<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 March 31, 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
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)
Former Address - 379 Thornall Street, Edison, NJ 08837
- --------------------------------------------------------------------------------
(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: 29,260,210 shares outstanding as of
April 20, 1999.
1
<PAGE> 2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Amounts in thousands except ------------------------
per share data) Unaudited 1999 1998
--------------------------------- -------- --------
<S> <C> <C>
Oil and gas revenue $ 32,342 $ 29,706
Other revenue, net 663 1,603
-------- --------
Total revenue 33,005 31,309
Operating costs and expenses
Lease operating expenses 6,981 7,276
Production taxes 765 1,050
General and administrative expenses 3,208 2,599
Depreciation, depletion and amortization 14,105 12,828
-------- --------
Total operating costs and expenses 25,059 23,753
-------- --------
Operating income 7,946 7,556
Interest and other income, net 41 98
Interest expense (9,905) (7,877)
-------- --------
Loss before income taxes (1,918) (223)
Federal and state income taxes (benefit) -- (83)
-------- --------
Net loss $ (1,918) $ (140)
======== ========
Basic loss per share of common stock $ (0.07) $ (0.00)
======== ========
Diluted loss per share of common stock $ (0.07) $ (0.00)
======== ========
Average shares outstanding for computation
of earnings per share
Basic 29,258 29,441
Diluted 29,258 29,441
======== ========
</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>
(Dollars in thousands except March 31, December 31,
per share data) Unaudited 1999 1998
- -------------------------------------------------- --------- ------------
<S> <C> <C>
Assets
------
Current assets
Cash and cash equivalents $ 6,992 $ 876
Trade accounts receivable, net 26,687 36,548
Other current assets 6,069 5,650
--------- ---------
Current assets 39,748 43,074
--------- ---------
Oil and gas properties, full cost method, net 243,738 248,582
Other property, plant and equipment, net 7,389 7,910
--------- ---------
Property, plant and equipment, net 251,127 256,492
--------- ---------
Deferred charges and other assets 8,723 9,312
--------- ---------
$ 299,598 $ 308,878
========= =========
Liabilities and stockholders' equity
------------------------------------
Current liabilities
Accounts payable $ 12,206 $ 24,267
Accrued liabilities 15,887 25,584
Short-term debt 150,000 135,700
--------- ---------
Current liabilities 178,093 185,551
--------- ---------
Deferred credits and other liabilities 2,957 2,896
--------- ---------
Long-term debt 274,657 274,635
--------- ---------
Stockholders' (deficit) equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 31,426,306 and
31,420,231, respectively 314 314
Additional paid-in capital 145,091 145,077
Retained (deficit) earnings (296,773) (294,854)
Less treasury stock, 2,167,096 shares, at cost (4,741) (4,741)
--------- ---------
Total stockholders' (deficit) equity (156,109) (154,204)
--------- ---------
$ 299,598 $ 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>
Three Months Ended
March 31,
--------------------------
(Dollars in thousands) Unaudited 1999 1998
- ------------------------------------------------------ --------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,918) $ (140)
Non-cash charges (credits):
Depreciation, depletion and amortization 14,105 12,828
Other non-cash charges and credits, net 593 572
--------- ---------
12,780 13,260
Net changes in assets and liabilities:
Trade accounts receivable 9,861 4,220
Accounts payable and accrued liabilities (21,173) (18,901)
Other, net 84 496
--------- ---------
Net cash provided by (used in) operating activities 1,552 (925)
--------- ---------
Cash flows from investing activities:
Investment in oil and gas properties (9,228) (61,577)
Proceeds from the sale of oil and gas properties 441 4,699
Other capital expenditures, net (6) (1,043)
--------- ---------
Net cash used in investing activities (8,793) (57,921)
--------- ---------
Cash flows from financing activities:
Proceeds from debt 16,300 183,500
Repayments of debt (2,000) (121,400)
Proceeds from issuance of common stock 14 3
Deferred financing costs (372) (3,544)
Dividends (585) (589)
--------- ---------
Net cash provided by financing activities 13,357 57,970
--------- ---------
Net increase (decrease) in cash and cash equivalents 6,116 (876)
Cash and cash equivalents at beginning of period 876 4,802
--------- ---------
Cash and cash equivalents at end of period $ 6,992 $ 3,926
========= =========
</TABLE>
The accompanying notes to the 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, or
$9.80 per share. Also as result of these adjustments, the Company has negative
stockholders' equity of $154.2 million as of December 31, 1998 ($156.1 million
at March 31, 1999) and is in default of certain covenants in its revolving
credit agreements. 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 revolving bank
credit agreements. The lenders have notified the Company that it is in default
under each of the credit agreements and that the lenders may at any time give
notice to the Company that the existence of such defaults constitutes Events of
Default. The lenders will then have the right to exercise any and all rights
and remedies under the credit agreements including declaring the principal
balances immediately due and payable. Should this occur, (i) the Company would
be unable to pay the amount due in cash, although the Company believes the
lenders to be fully secured; and (ii) the holders of the Company's senior notes
and senior subordinated notes would have the right to declare the principal
amount of the notes ($275 million) immediately due and payable. The Company is
currently negotiating forbearance arrangements which would terminate on June
30, 1999 with respect to each of the credit agreements. The proposed forbearance
arrangements would require minimum monthly principal payments and require
additional payments of principal based on operating cash flow and upon the sale
of any of the Company's oil and gas properties between the time the arrangement
is entered into and June 30, 1999. There can be no assurance that these
proposed forbearance arrangements will be entered into and even if they are,
upon termination of the forbearance arrangements (June 30, 1999), the defaults
under the credit agreements shall automatically become events of default. 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.
5
<PAGE> 6
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
To improve its financial situation, the Company has: 1) Reduced planned
1999 capital expenditures; 2) Planned property sales, which are expected to
raise cash proceeds of approximately $25 million in 1999; 3) Significantly
reduced the Company's Rocky Mountain region workforce; 4) Closed the Company's
New Jersey corporate office effective May 1, 1999 and transferred all functions
to its Houston, Texas facility, and 5) Froze senior management salaries for
1999. In addition, the Company has engaged a financial advisor to explore
strategic alternatives for financing its activities going forward. The Company
also intends to form partnerships with third-party investors to fund a large
portion of the VPP Program. Even if the proposed forbearance agreements
discussed above are entered into, there can be no assurances of a continuation
of the forbearance agreements after June 30, 1999 or consummation of other
financing arrangements that would remove the uncertainties regarding the
Company's ability to continue as a going concern.
3. 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 $13.8 million and $10.0 million for the
three months ended March 31, 1999 and March 31, 1998, respectively. No income
tax payments were made during the three months ended March 31, 1999 or March 31,
1998.
4. Basic earnings per share were computed by dividing net income 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 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 March 31,
------------------------------
1999 1998
------ ------
(amounts in thousands)
<S> <C> <C>
Average common stock outstanding 29,258 29,441
Average common stock equivalents 87 382
------ ------
Average common stock and common
stock equivalents outstanding 29,345 29,823
------ ------
</TABLE>
Common stock equivalents are not applicable for 1999 and 1998 earnings per share
as they would be antidilutive.
5. 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 was a royalty
basis suit. The royalty holders have applied to the court for reconsideration
and subsequently may petition the Texas Supreme Court for review. 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.
6
<PAGE> 7
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 revolving credit
agreements. See Liquidity and Capital Resources and Notes 2 and 7 to
Consolidated Financial Statements in the Company's 1998 Annual Report to
Stockholders.
The following discussion focuses on material changes in results of
operations for the three months ended March 31, 1999, compared to the three
months ended March 31, 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 loss for the three months ended March 31, 1999 was $1.9 million, or
$0.07 per share, compared to a loss of $0.1 million, or $0.00 per share, for the
same period last year. Significantly higher oil and gas production was more than
offset by lower oil and gas prices, costs associated with the closing of the New
Jersey corporate offices and higher interest costs.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Production:
Oil (Mbbl) 362 368
Liquids (Mbbl) 25 21
Gas (MMcf) 14,742 11,325
Total (MMcfe) 17,064 13,659
Average Price:
Oil (per bbl) $ 9.94 $ 13.23
Liquids (per bbl) 8.78 8.95
Gas (per Mcf) 1.93 2.18
Total (per Mcfe) 1.90 2.18
Revenue:
Oil $ 3,594 $ 4,875
Liquids 222 186
Gas 28,526 24,645
-------- --------
Total $ 32,342 $ 29,706
-------- --------
</TABLE>
7
<PAGE> 8
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gas revenue. For the three months ended March 31, 1999, gas revenue
increased $3.9 million to $28.5 million. Of this increase, $7.2 million was due
to a 30% increase in production, partially offset by an 11% decline in average
realized gas prices. Natural gas production during the 1999 quarter included
non-recurring production of approximately 2,000 MMcf 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 March 31, 1999, oil
and liquids revenue was $3.8 million, compared to $5.1 million during the 1998
period. Virtually all of this decrease was attributable to lower average
realized prices.
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
Other revenue decreased $0.9 million during the first quarter of 1999
compared to the same period in 1998, which included a $1.1 million severance tax
refund.
Lease operating expenses
Lease operating expenses during the three months ended March 31, 1999
decreased 4% to $7.0 million, compared to $7.3 million during the same period
last year as a result of cost reduction initiatives taken by the Company.
Production taxes
Production taxes, which are generally based on a percentage of revenue
(excluding VPP revenue), decreased $0.3 million to $0.8 million during the first
quarter of 1999, compared to the same period a year ago. This decrease reflects
lower oil and gas revenue, due mainly to lower prices, from the Gulf Coast and
Mid-Continent regions.
General and administrative expenses
For the three-month period ended March 31, 1999, general and
administrative expenses increased $0.6 million to $3.2 million compared to the
same period in 1998 as a result of approximately $0.7 million of non-recurring
costs, primarily associated with the closing of the New Jersey corporate office.
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. During the three months
ended March 31, 1999, DD&A increased $1.3 million due to higher oil and gas
revenue and, to a lesser extent, an increase in the DD&A rate to 42% of oil and
gas revenue, compared to a DD&A rate of 41% during the same period a year ago.
8
<PAGE> 9
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense
Interest expense was $9.9 million during the first quarter of 1999,
compared to $7.9 million for the same period last year due to higher average
borrowings during the 1999 period.
Income taxes
The Company did not record income tax benefits related to its pretax
losses in 1999. Due to significant losses recorded in 1998 and the uncertainty
of future oil and natural gas commodity prices, management concluded at year end
1998 that a valuation allowance against net deferred tax assets related to
operating loss carryforwards was required in accordance with SFAS 109. This
valuation allowance will be monitored for potential adjustments as future events
so indicate.
Liquidity and Capital Resources
Financial Covenant Violation and 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 for 1998 was increased by $288.4 million, or
$9.80 per share. Also as a result of these adjustments, the Company had negative
stockholders' equity of $154.2 million as of December 31, 1998 ($156.1 million
at March 31, 1999) and is in default of certain covenants in its revolving
credit agreements. The Company's budget for development and exploration has been
significantly reduced for 1999 due to the drop in oil and natural gas prices,
the related substantial reduction in the Company's net worth and the resultant
default in the tangible net worth covenants under the Company's revolving credit
facilities. While the Company had planned a capital expenditure program of
$60-$90 million, such program is likely to be reduced by as much as 50% absent a
significant rebound in commodity prices or the sale of assets substantially in
excess of currently projected levels. The Company's net worth is less than
required under the Company's two revolving bank credit facilities, which is a
default under the facilities. 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 revolving bank
credit agreements. While the defaults continue, the Company cannot borrow under
the credit facilities. The lenders have notified the Company that it is in
default under each of the credit agreements and that the lenders may at any
time give notice to the Company that the existence of such defaults constitutes
events of default. The lenders will then have the right to exercise any and all
rights and remedies under the credit agreements including declaring the
principal balances immediately due and payable. Should this occur, (i) the
Company would be unable to pay the amount due in cash, although the Company
9
<PAGE> 10
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
believes the lenders to be fully secured; and (ii) the holders of the Company's
senior notes and senior subordinated notes would have the right to declare the
principal amount of the notes ($275 million) immediately due and payable. The
Company is currently negotiating forbearance arrangements which would terminate
on June 30, 1999 with respect to each of the credit agreements. The proposed
forbearance arrangements would require minimum monthly principal payments and
require additional payments of principal based on operating cash flow and upon
the sale of any of the Company's oil and gas properties between the time the
arrangement is entered into and June 30, 1999. There can be no assurance that
these proposed forbearance arrangements will be entered into and even if they
are, upon termination of the forbearance arrangements (June 30, 1999), the
defaults under the credit agreements shall automatically become events of
default.
The lenders have also indicated their intention at sometime in the near
future to reduce the borrowing base under the revolving bank credit facilities.
Any reduction in the borrowing base would necessitate the additional repayment
of principal, and these payments would have a negative impact on cash
availability. Such required principal payments will place an added burden on
cash flow. There are no assurances that the amount of the borrowing base
reduction or the terms of repayment acceptable to the lenders will be able to be
satisfied from the Company's cash flow. If not, the failure to make the required
principal repayments when due will also constitute a default under the revolving
bank credit facilities.
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. The Company's independent public accountants issued a modified
report for 1998 with respect to the ability of the Company to continue as a
going concern. There can be no assurance that, given the Company's limited
capital resources, it can continue to maintain its current production levels
through oil and gas reserve replacement.
To improve its financial situation, the Company has: 1) Reduced planned
1999 capital expenditures; 2) Planned property sales, which are expected to
raise cash proceeds of approximately $25 million in 1999; 3) Significantly
reduced the Company's Rocky Mountain region workforce; 4) Closed the Company's
New Jersey corporate office effective May 1, 1999 and transferred all functions
to its Houston, Texas facility, and 5) Froze senior management salaries for
1999. In addition, the Company has engaged a financial advisor to explore
strategic alternatives for financing its activities going forward. The Company
also intends to form partnerships with third-party investors to fund a large
portion of the VPP Program. Even if the proposed forbearance agreements
discussed above are entered into, there can be no assurances of a continuation
of the forbearance agreements after June 30, 1999 or consummation of other
financing arrangements that would remove the uncertainties regarding the
Company's ability to continue as a going concern.
Cash flow from operating activities
Net income adjusted for non-cash charges for the three months ended
March 31, 1999 was $12.8 million compared to $13.3 million during the same
period in 1998. Net cash provided by operating activities was $1.6 million
during the current year three-month period, compared to cash used in operating
activities of $0.9 million for the three months ended March 31, 1998. The
significant changes in accounts payable and accrued liabilities in both the 1999
and 1998 periods was mainly due to the payment of accrued interest on January 15
of each year. The remainder of changes in working capital was largely related to
the timing of cash receipts and payments.
10
<PAGE> 11
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Investing activities
Capital expenditures for the three months ended March 31, 1999 were
$9.2 million of which $5.0 million was for development drilling, $2.2 million
for the acquisition of proved reserves under the Company's VPP program and $2.0
million for lease acquisitions, seismic surveys and exploratory drilling.
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 are needed at the Company's Tulsa,
Oklahoma office. This software is readily replaceable with Year 2000 ready
versions. The Company has plans in place to ensure that these systems are ready
by installing those versions available. It is anticipated that related upgrades
will be in place by the end of the second quarter of 1999.
Communications Hardware and Software
Communication software upgrades are needed at the Company's Tulsa,
Oklahoma office. This software is readily replaceable with Year 2000 ready
versions. The Company has plans in place to ensure that these systems are ready
by installing those versions available. It is anticipated that related upgrades
will be in place by the end of the second quarter of 1999.
Information Systems Hardware
Two servers are scheduled for replacement with Year 2000-compliant
models. Certain workstation replacements are needed throughout the Company, but
these replacements are minimal and readily available. It is anticipated that
replacements will be in place by the end of the third quarter of 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 plan is to have all
workstations on a Windows 2000 system, which is a Year 2000-compliant operating
system or, depending on the availability of Windows 2000, will install
vendor-provided patches, by the end of the second quarter of 1999 and
implementation of Windows 2000 upon release.
11
<PAGE> 12
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Back Office Applications
The Company's two principal Microsoft desktop productivity applications
are not currently Year 2000 compliant but it is anticipated that they will be
upgraded with the vendor release due in the second quarter of 1999. Certain
server applications such as SMS, SQL Arcserve and Inoculan, which allow the
Company to manage data as well as maintain network integrity, are also not
compliant but it is anticipated that they will be upgraded to Year 2000
readiness using vendor provided patches by the end of the second quarter of
1999.
Core Applications
The Company's principal core applications are for reserve engineering
and analysis, production reporting and financial and accounting systems. The
reserve engineering and production reporting applications are currently not Year
2000 ready, but are in the process of being upgraded to Year 2000-ready
versions. It is anticipated that upgrade of the reserve engineering and analysis
application will be completed prior to May 31, 1999 and the production reporting
system will be upgraded in the second quarter of 1999. The Company is in the
process of migrating all of its divisions to a single finance and accounting
solution which is Year 2000 compliant. It is anticipated that migration will be
completed by the end of the second 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 in any event
within the next 18 to 24 months in 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 is presently polling 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.
12
<PAGE> 13
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Based upon the results of the Company's assessment of third-party Year
2000 risks, it is anticipated that appropriate contingency plans will be
developed, including the use of manual systems and alternate vendors. The
methodology used in the development of the contingency plans, which are expected
to be in place by the end of the third quarter of 1999, is 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.
13
<PAGE> 14
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 March 31, 1999. At March 31, 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)
<S> <C> <C> <C>
1999
Second quarter 4,244 2.098 1,569
Third quarter 3,434 2.151 1,076
Fourth quarter 2,634 2.169 188
------------ --------------- --------------
Total 1999 10,312 2.134 2,833
2000 3,800 2.067 (543)
2001 3,000 2.055 (465)
2002 2,520 2.055 (391)
Thereafter 4,840 2.055 (750)
</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 following table provides
information regarding the Company's debt and the related contractual maturities.
<TABLE>
<CAPTION>
Fixed Rate Weighted Avg. Variable Rate Weighted Avg.
Debt Interest Rate Debt Interest Rate
----------------- ----------------- ----------------- -----------------
($ 000s) ($ 000s)
<S> <C> <C> <C> <C>
1999 $ -- 10.0% $ -- 7.6%
2000 -- 10.0% 150,000 7.6%
2001 -- 10.0% -- --
2002 -- 10.0% -- --
2003 150,000 10.0% -- --
Thereafter 125,000 8.9% -- --
</TABLE>
14
<PAGE> 15
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 was a
royalty basis suit. The royalty holders have applied to the court for
reconsideration and subsequently may petition the Texas Supreme Court
for review. 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
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 March 31, 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.
May 14, 1999 /s/ KATHRYN M. KINNAMON
------------ -------------------------------------
Kathryn M. Kinnamon
Vice President and Treasurer
(Principal Financial Officer)
May 14, 1999 /s/ FREDERICK DWYER
------------ -------------------------------------
Frederick Dwyer
Vice President, Controller
and Secretary
15
<PAGE> 16
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,992
<SECURITIES> 0
<RECEIVABLES> 26,724
<ALLOWANCES> 37
<INVENTORY> 1,335
<CURRENT-ASSETS> 39,748
<PP&E> 952,532
<DEPRECIATION> 708,794
<TOTAL-ASSETS> 299,598
<CURRENT-LIABILITIES> 178,093
<BONDS> 0
0
0
<COMMON> 314
<OTHER-SE> (156,923)
<TOTAL-LIABILITY-AND-EQUITY> 299,598
<SALES> 33,005
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,905
<INCOME-PRETAX> (1,918)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,918)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,918)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
