4,801 32,658 (38,801)
Interest and other income, net 223 (82) 445 117
Interest expense (10,145) (9,787) (30,046) (26,589)
--------- --------- --------- ---------
Income (loss) before income taxes 4,756 (5,068) 3,057 (65,273)
Federal and state income taxes (benefit) -- (1,487) -- (22,675)
--------- --------- --------- ---------
Net income (loss) $ 4,756 $ (3,581) $ 3,057 $ (42,598)
========= ========= ========= =========
Basic and dilutive earnings (loss)
per share of common stock $ 0.16 $ (0.12) $ 0.10 $ (1.44)
========= ========= ========= =========
Weighted average shares outstanding 29,268 29,537 29,262 29,486
========= ========= ========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
2
<PAGE> 3
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) Unaudited 1999 1998
------------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 20,895 $ 876
Trade accounts receivable, net 27,355 36,548
Other current assets 6,539 5,650
--------- ---------
Current assets 54,789 43,074
--------- ---------
Oil and gas properties, full cost method, net 217,342 248,582
Other property, plant and equipment, net 4,957 7,910
--------- ---------
Property, plant and equipment, net 222,299 256,492
--------- ---------
Deferred charges and other assets 9,540 9,312
--------- ---------
$ 286,628 $ 308,878
========= =========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 14,092 $ 24,267
Accrued liabilities 29,352 25,584
Bank credit facilities 117,011 135,700
Senior and subordinated notes 274,702 --
--------- ---------
Current liabilities 435,157 185,551
--------- ---------
Deferred credits and other liabilities 2,600 2,896
--------- ---------
Senior and subordinated notes -- 274,635
--------- ---------
Stockholders' equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 31,435,406 and
31,420,231, respectively 314 314
Additional paid-in capital 145,098 145,077
Retained earnings (deficit) (291,800) (294,854)
Less treasury stock, 2,167,096 shares, at cost (4,741) (4,741)
--------- ---------
Total stockholders' equity (151,129) (154,204)
--------- ---------
$ 286,628 $ 308,878
========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
<PAGE> 4
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
(Dollars in thousands) Unaudited 1999 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,057 $ (42,598)
Non-cash charges (credits):
Depreciation, depletion and amortization 38,982 43,942
Writedown of oil and gas properties - 57,631
Deferred income taxes - (20,130)
Other non-cash charges and credits, net 2,024 2,038
---------- ---------
44,063 40,883
Net changes in assets and liabilities:
Trade accounts receivable 9,193 6,718
Accounts payable and accrued liabilities (5,822) (29,522)
Other, net (2,379) (2,656)
---------- ---------
Net cash provided by operating activities 45,055 15,423
---------- ---------
Cash flows from investing activities:
Investment in oil and gas properties (31,077) (143,214)
Net proceeds from the sale of oil and gas properties 25,297 4,895
Other property, plant and equipment, net 1,039 (2,189)
---------- ---------
Net cash used in investing activities (4,741) (140,508)
---------- ---------
Cash flows from financing activities:
Proceeds from debt 16,300 255,200
Repayments of debt (34,989) (127,700)
Proceeds from issuance of common stock 21 865
Deferred financing costs (1,042) (3,787)
Other, net (585) (3,119)
---------- ---------
Net cash provided by (used in) financing activities (20,295) 121,459
---------- ---------
Net increase in cash and cash equivalents 20,019 (3,626)
Cash and cash equivalents at beginning of period 876 4,802
---------- ---------
Cash and cash equivalents at end of period $ 20,895 $ 1,176
========== =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
<PAGE> 5
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed interim financial statements included herein have been prepared
by KCS Energy, Inc. (KCS or Company), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and reflect all
adjustments which are of a normal recurring nature and which, in the opinion of
management, are necessary for a fair statement of the results for interim
periods. Certain information and footnote disclosures have been condensed or
omitted pursuant to such rules and regulations. Although KCS believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these condensed financial statements be read in conjunction with
the financial statements and the notes thereto included in the Company's latest
annual report to stockholders. Certain previously reported amounts have been
reclassified to conform with current year presentations.
2. Financial Condition
During 1998, due to very low prices for natural gas and crude oil and
disappointing performance of certain of the Company's Rocky Mountain prospects,
the Company incurred significant losses, due primarily to $268.5 million of
pretax non-cash ceiling writedowns of its oil and gas assets and a reduction
from $113.9 million ($93.9 million of which relates to the 1998 non-cash ceiling
test writedowns) to zero in the book value of net deferred tax assets. As a
result of these charges, net loss in 1998 was increased by $288.4 million. Also
as a result of these adjustments, the Company had negative stockholders' equity
of $154.2 million as of December 31, 1998 ($151.1 million at September 30, 1999)
and is in default of certain covenants in its bank credit facilities. While the
defaults continue, the Company cannot borrow under the credit facilities. In
addition, the Company's independent public accountants issued a modified report
with respect to the ability of the Company to continue as a going concern, which
also constitutes a default under the bank credit facilities.
On May 18, 1999, the Company and its bank lenders entered into
forbearance agreements which provided that the lenders would defer
redetermination of the borrowing base until July 1, 1999 and would refrain from
exercising their rights and remedies as a result of the existing defaults until
June 30, 1999. Under these initial forbearance agreements the Company committed
50% of monthly cash flow to payments of principal, with a minimum of $2 million
monthly. In addition, a portion of the proceeds from the sale of any of the
Company's oil and gas properties were dedicated to payment of principal under
the bank credit facilities.
On July 7, 1999 the lenders under each of the bank credit facilities
reset the Company's borrowing base, which had been $165 million at December 31,
1998, to $91 million. The principal amount outstanding under the bank loans at
June 30, 1999 was $126.7 million. Because the Company did not make this $35.7
million additional lump-sum payment, a payment default occurred. The lenders
declared due all amounts owing under the bank loans, demanded payment and
declared in effect the default rate of interest. The bank lenders also delivered
a payment blockage notice to the indenture trustee of the 8.875% subordinated
notes. The Company did not make the scheduled July 15, 1999 interest payments on
both the 8.875% subordinated notes and the 11% senior
5
<PAGE> 6
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
notes, totaling $13.8 million. As a result of the payment default under the bank
loans and the interest payment default on the notes, the holders of the
requisite percentage of the Company's senior notes and senior subordinated notes
have and the indenture trustees of the senior notes and the senior subordinated
notes the right to declare the principal amount of the notes immediately due and
payable. Current liabilities at September 30, 1999 include accrued interest of
$19.6 million on the notes. The outstanding principal amount of the subordinated
notes is $125 million and the outstanding principal amount of the senior notes
is $150 million.
On July 26, 1999, the Company and its bank lenders entered into new
forbearance agreements (effective as of July 1, 1999) which provided that the
lenders would refrain from exercising their rights and remedies not previously
exercised until October 5, 1999. Subsequently, these forbearance agreements
were extended on the same terms through December 3, 1999. The lenders did not
waive the payment default but rescinded their declaration that all amounts
outstanding under the credit facilities are immediately due and payable and
effectively waived the default rate of interest. The new forbearance agreements
preclude the Company from making interest payments on its senior notes and its
subordinated notes. Under the terms of the new forbearance agreements, the
Company has committed to make monthly principal payments of $2.5 million. In
addition, a portion of the proceeds from the sale of any of the Company's oil
and gas properties will be dedicated to payment of principal under the credit
facilities. From the time that the original forbearance agreements were entered
into, the Company has made principal repayments to its banks of $33 million,
reducing the outstanding loans from $150 million to $117 million as of
September 30, 1999. When the forbearance agreements expire, the lenders will be
able to exercise their rights under the credit agreements, including declaring
the principal balances immediately due and payable.
As a result of the above factors, there is substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of the asset carrying amounts or the amounts and classifications
of liabilities that might result should the Company be unable to continue as a
going concern. See Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources and Notes 2 and 7 to
Consolidated Financial Statements included in the Company's 1998 Annual Report
to Stockholders.
To improve its financial situation, the Company has: 1) Reduced planned
1999 capital expenditures; 2) Sold non-core properties raising net proceeds of
approximately $25 million during the nine months ended September 30, 1999; 3)
Reduced the Company's workforce by approximately 20% in 1999 and over 30% since
the beginning of 1998; 4) Closed the Company's New Jersey corporate office
effective May 1, 1999 and transferred all functions to its Houston, Texas
facility, and 5) Frozen senior management salaries for 1999.
The Company has already exceeded its planned 1999 property sales with
net proceeds of $25.3 million from property sales completed through September
30, 1999. The Company remains current on its trade obligations and intends to
continue paying its trade obligations in the ordinary course of business.
The Company is continuing to work with its financial advisors to pursue
a restructuring transaction which would result in deleveraging the Company's
balance sheet. The Company, with the assistance of its financial advisors, has
been engaged in conversations with institutional investors holding a majority of
both classes of outstanding notes in an effort to pursue a consensual
restructuring transaction. There can be no assurances, however, of a
consummation of any restructuring or of the continuation of the forbearance
agreements after December 3, 1999. Through September 30, 1999 the Company
incurred costs in the amount of $1.3 million associated with the proposed
restructuring. These costs are included in deferred charges and other assets.
6
<PAGE> 7
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. New York Stock Exchange Listing.
In October 1999, the Company reported that it does not currently meet
the newly effective New York Stock Exchange (NYSE) continued listing standards.
These standards require total market capitalization of not less than $50 million
and total stockholders' equity of not less than $50 million. At the close of
business on November 5, 1999, the Company's total market capitalization was
approximately $29.3 million. As a result of the non-cash ceiling writedown at
December 31, 1998, the Company currently has negative stockholders' equity.
The Company has submitted a plan to the NYSE's Listings and Compliance
Committee that sets forth a strategy to enable the Company to comply with the
new standards by the June 2000 deadline established by the NYSE. That plan was
accepted by the NYSE in November 1999. The Company will be monitored quarterly
for compliance with the plan. Should the Company not meet its compliance
objectives, it will be subject to trading suspension and delisting procedures.
4. Supplemental cash flow information. The Company considers all highly liquid
debt instruments with a maturity of three months or less when purchased to be
cash equivalents. Interest payments were $22.9 million and $27.3 million for the
nine months ended September 30, 1999 and September 30, 1998, respectively.
Income tax payments were $0.1 million and $0.3 million for the nine months ended
September 30, 1999 and September 30, 1998, respectively.
5. Basic earnings per share were computed by dividing net income (loss) by the
average number of common shares outstanding during the quarter as required by
FASB Statement No. 128, "Earnings per Share" ("SFAS 128"). Diluted earnings per
share have been computed by dividing net income (loss) by the average number of
common shares outstanding plus the incremental shares that would have been
outstanding assuming the exercise of stock options and stock warrants as
applicable. A reconciliation of shares used for basic earnings per share and
those used for diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
(amounts in thousands) (amounts in thousands)
<S> <C> <C> <C> <C>
Average common stock outstanding 29,268 29,537 29,262 29,486
Average common stock equivalents 5 153 33 287
------------ ------------ ------------ -------------
Average common stock and common
stock equivalents outstanding 29,273 29,690 29,295 29,773
============ ============ ============ =============
</TABLE>
Common stock equivalents are not applicable for 1998 earnings per share as they
would be antidilutive.
7
<PAGE> 8
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. On April 27, 1999, the Fifth Court of Appeals in Dallas, Texas upheld summary
judgment in favor of the Company in the Los Santos Suit. This is one of the two
remaining Royalty Basis Suits. The royalty holders applied to the court for
reconsideration. This request for reconsideration was denied and the court
reaffirmed its previous judgment on August 17, 1999. The royalty holders applied
to the Texas Supreme Court for review on September 28, 1999. The Texas Supreme
Court has not yet determined whether it will review the matter. In the Jesus
Yzaguirre Suit, the other remaining Royalty Basis Suit, the parties were
notified on October 28, 1999, that the Fifth Court of Appeals in Dallas had
determined that oral argument would not significantly aid it in determining the
legal and factual issues presented, which are basically the same as in the Los
Santos Suit. Accordingly, the appeal will be submitted to the Fifth Court of
Appeals for decision on January 4, 2000. Reference is made to Item 3, Legal
Proceedings, in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
In another legal matter, the Company received a $1.75 million
settlement in May 1999 in connection with a lawsuit regarding a severance tax
dispute.
The Company and several of its subsidiaries have been named as
co-defendants along with numerous other industry parties in an action brought by
Jack Grynberg on behalf of the Government of the United States. The complaint,
filed under the Federal False Claims Act, alleges underpayment of royalties to
the Government of the United States as a result of alleged mismeasurement of the
volume and wrongful analysis of the heating content of natural gas produced from
federal and Native American lands. The complaint is substantially similar to
other complaints filed by Jack Grynberg on behalf of the Government of the
United States against multiple other industry parties. All of the complaints
have been consolidated in one proceeding. In April 1999, the Government of the
United States filed notice that it had decided not to intervene in these
actions. The Company believes that the allegations in the complaint are without
merit.
The Company, Kerr-McGee Corporation, Kerr-McGee Onshore LP and two of
the Company's subsidiaries have been named as defendants in a suit for a
declaratory judgment brought by Mid American Capital Company and InterCoast
Energy Company. The plaintiffs are requesting a declaration of the indemnity
obligations of the parties in connection with certain environmental and surface
restoration issues relating to the lands in Los Angeles County, California
covered by the Rancho San Francisco and Ferguson oil, gas and mineral leases.
The leases were initially owned by Kerr-McGee Onshore Oil & Gas LP and were
among the assets acquired by the Company from Mid American in 1997. The Company
believes that Kerr-McGee has indemnity obligations with respect to most of the
restoration issues and, in the event that Kerr-McGee's indemnity is unavailable,
that Mid American has indemnity obligations for 90% of any losses the Company
may incur in connection with the matter.
8
<PAGE> 9
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
During 1997 and 1998, as a result of very low prices for natural gas
and crude oil and, in 1998, disappointing performance of certain prospects in
the Rocky Mountain Region, the Company has incurred significant losses due
primarily to non-cash ceiling writedowns of its oil and gas assets and the
reduction to zero of the book value of net deferred tax assets. As a result of
these adjustments, the Company had negative stockholders' equity as of December
31, 1998 and is in default of certain covenants in its bank credit facilities.
See Note 2 to Condensed Consolidated Financial Statements, Liquidity and Capital
Resources and Notes 2 and 7 to Consolidated Financial Statements in the
Company's 1998 Annual Report to Stockholders.
During the second quarter of 1999, prices for natural gas and crude oil
began to strengthen and continued to increase during the third quarter of 1999.
The Company's averaged realized prices per Mcfe were $1.90, $2.12 and $2.48
during the first, second and third quarters of 1999, respectively. Increased gas
and oil prices together with the Company's cost reduction initiatives and
refocus on core areas of operations were the primary reasons for the significant
improvement in the Company's results of operations for the nine months ended
September 30, 1999 compared to the same period last year.
The following discussion focuses on material changes in results of
operations for the three and nine months ended September 30, 1999, compared to
the three and nine months ended September 30, 1998, and in financial condition
since December 31, 1998. All references in the following discussion related to
earnings per share relate to the Company's diluted earnings per share.
Results of Operations
Net income for the three months ended September 30, 1999 was $4.8
million, or $0.16 per share, compared to a net loss of $3.6 million, or $0.12
per share, for the same period last year. The current year three-month period
reflects significantly higher natural gas and oil prices along with
significantly lower operating and administrative expenses when compared to the
same period a year ago, partially offset by lower natural gas and oil
production.
Net income for the nine months ended September 30, 1999 was $3.1
million, or $0.10 per share, compared to a net loss of $42.6 million, or $1.44
per share for the same period last year. The loss in the prior year nine-month
period excluding a non-cash writedown of oil and gas properties of $57.6 million
($37.5 million after tax) was $5.1 million, or $0.17 per share. For the nine
months ended September 30, 1999, higher natural gas production and lower
operating and administrative expenses more than offset higher interest costs.
9
<PAGE> 10
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Revenue
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Production:
Gas (MMcf) 11,387 12,728 38,889 36,365
Oil (Mbbl) 299 428 967 1,285
Liquids (Mbbl) 33 22 85 78
Total (MMcfe) 13,383 15,430 45,202 44,542
Average Price:
Gas (per Mcf) $ 2.39 $ 2.00 $ 2.12 $ 2.11
Oil (per bbl) 18.80 11.10 14.25 11.60
Liquids (per bbl) 10.52 10.56 9.71 7.85
Total (per Mcfe) 2.48 1.97 2.14 2.07
Revenue:
Gas $ 27,266 $ 25,462 $ 82,310 $ 76,787
Oil 5,617 4,749 13,770 14,910
Liquids 347 235 826 612
-------------- -------------- ------------- --------------
Total $ 33,230 $ 30,446 $ 96,906 $ 92,309
============== ============== ============= ==============
</TABLE>
Gas revenue. For the three months ended September 30, 1999, gas revenue
increased $1.8 million to $27.3 million due to a 20% increase in average
realized natural gas prices. The impact of the increased prices, which added
$5.1 million of gas revenue during the 1999 three-month period compared to the
same period a year ago, was partially offset by an 11% decrease in production
primarily as a result of sales of producing properties.
For the nine months ended September 30, 1999, gas revenue increased
$5.5 million to $82.3 million primarily due to a 7% increase in production. The
production increase in 1999 was attributable to 2,000 MMcf of non-recurring
production in the first quarter of 1999 related to under-deliveries associated
with the VPP program during August through October 1998 as a result of storms in
the Gulf of Mexico.
Oil and liquids revenue. For the three months ended September 30, 1999, oil and
liquids revenue was $6.0 million, compared to $5.0 million during the 1998
period. A 69% increase in average realized oil prices added $3.2 million in
revenue, partially offset by a 26% decrease in oil and liquids production.
For the nine months ended September 30, 1999, oil and liquids revenue
decreased $0.9 million to $14.6 million as the benefits of a 23% increase in
average realized oil prices was offset by a 23% decrease in production. The
production decreases are primarily due to the sale of producing properties
during the second and third quarters of 1999.
10
<PAGE> 11
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Prices for oil and gas are subject to wide fluctuations 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 and overall economic conditions.
Other revenue, net
For the three months ended September 30, 1999, other revenue included
$1.4 million from production tax refunds and adjustments and $0.8 million from a
non recurring sale of emission reduction credits. For the nine months ended
September 30, 1999, other revenue also included $1.5 million from a settlement
of a production tax dispute during the second quarter. In 1998, other revenue
included $1.4 million for the three months and $3.6 million for the nine months
ended September 30 1998, related to production tax refunds. As of September 30,
1999, the Company has filed for substantially all of the production tax refunds
it is entitled to. Other revenue also includes certain marketing and gathering
revenue incidental to the Company's oil and gas exploration and production
operations.
Lease operating expenses
Lease operating expenses decreased 15% to $6.9 million for the three
months ended September 30, 1999. For the nine months ended September 30, 1999,
lease operating expenses decreased 11% to $20.5 million. The lower expense
levels in the current year reflect cost reduction initiatives taken by the
Company and the sale of marginal higher-cost oil and gas properties.
Production taxes
Production taxes, which are generally based on a percentage of revenue
(excluding VPP revenue), decreased $0.1 million to $0.9 million for the third
quarter of 1999 and $0.5 million to $2.5 million for the nine months ended
September 30, 1999, compared to the same periods in 1998.
General and administrative expenses
General and administrative expenses ("G&A") decreased 41%, or $1.2
million to $1.7 million for the three months ended September 30, 1999 compared
to the same period a year ago. Cost savings associated with the closing of the
New Jersey corporate office, the significant reduction in the workforce and
other cost reduction initiatives throughout the Company were the primary reasons
for the decrease. For the nine months ended September 30, 1999, G&A was $7.3
million compared to $8.5 million for the same period a year ago. The current
year nine-month period includes approximately $0.7 million of non-recurring
costs, primarily associated with the closing of the New Jersey corporate office.
11
<PAGE> 12
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation, depletion and amortization
The Company provides for depletion on its oil and gas properties using
the future gross revenue method based on recoverable reserves valued at current
prices. During the three months ended September 30, 1999, depreciation,
depletion and amortization ("DD&A") decreased $4.1 million to $11.4 million
mainly as a result of the decline in the depletion rate to 33% compared to 49%
for the three months ended September 30, 1998. For the nine months ended
September 30, 1999, DD&A decreased $5.0 million, compared to the same period in
1998. This decrease was primarily due to a lower depletion rate, partially
offset by higher oil and gas revenues. The significant decline in the depletion
rates in 1999 was largely attributable to the significant increases in oil and
gas prices and the 1998 writedown of oil and gas properties.
1998 Writedown of oil and gas properties
At June 30, 1998, the Company, in accordance with the full cost
accounting method and procedures prescribed by the SEC, recorded a $57.6 million
($37.5 million after tax) non-cash writedown of its oil and gas properties.
Under the SEC accounting procedures, capitalized oil and gas property costs are
limited to the present value of future net revenues from estimated production of
proved oil and gas reserves at end of period prices, discounted at 10%, plus the
lower of cost or fair value of unproved properties ("SEC PV10 value"). To the
extent that the capitalized costs exceed the estimated SEC PV 10 value at the
end of any fiscal quarter, such excess costs are written down with a
corresponding charge to income. The decrease in the June 30, 1998 SEC PV 10
value was primarily attributable to the impact of significantly lower period end
oil and gas prices.
Interest expense
Interest expense was $10.1 million during the third quarter of 1999,
compared to $9.8 million for the same period last year due to higher interest
rates and increased amortization of deferred financing costs. For the nine
months ended September 30, 1999, interest expense was $30.0 million, compared to
$26.6 million for the same period last year. The increase in the 1999
nine-month period was mainly attributable to higher average borrowings during
the first half of 1999 compared to the same period in 1998 and, to a lesser
extent, higher interest rates during the third quarter of 1999 and increased
amortization of deferred financing costs. Average borrowings have declined
significantly since May 1999. See "Liquidity and Capital Resources."
Liquidity and Capital Resources
Continuation as a Going Concern
During 1998, due to very low prices for natural gas and crude oil and
disappointing performance of certain of the Company's Rocky Mountain prospects,
the Company incurred significant losses, due primarily to $268.5 million of
pretax non-cash ceiling writedowns of its oil and gas assets and a reduction
from $113.9 million ($93.9 million of which relates to the 1998 non-cash ceiling
test writedowns) to zero in the book value of net deferred tax assets. As a
result of these charges, net loss in 1998 was increased by $288.4 million. Also
as a result of these adjustments, the Company had negative stockholders' equity
of $154.2 million as of December 31, 1998 ($151.1 million at September 30, 1999)
and is in default of certain covenants in its bank credit facilities. While the
12
<PAGE> 13
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
defaults continue, the Company cannot borrow under the credit facilities. In
addition, the Company's independent public accountants issued a modified report
with respect to the ability of the Company to continue as a going concern, which
also constitutes a default under the bank credit facilities.
On May 18, 1999, the Company and its bank lenders entered into
forbearance agreements which provided that the lenders would defer
redetermination of the borrowing base until July 1, 1999 and would refrain from
exercising their rights and remedies as a result of the existing defaults until
June 30, 1999. Under these initial forbearance agreements the Company committed
50% of monthly cash flow to payments of principal, with a minimum of $2 million
monthly. In addition, a portion of the proceeds from the sale of any of the
Company's oil and gas properties were dedicated to payment of principal under
the bank credit facilities.
On July 7, 1999 the lenders under each of the bank credit facilities
reset the Company's borrowing base, which had been $165 million at December 31,
1998, to $91 million. The principal amount outstanding under the bank loans at
June 30, 1999 was $126.7 million. Because the Company did not make this $35.7
million additional lump-sum payment, a payment default occurred. The lenders
declared due all amounts owing under the bank loans, demanded payment and
declared in effect the default rate of interest. The bank lenders also delivered
a payment blockage notice to the indenture trustee of the 8.875% subordinated
notes. The Company did not make the scheduled July 15, 1999 interest payments on
both the 8.875% subordinated notes and the 11% senior notes, totaling $13.8
million. As a result of the payment default under the bank loans and the
interest payment default on the notes, the holders of the requisite percentage
of the Company's senior notes and senior subordinated notes and the indenture
trustees of the senior notes and the senior subordinated notes have the right to
declare the principal amount of the notes immediately due and payable. Current
liabilities at September 30, 1999 include accrued interest of $19.6 million on
the notes. The outstanding principal amount of the subordinated notes is $125
million and the outstanding principal amount of the senior notes is $150
million.
On July 26, 1999, the Company and its bank lenders entered into new
forbearance agreements (effective as of July 1, 1999) which provided that the
lenders would refrain from exercising their rights and remedies not previously
exercised until October 5, 1999. Subsequently, these forbearance agreements were
extended on the same terms through December 3, 1999. The lenders did not waive
the payment default but rescinded their declaration that all amounts outstanding
under the credit facilities are immediately due and payable and effectively
waived the default rate of interest. The new forbearance agreements preclude the
Company from making interest payments on its senior notes and its subordinated
notes. Under the terms of the new forbearance agreements, the Company has
committed to make monthly principal payments of $2.5 million. In addition, a
portion of the proceeds from the sale of any of the Company's oil and gas
properties will be dedicated to payment of principal under the credit
facilities. From the time that the original forbearance agreements were entered
into, the Company made principal repayments to its banks of $33 million,
reducing the outstanding loans from $150 million to $117 million as of
September 30, 1999. When the forbearance agreements expire, the lenders will be
able to exercise their rights under the credit agreements, including declaring
the principal balances immediately due and payable.
As a result of the above factors, there is substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of the asset carrying amounts or the amounts and classifications
of liabilities that might result should the Company be unable to continue as a
going concern.
13
<PAGE> 14
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
To improve its financial situation, the Company has: 1) Reduced planned
1999 capital expenditures; 2) Sold non-core properties raising net proceeds of
approximately $25 million during the nine months ended September 30, 1999; 3)
Reduced the Company's workforce by approximately 20% in 1999 and over 30% since
the beginning of 1998; 4) Closed the Company's New Jersey corporate office
effective May 1, 1999 and transferred all functions to its Houston, Texas
facility, and 5) Frozen senior management salaries for 1999.
The Company has already exceeded its planned 1999 property sales with
net proceeds of $25.3 million from property sales completed through September
30, 1999. The Company remains current on its trade obligations and intends to
continue paying its trade obligations in the ordinary course of business.
The Company is continuing to work with its financial advisors to pursue
a restructuring transaction which would result in deleveraging the Company's
balance sheet. The Company, with the assistance of its financial advisors, has
been engaged in conversations with institutional investors holding a majority of
both classes of outstanding notes in an effort to pursue a consensual
restructuring transaction. There can be no assurances, however, of a
consummation of any restructuring or of the continuation of the forbearance
agreements after December 3, 1999.
Cash flow from operating activities
Net income adjusted for non-cash charges increased $3.2 million to
$44.1 million for the nine months ended September 30, 1999, compared to $40.9
million during the same period in 1998, mainly due to the impact of higher
average realized natural gas and oil prices and lower operating and
administrative expenses, partially offset by higher interest costs. Net cash
provided by operating activities was $45.1 million during the current year
nine-month period, compared to $15.4 million for the nine months ended September
30, 1998. Accounts payable and accrued liabilities decreased $6.4 million during
the nine months ended September 30, 1999 compared to a decrease of $29.5 million
during the nine months ended September 30, 1998. This difference was
attributable to the non-payment of $13.8 million on July 15, 1999 of accrued
interest on the senior and subordinated notes and the timing of cash receipts
and payments.
Investing activities
Capital expenditures on oil and gas properties for the nine months
ended September 30, 1999 were $31.1 million, of which $16.0 million was for
development drilling, $8.0 million for the acquisition of proved reserves
primarily under the Company's VPP program and $7.1 million for lease
acquisitions, seismic surveys and exploratory drilling. It is currently
anticipated that, in total, the Company's 1999 capital program will be $55-$60
million. In October 1999, the Company completed two acquisitions of working
interest oil and gas properties at a total investment of $10.4 million and one
VPP for $5.2 million. The remainder of the Company's 1999 capital spending
program is expected to be funded by cash flow from operations and proceeds from
pending asset sales.
Capital expenditures on oil and gas properties for the nine months
ended September 30, 1998 were $143.2 million, of which $60.3 million was for
development drilling, $69.9 million for the acquisition of proved reserves
primarily under the Company's VPP program and $13.0 million for lease
acquisitions, seismic surveys and exploratory drilling.
14
<PAGE> 15
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the nine months ended September 30, 1999 the Company sold
certain non-core producing properties which raised net proceeds of $25.3
million. The sales of these producing properties were the primary reason for the
13% decrease in natural gas and oil production to 13,383 MMcfe during the three
months ended September 30, 1999 compared to the same period in 1998. The October
1999 acquisitions and recent drilling activity should result in higher
production in the fourth quarter of 1999. Certain of the Company's volumetric
production payments which account for approximately 14 MMcfe per day expire on
December 31, 1999. The Company's ability to offset the impact of these expiring
VPPs is dependent upon the timing and amount of capital expenditures and the
success of the Company's drilling activities.
Year 2000 Issue
The Year 2000 problem concerns the possible inability of certain
information systems, primarily computer software programs, to properly recognize
date-sensitive information beginning January 1, 2000 and the related data
processing errors and resulting business problems that this may cause. The
Company has a Year 2000 program in place to 1) Identify and resolve internal
systems issues, and 2) Identify and plan for potential issues with respect to
external vendors and customers.
Internal Systems
The Company's planning for the internal systems aspects of the Year
2000 problem is focused on five areas: 1) Communications Hardware and Software;
2) Information Systems Hardware; 3) Network Operating Systems Software; 4) Back
Office Applications and 5) Core Applications.
Communications Hardware and Software
Communication software upgrades have been completed at all Company
operated locations. The vendor provided Year 2000 ready versions have been
successfully installed and tested.
Information Systems Hardware
All application and file servers have been either replaced or upgraded
with Year 2000-ready models with the exception of one Unix server at the Tulsa,
Oklahoma office which is currently scheduled to be removed from service prior to
year end. Ninety-five percent of the necessary workstation replacements have
been completed to date with the remaining 5% to be completed prior to December
1999.
Network Operating Systems Software
The Company presently uses Windows NT4 and Windows 95 operating systems
which are not Year 2000 compliant. The Company's original plan to implement
Windows 2000 upon release is no longer viable as it has not yet been released.
The Company is continuing the process of installing all vendor provided patches
as they are released. Shortly after the release of Windows 2000, and if any Year
2000 issues arise, immediate implementation of Windows 2000 will begin.
15
<PAGE> 16
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Back Office Applications
The Company's principal Microsoft desktop productivity applications are
currently being replaced with Microsoft Office 2000 which is Year 2000
compliant. To date, 80% of the Company's desktop computers have been migrated to
Microsoft Office 2000 and it is anticipated that the remaining 20% will be
migrated prior to December 1999. Certain server applications such as SMS, SQL
Arcserve and Inoculan, which allow the Company to manage data as well as
maintain network integrity, were not Year 2000 compliant but have been upgraded
to Year 2000 readiness using vendor provided patches. In some instances the
current Year 2000 ready version has been installed.
Core Applications
The Company's principal core applications are for reserve engineering
and analysis, production reporting and financial and accounting systems. The
reserve engineering application was upgraded to a Year 2000 compliant version
during the second quarter of 1999. The production reporting application was
upgraded to the Year 2000 compliant version in the Houston location during the
third quarter of 1999 and was upgraded in the Tulsa location in November 1999.
The Company completed the migration of its divisions to a single finance and
accounting solution which is Year 2000 compliant during the third quarter of
1999.
The Company believes that the program outlined above will mitigate its
internal systems risk related to the Year 2000 problem. The incremental costs of
this program in 1998 and 1999 are currently estimated to be between $400,000 and
$600,000 in the aggregate, most of which would have been spent within the next
year as part of the continuing process of upgrading information systems to the
latest technology. These costs are being expensed as incurred except for any
major investments in replacement computer hardware or new application systems
projects that are normally capitalized and amortized over the life of the asset.
External Vendor and Customer Issues
The Company also relies on the systems capabilities of various vendors
and customers to conduct its business. The Company has polled its major vendors
and customers to ensure that they will be Year 2000 compliant on a timely basis
and to develop contingency plans for any disruption in their services or
products that could have a significant adverse impact on the Company's business.
These activities are intended to provide a means of managing risk, but cannot
eliminate the potential for disruption due to third-party failure.
The worst case scenario of non-compliance by third parties is as
follows:
1) Inability of the operators of certain wells in which the Company
owns a working interest to report production, bill, collect and
remit revenues that are due to the Company.
2) Inability of pipeline companies and others to which the Company
sells natural gas to properly meter production, remarket the gas
and pay the Company as due.
3) Inability of the Company's suppliers to schedule and deliver
equipment to the Company's operated well sites, causing potential
delays in drilling and development activities and, conceivably,
other safety and environmental risks.
16
<PAGE> 17
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the event of a Year 2000 compliance issue with a third party, the
appropriate contingency plans will be implemented, including the use of manual
systems and alternate vendors. The methodology used in the development of the
contingency plans, was largely dependent upon the responses received from the
Company's vendors and customers as to their Year 2000 compliance. The Company
does not expect these risks to materialize in any significant manner. However,
if Year 2000 failures do occur and are not corrected on a timely basis or
otherwise mitigated by the Company's contingency plans, they could have a
material adverse effect on the results of operations, liquidity and overall
financial condition.
Forward-looking Statements
The information discussed in this Form 10-Q 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 Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included herein regarding planned capital expenditures, the
Company's financial position and future operations, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, they do involve certain
assumptions, risks and uncertainties, and the Company can give no assurance that
such expectations will prove to have been correct. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the timing and success of
the Company's drilling activities, the volatility of prices and supply and
demand for oil and gas, the numerous uncertainties inherent in estimating
quantities of oil and gas reserves and actual future production rates and
associated costs, the usual hazards associated with the oil and gas industry
(including blowouts, cratering, pipe failure, spills, explosions and other
unforeseen hazards), and increases in regulatory requirements.
All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by such factors.
17
<PAGE> 18
MARKET RISK DISCLOSURE
The Company has, and may continue to, enter into swaps, futures
contracts and options to manage the price risk associated with the production of
natural gas and liquids. Since these contracts qualify as hedges and correlate
to market price movement of natural gas or liquids, any gains or losses
resulting from market changes will be offset by losses or gains on corresponding
physical transactions.
These hedging arrangements have the effect of fixing for specified
periods the prices the Company will receive for the volumes to which the hedge
relates. As a result, while these hedging arrangements are structured to reduce
the Company's exposure to decreases in the price associated with the underlying
commodity, they also limit the benefit the Company might otherwise have received
from any price increases associated with the hedged commodity. In accordance
with Item 305 of Regulation S-K, the Company has elected the tabular method to
disclose market-risk related to derivative financial instruments as well as
other financial instruments.
The following table sets forth the Company's natural gas hedged
position at September 30, 1999. At September 30, 1999 the Company did not have
any oil hedges in place. The Company accounts for oil and natural gas futures
contracts and commodity price swaps in accordance with FASB Statement No. 80
"Accounting for Futures Contracts".
<TABLE>
<CAPTION>
Contract Weighted Unrealized
Maturity Date Volume Avg. Price Gain (Loss)
----------------- ------- ------------- ------------
(MMbtu) ($ per MMbtu) ($ 000s)
1999
<S> <C> <C> <C>
Fourth quarter 2,130 2.232 (1,043)
2000 3,480 2.055 (2,105)
2001 3,000 2.055 (1,815)
2002 2,520 2.055 (1,525)
Thereafter 4,840 2.055 (2,929)
</TABLE>
The Company uses fixed and variable rate long-term debt to finance the
Company's capital spending program. These debt arrangements expose the Company
to market risk related to changes in interest rates. The Company's weighted
average interest rate on its fixed rate debt of $275 million is 10%. The
weighted average interest rate on its variable rate debt of $117.0 million is
8.6% All of the Company's debt has been classified as short-term as a result of
defaults under its debt agreements. See Note 2 to Condensed Consolidated
Financial Statements.
18
<PAGE> 19
KCS ENERGY, INC. - FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On April 27, 1999, the Fifth Court of Appeals in Dallas upheld summary
judgment in favor of the Company in the Los Santos Suit. This is one of
the two remaining Royalty Basis Suits. The royalty holders applied to
the court for reconsideration. This request for reconsideration was
denied and the court reaffirmed its previous judgment on August 17,
1999. The royalty holders applied to the Texas Supreme Court for review
on September 28, 1999. The Texas Supreme Court has not yet determined
whether it will review the matter. In the Jesus Yzaguirre Suit, the
other remaining Royalty Basis Suit, the parties were notified on
October 28, 1999, that the Fifth Court of Appeals in Dallas had
determined that oral argument would not significantly aid it in
determining the legal and factual issues presented, which are basically
the same as in the Los Santos Suit. Accordingly, the appeal will be
submitted to the Fifth Court of Appeals for decision on January 4,
2000.
In another legal matter, the Company received a $1.75 million
settlement in May 1999 in connection with a lawsuit regarding a
severance tax dispute.
The Company and several of its subsidiaries have been named as
co-defendants along with numerous other industry parties in an action
brought by Jack Grynberg on behalf of the Government of the United
States. The complaint, filed under the Federal False Claims Act,
alleges underpayment of royalties to the Government of the United
States as a result of alleged mismeasurement of the volume and wrongful
analysis of the heating content of natural gas produced from federal
and Native American lands. The complaint is substantially similar to
other complaints filed by Jack Grynberg on behalf of the Government of
the United States against multiple other industry parties. All of
the complaints have been consolidated in one proceeding. In April
1999, the Government of the United States filed notice that it had
decided not to intervene in these actions. The Company believes that
the allegations in the complaint are without merit.
The Company, Kerr-McGee Corporation, Kerr-McGee Onshore LP and two of
the Company's subsidiaries have been named as defendants in a suit
seeking a declaratory judgment brought by Mid American Capital Company
and InterCoast Energy Company. The plaintiffs are requesting a
declaration of the indemnity obligations of the parties in connection
with certain environmental and surface restoration issues relating to
the lands in Los Angeles County, California covered by the Rancho San
Francisco and Ferguson oil, gas and mineral leases. The leases were
initially owned by Kerr-McGee Onshore Oil & Gas LP and were among the
assets acquired by the Company from Mid American In 1997. The Company
believes that Kerr-McGee has indemnity obligations with respect to most
of the restoration issues and, in the event that Kerr-McGee's indemnity
is unavailable, that Mid American has indemnity obligations for 90% of
any losses the Company may incur in connection with the matter.
19
<PAGE> 20
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 10.1. Amendment to Forbearance Agreement dated
September 30, 1999 by and among KCS Energy, Inc. and certain
affiliated entities, Canadian Imperial Bank of Commerce, as
Agent, CIBC Inc., as Collateral Agent and the lenders party
thereto from time to time.
Exhibit 10.2 Amendment to Forbearance Agreement dated
September 30, 1999 by and among KCS Energy, Inc. and certain
affiliated entities, Canadian Imperial Bank of Commerce, as
Agent, CIBC Inc., as Collateral Agent, Bank One, Texas,
National Association, as Co-Agent, Nationsbank of Texas,
National Association, as Co-Agent and the lenders party
thereto from time to time.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the three
months ended September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KCS ENERGY, INC.
November 11, 1999 /s/ KATHRYN M. KINNAMON
------------------ ----------------------------------------
Kathryn M. Kinnamon
Vice President and Treasurer
(Principal Financial Officer)
November 11, 1999 /s/ FREDERICK DWYER
------------------ ----------------------------------------
Frederick Dwyer
Vice President, Controller
and Secretary
(Principal Accounting Officer)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
10.1 Amendment to Forbearance Agreement dated September 30, 1999 by
and among KCS Energy, Inc. and certain affiliated entities,
Canadian Imperial Bank of Commerce, as Agent, CIBC Inc., as
Collateral Agent and the lenders party thereto from time to
time.
10.2 Amendment to Forbearance Agreement dated September 30, 1999 by
and among KCS Energy, Inc. and certain affiliated entities,
Canadian Imperial Bank of Commerce, as Agent, CIBC Inc., as
Collateral Agent, Bank One, Texas, National Association, as
Co-Agent, Nationsbank of Texas, National Association, as
Co-Agent and the lenders party thereto from time to time.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AMENDMENT TO FORBEARANCE AGREEMENT
THIS AMENDMENT TO FORBEARANCE AGREEMENT, dated as of September 30, 1999
(herein called this "Amendment"), is entered into by and among KCS MEDALLION
RESOURCES, INC., a Delaware corporation (formerly known as InterCoast Oil and
Gas Company) ("KCS Medallion"), KCS ENERGY, INC., a Delaware corporation
("KCS"), KCS ENERGY SERVICES, INC., a Delaware corporation (formerly known as
InterCoast Gas Services Company) ("Medallion Gas Services" and together with KCS
Medallion, KCS and KCS Energy Services, each individually, a "Borrower" and
collectively, the "Borrowers", each lender that is a signatory hereto or becomes
a party hereto as provided in Sections 9.1 or 2.25 of the Credit Agreement
(hereinafter defined) (individually, together with its successors and assigns, a
"Lender" and, collectively, together with their respective successors and
assigns, the "Lenders"), CANADIAN IMPERIAL BANK OF COMMERCE, acting through its
New York agency (in its individual capacity, "CIBC"), and as agent for the
Lenders (in such capacity, together with its successors in such capacity, the
"Agent"), and CIBC Inc., a Delaware corporation as collateral agent for the
Lenders (in such capacity pursuant to the terms hereof, the "Collateral Agent").
Terms used herein which are defined in the Forbearance Agreement (as hereinafter
defined) are used herein with the meanings given them therein.
W I T N E S S E T H:
WHEREAS, the Borrowers, the Lenders, the Collateral Agent and the Agent
have entered into a Forbearance Agreement dated as of July 26, 1999 but
effective as of July 1, 1999, (the "Forbearance Agreement ") pursuant to which,
on the terms provided therein, the Lenders have agreed (x) to forbear from
exercising any further rights and remedies as provided in the Loan Documents or
otherwise during the Forbearance Period and (y) to rescind the declaration
contained in a notice of default dated July 12, 1999 that all Obligations of the
Borrowers pursuant to the Loan Documents are immediately due and payable, such
rescission and forbearance to be in effect until termination of the Forbearance
Period and notice to the Borrowers from the Agent accelerating the date for
payment of the Obligations; and
WHEREAS, the Borrowers, the Lenders, the Collateral Agent and the Agent
now wish to amend the Forbearance Agreement in certain respects;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. Amendment to Section 1.2. Section 1.2 of the Forbearance
Agreement is hereby amended by deleting the reference to the date " October 5,
1999" in the ninth line thereof and inserting in lieu thereof the date "December
3, 1999."
SECTION 2. Amendment to Section 3.3 Section 3.3 of the Forbearance
Agreement is hereby amended as follows:
<PAGE> 2
(i) The first sentence of clause (a) of Section 3.3 of the
Forbearance Agreement is amended and restated in its entirety to read
as follows: "(a) Accrued and unpaid interest on each outstanding Base
Rate Loan shall be due and payable on July 31, 1999, August 31, 1999,
September 30, 1999, October 31, 1999 and November 30, 1999."
(ii) The first sentence of clause (b) of Section 3.3 of the
Forbearance Agreement is amended and restated in its entirety to read
as follows: "(b) During the Forbearance Period, payments of principal
of the Tranche A Loans shall be due and payable in the amount of
$1,250,000 on each of July 31, 1999, August 31, 1999, September 30,
1999, October 31, 1999 and November 30, 1999."
SECTION 3. Amendment to Section 3.4. Section 3.4(a) of the Forbearance
Agreement is amended by deleting the reference to the date "September 30, 1999"
in the seventh line thereof and inserting in lieu thereof the date "December 3,
1999".
SECTION 4. Conditions to Effectiveness. The effectiveness of this
Amendment is conditioned upon receipt by the Agent of all the following
documents, each in form and substance satisfactory to the Agent:
(i) Multiple counterparts of this Amendment as requested by
the Agent; and
(ii) certificates of the secretary or an assistant secretary
of each Borrower, certifying as to resolutions of the board of
directors of such entity authorizing this amendment and the incumbency
and signatures of the officers of such company authorized to execute
this Amendment.
SECTION 5. Effect. This Amendment shall be deemed to be an amendment to
the Forbearance Agreement, and the Forbearance Agreement, as amended hereby, is
hereby ratified, approved and confirmed in each and every respect. All
references to the Forbearance Agreement in any other document, instrument,
agreement or writing shall hereafter be deemed to refer to the Forbearance
Agreement as amended hereby.
SECTION 6. Counterparts. This Amendment 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 Amendment by signing one or
more counterparts.
SECTION 7. Successors. This Amendment shall be binding upon each of the
Borrowers, the Lenders, the Collateral Agent and the Agent and their respective
successors and assigns, and shall inure to the benefit of each of the Borrowers,
the Lenders, the Collateral Agent and the Agent and the successors and assigns
of the Lenders, the Collateral Agent and the Agent.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
BORROWERS:
KCS MEDALLION RESOURCES, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
KCS ENERGY, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
KCS ENERGY SERVICES, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
KCS MEDALLION GAS SERVICES, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
<PAGE> 4
LENDERS:
BANK ONE, TEXAS, NATIONAL ASSOCIATION
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 5
COMERICA BANK-TEXAS
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 6
SOCIETE GENERALE, SOUTHWEST AGENCY
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 7
DEN NORSKE BANK ASA
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 8
PARIBAS
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 9
GENERAL ELECTRIC CAPITAL CORPORATION
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 10
CIBC INC., Lender and Collateral Agent
By:
--------------------------------------
Authorized Signatory
AGENT:
CANADIAN IMPERIAL BANK OF COMMERCE
By:
--------------------------------------
<PAGE> 1
EXHIBIT 10.2
AMENDMENT TO FORBEARANCE AGREEMENT
THIS AMENDMENT TO FORBEARANCE AGREEMENT, dated as of September 30, 1999
(herein called this "Amendment"), is entered into by and among KCS Energy, Inc.,
a Delaware corporation ("KCS"), KCS RESOURCES, INC., a Delaware corporation
("KRI") for itself and as successor by merger to KCS Pipeline Systems, Inc., a
Delaware corporation; KCS MICHIGAN RESOURCES, INC., a Delaware corporation ("KCS
Michigan"); and KCS ENERGY MARKETING, INC., a New Jersey corporation ("KCS
Marketing," and together with KRI and KCS Michigan, each individually, a
"Borrower" and collectively, the "Borrowers"), each lender that is a signatory
hereto or becomes a party hereto as provided in Sections 9.1 or 2.25 of the
Credit Agreement (hereinafter defined) (individually, together with its
successors and assigns, a "Lender" and, collectively, together with their
respective successors and assigns, the "Lenders"), CANADIAN IMPERIAL BANK OF
COMMERCE, acting through its New York agency (in its individual capacity,
"CIBC"), and as agent for the Lenders (in such capacity, together with its
successors in such capacity, the "Agent"), BANK ONE, TEXAS, NATIONAL
ASSOCIATION, a national banking association, as co-agent for the Lenders, and
BANK OF AMERICA, N.A., formerly known as NationsBank, N.A., as co-agent for the
Lenders, and CIBC Inc., a Delaware corporation as collateral agent for the
Lenders (in such capacity pursuant to the terms hereof, the "Collateral Agent").
Terms used herein which are defined in the Forbearance Agreement (as hereinafter
defined) are used herein with the meanings given them therein.
W I T N E S S E T H:
WHEREAS, KCS, the Borrowers, the Lenders, the Collateral Agent and the
Agent have entered into a Forbearance Agreement dated as of July 26, 1999 but
effective as of July 1, 1999, (the "Forbearance Agreement ") pursuant to which,
on the terms provided therein, the Lenders have agreed (x) to forbear from
exercising any further rights and remedies as provided in the Loan Documents or
otherwise during the Forbearance Period and (y) to rescind the declaration
contained in a notice of default dated July 12, 1999 that all Obligations of KCS
and the Borrowers pursuant to the Loan Documents are immediately due and
payable, such rescission and forbearance to be in effect until termination of
the Forbearance Period and notice to the Borrowers from the Agent accelerating
the date for payment of the Obligations; and
WHEREAS, KCS, the Borrowers, the Lenders, the Collateral Agent and the
Agent now wish to amend the Forbearance Agreement in certain respects;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. Amendment to Section 1.2. Section 1.2 of the Forbearance
Agreement is hereby amended by deleting the reference to the date " October 5,
1999" in the ninth line thereof and inserting in lieu thereof the date "December
3, 1999."
<PAGE> 2
SECTION 2. Amendment to Section 3.3 Section 3.3 of the Forbearance
Agreement is hereby amended as follows:
(i) The first sentence of clause (a) of Section 3.3 of the
Forbearance Agreement is amended and restated in its entirety to read
as follows: "(a) Accrued and unpaid interest on each outstanding Base
Rate Loan shall be due and payable on July 31, 1999, August 31, 1999,
September 30, 1999, October 31, 1999 and November 30, 1999."
(ii) The first sentence of clause (b) of Section 3.3 of the
Forbearance Agreement is amended and restated in its entirety to read
as follows: "(b) During the Forbearance Period, payments of principal
of the Tranche A Loans shall be due and payable in the amount of
$1,250,000 on each of July 31, 1999, August 31, 1999, September 30,
1999, October 31, 1999 and November 30, 1999."
SECTION 3. Amendment to Section 3.4. Section 3.4(a) of the Forbearance
Agreement is amended by deleting the reference to the date "September 30, 1999"
in the ninth line thereof and inserting in lieu thereof the date "December 3,
1999".
SECTION 4. Conditions to Effectiveness. The effectiveness of this
Amendment is conditioned upon receipt by the Agent of all the following
documents, each in form and substance satisfactory to the Agent:
(i) Multiple counterparts of this Amendment as requested by
the Agent; and
(ii) certificates of the secretary or an assistant secretary
of KCS and each Borrower, certifying as to resolutions of the board of
directors of such entity authorizing this amendment and the incumbency
and signatures of the officers of such company authorized to execute
this Amendment.
SECTION 5. Effect. This Amendment shall be deemed to be an amendment to
the Forbearance Agreement, and the Forbearance Agreement, as amended hereby, is
hereby ratified, approved and confirmed in each and every respect. All
references to the Forbearance Agreement in any other document, instrument,
agreement or writing shall hereafter be deemed to refer to the Forbearance
Agreement as amended hereby.
SECTION 6. Counterparts. This Amendment 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 Amendment by signing one or
more counterparts.
SECTION 7. Successors. This Amendment shall be binding upon each of KCS
and the Borrowers, the Lenders, the Collateral Agent and the Agent and their
respective successors and
<PAGE> 3
assigns, and shall inure to the benefit of each of KCS and the Borrowers, the
Lenders, the Collateral Agent and the Agent and the successors and assigns of
the Lenders, the Collateral Agent and the Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
KCS ENERGY, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
BORROWERS:
KCS RESOURCES, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
KCS MICHIGAN RESOURCES, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
KCS ENERGY MARKETING, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 4
CO-AGENT AND A LENDER:
BANK ONE, TEXAS, NATIONAL ASSOCIATION
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 5
CO-AGENT AND A LENDER:
BANK OF AMERICA, N.A.,
formerly known as NationsBank, N.A.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 6
LENDERS:
COMERICA BANK-TEXAS
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 7
DEN NORSKE BANK ASA
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 8
GENERAL ELECTRIC CAPITAL CORPORATION
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 9
CIBC INC., Lender and Collateral Agent
By:
--------------------------------------
Authorized Signatory
AGENT:
CANADIAN IMPERIAL BANK OF COMMERCE
By:
--------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 20,895
<SECURITIES> 0
<RECEIVABLES> 27,355
<ALLOWANCES> 0
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<PP&E> 947,741
<DEPRECIATION> 725,442
<TOTAL-ASSETS> 286,628
<CURRENT-LIABILITIES> 435,157
<BONDS> 391,713
0
0
<COMMON> 314
<OTHER-SE> (151,129)
<TOTAL-LIABILITY-AND-EQUITY> 286,628
<SALES> 101,965
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<CGS> 0
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<OTHER-EXPENSES> 69,307
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