<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 June 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
-------
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
July 30, 1999.
<PAGE> 2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Amounts in thousands except per share data) June 30, June 30,
----------------------------- -------------------------------
Unaudited 1999 1998 1999 1998
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Oil and gas revenue $ 31,334 $ 32,157 $ 63,676 $ 61,863
Other revenue, net 2,021 1,506 2,684 3,109
------------ ------------ -------------- ------------
Total revenue 33,355 33,663 66,360 64,972
Operating costs and expenses
Lease operating expenses 6,644 7,642 13,625 14,918
Production taxes 812 1,008 1,577 2,058
General and administrative expenses 2,422 2,993 5,630 5,592
Depreciation, depletion and amortization 13,443 15,547 27,548 28,375
Writedown of oil and gas properties - 57,631 - 57,631
------------ ------------ -------------- ------------
Total operating costs and expenses 23,321 84,821 48,380 108,574
------------ ------------ -------------- ------------
Operating income (loss) 10,034 (51,158) 17,980 (43,602)
Interest and other income, net 181 101 222 199
Interest expense (9,996) (8,925) (19,901) (16,802)
------------ ------------ -------------- ------------
Income (loss) from before income taxes 219 (59,982) (1,699) (60,205)
Federal and state income taxes (benefit) - (21,105) - (21,188)
------------ ------------ -------------- ------------
Net income (loss) $ 219 $ (38,877) $ (1,699) $ (39,017)
============ ============ ============== ============
Basic earnings (loss) per share
of common stock $ 0.01 $ (1.32) $ (0.06) $ (1.32)
============ ============ ============== ============
Weighted average shares outstanding 29,261 29,480 29,259 29,461
============ ============ ============== ============
</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>
June 30, December 31,
(Dollars in thousands) Unaudited 1999 1998
----------------- -----------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 15,934 $ 876
Trade accounts receivable, net 22,830 36,548
Other current assets 8,499 5,650
----------------- -----------------
Current assets 47,263 43,074
----------------- -----------------
Oil and gas properties, full cost method, net 222,765 248,582
Other property, plant and equipment, net 6,305 7,910
----------------- -----------------
Property, plant and equipment, net 229,070 256,492
----------------- -----------------
Deferred charges and other assets 8,603 9,312
----------------- -----------------
$ 284,936 $ 308,878
================= =================
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 13,336 $ 24,267
Accrued liabilities 23,270 25,584
Bank credit facilities 126,711 135,700
Senior and subordinated notes 274,679 -
----------------- -----------------
Current liabilities 437,996 185,551
----------------- -----------------
Deferred credits and other liabilities 2,825 2,896
----------------- -----------------
Senior and subordinated notes - 274,635
----------------- -----------------
Stockholders' equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 31,431,806 and
31,420,231, respectively 314 314
Additional paid-in capital 145,096 145,077
Retained earnings (deficit) (296,554) (294,854)
Less treasury stock, 2,167,096 shares, at cost (4,741) (4,741)
----------------- -----------------
Total stockholders' equity (155,885) (154,204)
----------------- -----------------
$ 284,936 $ 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>
Six Months Ended
June 30,
----------------------
(Dollars in thousands) Unaudited 1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,699) $(39,017)
Non-cash charges (credits):
Depreciation, depletion and amortization 27,548 28,375
Writedown of oil and gas properties -- 57,631
Deferred income taxes -- (21,361)
Other non-cash charges and credits, net 1,246 1,046
-------- --------
27,095 26,674
Net changes in assets and liabilities:
Trade accounts receivable 13,718 10,188
Accounts payable and accrued liabilities (13,245) (18,037)
Other, net (2,110) 190
-------- --------
Net cash provided by operating activities 25,458 19,015
-------- --------
Cash flows from investing activities:
Investment in oil and gas properties (21,596) (117,494)
Net proceeds from the sale of oil and gas properties 21,432 4,815
Other capital expenditures, net 5 (2,101)
-------- --------
Net cash used in investing activities (159) (114,780)
-------- --------
Cash flows from financing activities:
Proceeds from debt 16,300 229,100
Repayments of debt (25,289) (127,700)
Proceeds from issuance of common stock 19 728
Deferred financing costs (686) (3,760)
Other, net (585) (1,178)
-------- --------
Net cash provided by (used in) financing activities (10,241) 97,190
-------- --------
Net increase in cash and cash equivalents 15,058 1,425
Cash and cash equivalents at beginning of period 876 4,802
-------- --------
Cash and cash equivalents at end of period $ 15,934 $ 6,227
======== ========
</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, 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 ($155.9 million
at June 30, 1999) and is in default of certain covenants in its revolving bank
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.
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 the 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. During the period these forbearance agreements were
in effect, the Company made principal repayments to its banks of $23.3 million,
reducing the outstanding loans from $150 million to $126.7 million as of June
30, 1999.
On July 7, 1999 the lenders under each of the revolving 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. As a result of the payment
default under the bank loans, the holders of the Company's senior notes and
senior subordinated notes have the right to declare the principal amount of the
notes immediately due and payable. The 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. The
outstanding principal amount of the subordinated notes was $125 million and
5
<PAGE> 6
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
the outstanding principal amount of the senior notes was $150 million at June
30, 1999.
On July 26, 1999, the Company and its bank lenders entered into new
forbearance agreements (effective as of July 1, 1999) which provide that the
lenders will refrain from exercising their rights and remedies not heretofore
exercised until October 5, 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. 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: 1) Reduced planned
1999 capital expenditures; 2) Planned property sales, 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.
The Company is ahead of target on its planned 1999 property sales of
$25 million with $21.4 million of net proceeds from property sales completed
through June 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 significantly deleveraging the
Company's balance sheet. There can be no assurances, however, of a consummation
of any restructuring or of the continuation of the forbearance agreements after
October 5, 1999.
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 $20.2 million and $11.2 million for the
six months ended June 30, 1999 and June 30, 1998, respectively. Income tax
payments were $0.1 million and $0.3 million for the six months ended June 30,
1999 and June 30, 1998, respectively.
4. 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
6
<PAGE> 7
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 Six Months Ended
June 30, June 30,
---------------------------- ------------------------------
1999 1998 1999 1998
----------- ------------ ------------ -------------
(amounts in thousands) (amounts in thousands)
<S> <C> <C> <C> <C>
Average common stock outstanding 29,261 29,480 29,259 29,461
Average common stock equivalents 7 325 47 353
----------- ------------ ------------ -------------
Average common stock and common
stock equivalents outstanding 29,268 29,805 29,306 29,814
=========== ============ ============ =============
</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.
The Company and several of its subsidiaries have been named as
defendants 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. 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.
7
<PAGE> 8
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 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.
The following discussion focuses on material changes in results of
operations for the three and six months ended June 30, 1999, compared to the
three and six months ended June 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 June 30, 1999 was $0.2 million,
or $0.01 per share, compared to a net loss of $38.9 million, or $1.32 per share,
for the same period last year. The loss in the 1998 quarter resulted primarily
from a non-cash writedown of oil and gas properties of $57.6 million ($37.5
million after tax). Excluding the effect of this non-cash writedown, the net
loss was $1.4 million, or $0.05 per share. In the current year period, increased
natural gas production, higher oil prices and lower operating expenses were
partially offset by lower oil production and increased interest costs.
Net loss for the six months ended June 30, 1999 was $1.7 million, or
$0.06 per share, compared to a net loss of $39.0 million, or $1.32 per share for
the same period last year. Excluding the effect of the non-cash writedown of oil
and gas properties, the net loss for the six months ended June 30, 1998 was $1.6
million, or $0.05 per share. For the six months ended June 30, 1999, higher
natural gas production and lower operating expenses were offset by significantly
lower natural gas prices during the first quarter of the year and higher
interest costs.
8
<PAGE> 9
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenue
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- ------------- ------------- --------------
Production:
<S> <C> <C> <C> <C>
Gas (MMcf) 12,760 12,312 27,502 23,637
Oil (Mbbl) 306 489 668 857
Liquids (Mbbl) 27 35 52 56
Total (MMcfe) 14,755 15,453 31,819 29,112
Average Price:
Gas (per Mcf) $ 2.08 $ 2.17 $ 2.00 $ 2.17
Oil (per bbl) 14.91 10.82 12.22 11.86
Liquids (per bbl) 9.60 5.48 9.20 6.77
Total (per Mcfe) 2.12 2.08 2.00 2.13
Revenue:
Gas $ 26,518 $ 26,678 $ 55,044 $ 51,325
Oil 4,559 5,287 8,153 10,161
Liquids 257 192 479 377
-------------- ------------- ------------- --------------
Total $ 31,334 $ 32,157 $ 63,676 $ 61,863
============== ============= ============= ==============
</TABLE>
Gas revenue. For the three months ended June 30, 1999, gas revenue
decreased $0.2 million to $26.5 million. A 4% increase in production added $1.0
million of gas revenue during the 1999 three month period. The impact of the
increased production was offset by a 4% decrease in average realized gas prices
which resulted in a decrease of $1.2 million in gas revenue compared to the same
period a year ago.
For the six months ended June 30, 1999, gas revenue increased $3.7
million to $55.0 million. A 16% increase in production added $8.4 million of gas
revenue, partially offset by an 8% decrease in average realized gas prices. The
production gains in 1999 were attributable to the VPP Program which included
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.
Absent a capital infusion or a significant discovery, gas production
will decline during the second half of 1999 mainly as a result of the sale of
producing properties during the second quarter of 1999 and, to a lesser extent,
the natural decline of production associated with existing wells.
Oil and liquids revenue. For the three months ended June 30, 1999, oil
and liquids revenue was $4.8 million, compared to $5.5 million during the 1998
period. A 37% decline in production mainly in the Rocky Mountain and
Mid-Continent regions decreased revenue $2.7 million. This was partially offset
9
<PAGE> 10
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
by a 38% increase in average realized oil prices which added $2.0 million in
revenue.
For the six months ended June 30, 1999, oil and liquids revenue
decreased $1.9 million to $8.6 million, compared to the same period in 1998,
primarily due to lower production. It is anticipated that oil and liquids
production will decline during the second half of 1999 due to the sale of
producing properties and natural production declines.
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 included $1.5 million for the three months ended June 30,
1999 related to a settlement of a severance tax dispute. In the prior year,
other revenue included $1.1 million and $2.2 million for the three and six
months ended June 30, 1998, respectively, related to severance tax refunds.
Lease operating expenses
Lease operating expenses decreased 13% to $6.6 million for the three
months ended June 30, 1999. For the six months ended June 30, 1999, lease
operating expenses decreased 9% to $13.6 million. The lower expense levels in
the current year reflect lower activity in the Rocky Mountain region, the sale
of marginal higher-cost oil and gas properties and other cost reduction
initiatives taken by the Company.
Production taxes
Production taxes, which are generally based on a percentage of revenue
(excluding VPP revenue), decreased $0.2 million to $0.8 million for the second
quarter of 1999 and $0.5 million to $1.6 million for the six months ended June
30, 1999, compared to the same periods in 1998.
General and administrative expenses
General and administrative expenses ("G&A") decreased $0.6 million to
$2.4 million for the three months ended June 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 Rocky Mountain workforce and
other cost reduction initiatives throughout the Company were the primary reasons
for the decrease. G&A was $5.6 million for both the six months ended June 30,
1999 and the six months ended June 30, 1998. The current year six-month period
includes 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 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 June 30, 1999, depreciation, depletion and
amortization ("DD&A") decreased $2.1 million to $13.4 million
10
<PAGE> 11
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
mainly as a result of the decline in the depletion rate to 39% compared to 46%
for the three months ended June 30, 1998. DD&A for the 1999 three-month period
also included $0.7 million from the impairment of a Company-owned building in
the Rocky Mountain region which is expected to be sold during the third quarter
of 1999.
For the six months ended June 30, 1999, DD&A decreased $0.8 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.
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 $10.0 million during the second quarter of 1999,
compared to $8.9 million for the same period last year. For the six months ended
June 30, 1999, interest expense was $19.9 million, compared to $16.8 million for
the same period last year. The increases during the 1999 periods were mainly
attributable to higher average borrowings. The Company anticipates that interest
expense will decline during the second half of 1999 following significant
reductions in bank debt in May and June 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 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 ($155.9 million
at June 30, 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.
11
<PAGE> 12
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the 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. During the period these forbearance agreements were
in effect, the Company made principal repayments to its banks of $23.3 million,
reducing the outstanding loans from $150 million to $126.7 million as of
June 30, 1999.
On July 7, 1999 the lenders under each of the revolving 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. As a result of the payment
default under the bank loans, the holders of the Company's senior notes and
senior subordinated notes have the right to declare the principal amount of the
notes immediately due and payable. The 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. The
outstanding principal amount of the subordinated notes was $125 million and the
outstanding principal amount of the senior notes was $150 million at June 30,
1999.
On July 26, 1999, the Company and its bank lenders entered into new
forbearance agreements (effective July 1, 1999) which provide that the lenders
will refrain from exercising their rights and remedies not heretofore exercised
until October 5, 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. 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.
To improve its financial situation, the Company: 1) Reduced planned
1999 capital expenditures; 2) Planned property sales, expected to raise cash
proceeds of approximately $25 million in 1999; 3) Significantly reduced the
Company's Rocky Mountain region workforce; 4) Closed the
12
<PAGE> 13
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
The Company is ahead of target on its planned 1999 property sales of
$25 million with net proceeds of $21.4 million in property sales completed
through June 30, 1999. The Company remains current on its trade obligations and
intends to continue paying its trade obligations in the ordinary course of
business.
Available funding for capital expenditures has been reduced materially
because of the above factors. However, based on the current oil and gas
commodity price environment and planned asset sales, it is anticipated that cash
flow from operations could support a $60 million capital program.
The Company is continuing to work with its financial advisors to pursue
a restructuring transaction which would result in significantly deleveraging the
company's balance sheet. There can be no assurances, however, of a consummation
of any restructuring or of the continuation of the forbearance agreements after
October 5, 1999.
Cash flow from operating activities
Net income adjusted for non-cash charges increased $0.4 million to
$27.1 million for the six months ended June 30, 1999, compared to $26.7 million
during the same period in 1998, mainly due to the impact of higher natural gas
production and lower operating expenses largely offset by lower oil and gas
prices and higher interest costs. Net cash provided by operating activities was
$25.5 million during the current year six-month period, compared to $19.0
million for the six months ended June 30, 1998. The significant changes in
accounts payable and accrued liabilities in both the 1999 and 1998 periods were
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.
Investing activities
Capital expenditures on oil and gas properties for the six months ended
June 30, 1999 were $21.6 million, of which $10.9 million was for development
drilling, $7.7 million for the acquisition of proved reserves primarily under
the Company's VPP program and $3.0 million for lease acquisitions, seismic
surveys and exploratory drilling.
Capital expenditures on oil and gas properties for the six months ended
June 30, 1998 were $117.5 million, of which $47.9 million was for development
drilling, $60.5 million for the acquisition of proved reserves primarily under
the Company's VPP program and $9.1 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.
13
<PAGE> 14
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Internal Systems
The Company's planning for the internal systems aspects of the Year
2000 problem is focused on five areas: 1) Communications Hardware ad 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 third 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, to install
vendor-provided patches. To date, 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.
Back Office Applications
The Company's principal Microsoft desktop productivity applications are
currently being replaced with Microsoft Office 2000 which is Year 2000 compliant
and it is anticipated that the implementation should be completed by the end of
the third 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 not Year 2000 compliant but it is anticipated that they will be
upgraded to Year 2000 readiness using vendor provided patches by the end of the
third 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 application was upgraded to a Year 2000 compliant version
during the second quarter of 1999. The production reporting application is
currently not Year 2000 ready, but is in the process of being upgraded to a Year
2000-ready version. It is anticipated that this application will be upgraded in
the third 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
third quarter of 1999.
14
<PAGE> 15
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 12 to 18 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.
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
15
<PAGE> 16
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
16
<PAGE> 17
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 June 30, 1999. At June 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)
<S> <C> <C> <C>
1999
Third quarter 2,156 2.168 (500)
Fourth quarter 2,634 2.169 (1,034)
------------ --------------- --------------
Total 1999 4,790 2.169 (1,534)
2000 3,480 2.055 (1,340)
2001 3,000 2.055 (1,155)
2002 2,520 2.055 (970)
Thereafter 4,840 2.055 (1,863)
</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 $126.7 million is
8.3% 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.
17
<PAGE> 18
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.
The Company and several of its subsidiaries have been named as
defendants 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. 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 10.1. Forbearance Agreement dated July 26, 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 Forbearance Agreement dated July 26, 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.
On May 18, 1999, the Company filed a Form 8-K reporting that
it had entered into forbearance agreements with respect to
each of its revolving bank credit facilities.
On July 13, 1999, the Company filed a Form 8-K reporting that
its lenders under each of its revolving bank credit facilities
had reset the Company's borrowing base to $91 million which
was $35.7 million lower than the outstanding bank debt and
that because the Company did not make this $35.7 million
lump-sum payment, a payment default occurred.
18
<PAGE> 19
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.
August 13, 1999 /S/ KATHRYN M. KINNAMON
---------------- --------------------------------
Kathryn M. Kinnamon
Vice President and Treasurer
(Principal Financial Officer)
August 13, 1999 /S/ FREDERICK DWYER
---------------- --------------------------------
Frederick Dwyer
Vice President, Controller
and Secretary
(Principal Accounting Officer)
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.1. Forbearance Agreement dated July 26, 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 Forbearance Agreement dated July 26, 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
FORBEARANCE AGREEMENT
THIS FORBEARANCE AGREEMENT (this "Forbearance Agreement") is made and
entered into on July 26, 1999 and effective as of July 1, 1999 (the "Effective
Date"), 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, NATIONAL ASSOCIATION, successor to
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").
WITNESSETH:
WHEREAS, on December 22, 1998, the Borrowers, the Lenders, and the
Agent entered into a First Amended and Restated Credit Agreement (the "Credit
Agreement") whereby, upon the terms and conditions therein stated, the Lenders
agreed to make loans to the Borrowers up to the aggregate amount of
$160,000,000.00 to be used by the Borrowers for the purposes set forth in
Section 2.6 of the Credit Agreement; and
WHEREAS, the Annual Report of KCS on Form 10-K filed with the SEC on
March 31, 1999 (the "10-K Report") revealed the existence of certain events and
conditions (the "MAC Events") which are in violation of the terms and provisions
of the Credit Agreement and/or which constitute a Material Adverse Effect; and
WHEREAS, the Agent has advised KCS and the Borrowers in a letter dated
April 7, 1999 (the "Default Letter") that the existence of each such MAC Event
constitutes a Default; and
WHEREAS, the Borrowers, KCS, the Lenders, the Agent and the Collateral
Agent entered into a Forbearance Agreement dated May 14, 1999 but effective
April 1, 1999 (the "Prior Forbearance Agreement") and the Prior Forbearance
Agreement terminated pursuant to its terms on June 30, 1999; and
<PAGE> 2
WHEREAS, pursuant to Section 9.4 of the Prior Forbearance Agreement the
Defaults resulting from the MAC Events have become Events of Default pursuant to
which the Agent, the Collateral Agent and the Lenders have the right to exercise
the rights and remedies available to them under such circumstances, all as set
forth in the Credit Agreement and other Loan Documents; and
WHEREAS, pursuant to the terms of the Credit Agreement and the Prior
Forbearance Agreement, the Lenders and the Agent redetermined the Borrowing Base
on July 1, 1999 and, as of such date, the Tranche A Obligations were in excess
of the Borrowing Base; and
WHEREAS, the Agent in a letter delivered July 7, 1999, notified KCS and
the Borrowers of such excess and demanded pursuant to Sections 3.5(a) and 9.8 of
the Prior Forbearance Agreement that payment thereof be made within five days of
receipt of the July 7, 1999 notice; and
WHEREAS, the Borrower failed to pay Obligations in an amount sufficient
to eliminate the excess of the Tranche A Obligations over the Borrowing Base;
and
WHEREAS, the Borrowers' failure to repay Obligations in the amount
required to reduce Tranche A Obligations to an amount equal to the Borrowing
Base on or before July 12, 1999 is an Event of Default pursuant to the Prior
Forbearance Agreement and Section 7.1(a)(i) of the Credit Agreement; and
WHEREAS, the Agent delivered a notice of default dated July 12, 1999
(the "Notice of Default"), pursuant to which (i) all Obligations of the
Borrowers and KCS were declared immediately due and payable and (ii) all
Commitments of the Lenders to extend credit or to participate in Letters of
Credit and the Agent's obligation to issue such Letters of Credit were
terminated; and
WHEREAS, KCS and the Borrowers have requested that, in consideration of
the compliance by KCS and the Borrowers with the terms and provisions of this
Agreement, the Agent, the Collateral Agent and the Lenders forbear from
exercising any further rights and remedies pursuant to the Loan Documents or
otherwise and the Agent and the Lenders rescind that declaration contained in
the Notice of Default that all Obligations of KCS and the Borrowers pursuant to
the Credit Agreement are immediately due and payable; and
WHEREAS, subject to (i) compliance by KCS and the Borrowers with the
terms and provisions of this Agreement applicable to each, and (ii) the other
terms and provisions of this Agreement, 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 the Notice of Default that all Obligations of KCS and
the Borrowers pursuant to the Loan Documents are immediately due and payable,
such rescission 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.
2
<PAGE> 3
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
ARTICLE 1
GENERAL TERMS
Section 1.1 Terms Defined in Agreement. As used in this Agreement,
except as may otherwise be provided in this Agreement, all capitalized terms
which are defined in the Credit Agreement shall have the same meaning herein as
therein, all of such terms and definitions being incorporated herein by
reference.
Section 1.2 Forbearance Period. Subject to (i) satisfaction of the
conditions set forth in Section 4.1 of this Agreement, (ii) continuous
compliance by KCS and the Borrowers with the terms and provisions of this
Agreement applicable to each, and (iii) the other terms and provisions of this
Agreement, the Lenders hereby agree to forbear from exercising any rights and
remedies not heretofore exercised which may be available to them as a result of
the Events of Default described in the Default Letter and the Notice of Default
and subsections 4.2(a)(ii) through (iv) of this Agreement during a period
commencing as of the date hereof and ending on the first to occur of (i) any
event or condition pursuant to which the Forbearance Period automatically
terminates, including without limitation, any of the provisions of Section 8.1
of this Agreement, or (ii) October 5, 1999 (the "Forbearance Termination Date").
The term "Forbearance Period" means the period of time commencing on the
Effective Date and ending at 11:59 p.m. on the Forbearance Termination Date. The
Agent and the Lenders also agree to rescind, and do hereby rescind, the
declaration contained in the Notice of Default that all Obligations of KCS and
the Borrowers pursuant to the Loan Documents are immediately due and payable;
provided that upon the termination of the Forbearance Period, such declaration
may be reinstated by notice to the Borrowers from the Agent; and provided
further that the demand for immediate payment of the Tranche A Obligations in
excess of the Borrowing Base contained in the Notice of Default shall not be
deemed to be modified or altered in any manner hereby and remains in full force
and effect. Except as expressly herein provided, upon termination of the
Forbearance Period (regardless of how such termination occurs), this Agreement
shall have no further force and effect whatsoever, and thereafter the terms and
provisions of the Credit Agreement and the other Loan Documents shall be
effective as expressly therein provided without further reference to the terms
and provisions of this Agreement. Upon the termination of the Forbearance
Period, the Agent, on behalf of the Lenders, may declare all Obligations of KCS
and the Borrowers pursuant to the Loan Documents to be immediately due and
payable, without any grace or cure period that might otherwise be provided in
any Loan Document, by delivery of a notice to the Borrowers that such
Obligations are due and payable. Nothing herein shall be, or be construed to be,
a waiver of the Events of Default as described in the Default Letter or Notice
of Default, and nothing herein shall be construed to mean that such Events of
Default have been cured or have ceased to exist.
3
<PAGE> 4
ARTICLE 2
DEFINITIONS
Section 2.1 Definitions. The following terms shall have meanings as
follows:
"1996 Indenture" means the Indenture dated as of January 15, 1996 by
and among KCS, the Subsidiary Guarantors (as such term is defined therein) and
Fleet National Bank of Connecticut, as Trustee, relating to the sale by KCS of
its eleven percent (11%) Senior Notes due 2003.
"1998 Indenture" means the Indenture dated as of January 15, 1998, by
and among KCS, the Subsidiary Guarantors (as such term is defined therein) and
State Street Bank and Trust Company, as Trustee, relating to the sale by KCS of
its eight and seven-eighths percent (8 7/8%) Senior Subordinated Notes due 2008.
"Applicable Margin" shall mean as to each Tranche A Base Rate Loan and
each Tranche A LIBO Rate Loan, an amount equal to the percentage set forth in
the grid below for such type of Loan:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Applicable Margin
(Tranche A)
<S> <C> <C>
- ---------------------------------------------------------------------------
Type of Loans Base Rate LIBO Rate
- ---------------------------------------------------------------------------
Loans in an Aggregate Principal Amount in 1.5% 2.5%
the amount of the Borrowing Base or less
- ---------------------------------------------------------------------------
Loans in Excess of Borrowing Base 2.0% 3.0%
- ---------------------------------------------------------------------------
</TABLE>
"Borrowing Base Deficiency" means, at any time, the excess of Tranche A
Obligations over the Borrowing Base in effect as of such date.
"Interest Period" shall mean, subject to the limitations set forth in
Section 2.4 of the Credit Agreement, with respect to any LIBO Rate Loan, a
period commencing on the date such Loan is converted from a Loan of another type
pursuant to the Credit Agreement or the last day of the next preceding Interest
Period with respect to such Loan and ending on the numerically corresponding day
in the calendar month that is one or two months thereafter, as the Borrowers may
request in the Tranche A Borrowing Request or the Tranche B Borrowing Request
for such Loan provided that, the Interest Period for each LIBO Rate Loan shall
end on or before the Forbearance Termination Date.
4
<PAGE> 5
"Tranche B Borrowing Base Deficiency" means, at any time, the excess of
Tranche B Obligations over the difference of the Tranche B Borrowing Base less
the Borrowing Base in effect as of such date.
ARTICLE 3
TERMS AND FACILITIES
Section 3.1 Loans and Continuing Termination of Commitments. Pursuant
to the Notice of Default, the Commitments have been terminated and the Lenders
are not obligated and do not have any commitment whatsoever to make Loans, other
than conversions of LIBO Rate Loans into Base Rate Loans or Base Rate Loans into
LIBO Rate Loans and reborrowings of LIBO Rate Loans which occur at the end of an
Interest Period, in each case occurring during the Forbearance Period. The
Borrowers may not reborrow any portion of any Loan after all or such portion of
any such Loan shall have been repaid. The Lenders shall have no obligation to
continue loans as LIBO Rate Loans or to convert Base Rate Loans into LIBO Rate
Loans after the Forbearance Termination Date.
Section 3.2 Letters of Credit. No Letters of Credit were outstanding as
of the Effective Date and none are outstanding as of the date hereof and the
Agent is not obligated to issue, on behalf of the Lenders or otherwise, and the
Lenders are not obligated to participate in, any Letters of Credit.
Section 3.3 Repayment of Loans and Interest. (a) Accrued and unpaid
interest on each outstanding Base Rate Loan shall be due and payable on July 31,
1999, August 31, 1999 and September 30, 1999. Accrued and outstanding interest
on each LIBO Rate Loan shall be due and payable on the last day of the Interest
Period for such LIBO Rate Loan and, in the case of any Interest Period for LIBO
Rate Loans which is in excess of one month, on the last day of each calendar
month following the commencement of such Interest Period, the payment in each
instance to be the amount of interest which has accrued and remains unpaid in
respect of the relevant Loan. Notwithstanding the Notice of Default and subject
to Section 2.20 of the Credit Agreement, Loans shall bear interest at the
Adjusted Base Rate for each Base Rate Loan and the Adjusted LIBO Rate for each
LIBO Rate Loan; provided that, for purposes of determining the Adjusted Base
Rate and Adjusted LIBO Rate for Tranche A Loans, the term "Applicable Margin"
shall have the meaning set forth in Section 2.1 of this Agreement.
(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 and September 30, 1999. At the time of the
making of each payment hereunder, the Borrowers shall specify to the Agent the
Tranche A Loans to which such payment is to be applied. In the event the
Borrowers fail to so specify, the Agent may apply such payment to Tranche A
Loans as it may elect in its discretion and in accordance with the terms of the
Credit Agreement and this Agreement.
Section 3.4 Borrowing Base; Mandatory Prepayments. (a) The Borrowing
Base in effect as of the Effective Date is $40,000,000 and the Tranche B
Borrowing Base in effect as of the
5
<PAGE> 6
Effective Date is $45,000,000. The Borrowing Base and the Tranche B Borrowing
Base shall be automatically reduced in the amount of the Specified Value of each
of the Oil and Gas Properties of any of the Borrowers sold in accordance with
Section 3.6 hereof. Notwithstanding clauses (b), (c), (f) and (g) of Section
2.12 of the Credit Agreement, except for redeterminations pursuant to the
immediately preceding sentence, the Borrowing Base and Tranche B Borrowing Base
in effect as of the Effective Date shall remain in effect until the first
Business Day following the earlier of (x) the Forbearance Termination Date and
(y) September 30, 1999 (the "Redetermination Date") and, notwithstanding Section
2.12 of the Credit Agreement, such redetermination of the Borrowing Base shall
be the amount agreed to by the Agent and the Tranche A Lenders and such
redetermination of the Tranche B Borrowing Base shall be the amount agreed to by
the Agent and the Tranche B Lenders on or after the Redetermination Date.
(b) If on or after the Redetermination Date, a Borrowing Base
Deficiency exists after giving effect to such redetermination of the Borrowing
Base, KCS and the Borrowers shall, within five days from receiving notice of the
Borrowing Base, prepay Tranche A Loans in the amount of any increase in the
Borrowing Base Deficiency in effect by reason of such redetermination together
with accrued and unpaid interest thereon.
(c) If on or after the Redetermination Date, a Tranche B
Borrowing Base Deficiency exists after giving effect to such redetermination of
the Tranche B Borrowing Base, KCS and the Borrowers shall, within five days from
receiving notice of the Borrowing Base and the Tranche B Borrowing Base, prepay
Tranche B Loans in the amount of any increase in the Tranche B Borrowing Base
Deficiency in effect by reason of such redetermination together with accrued and
unpaid interest thereon, provided, that any payments required by the immediately
preceding clause (b) shall be made prior to payments pursuant to this clause
(c).
(d) In addition to the amounts payable pursuant to clauses (b)
and (c) above, if any, upon the termination of the Forbearance Period, Tranche A
Loans in the amount of any Borrowing Base Deficiency and Tranche B Loans in the
amount of any Tranche B Borrowing Base Deficiency existing prior to the
redetermination of the Borrowing Base and Tranche B Borrowing Base,
respectively, as provided in clause (a) above (but in each case not to exceed
the Borrowing Base Deficiency or Tranche B Borrowing Base Deficiency, as the
case may be, in effect as of the Redetermination Date) are immediately due and
payable without any grace or cure period.
Section 3.5 Borrowing Base Deficiency, etc. Upon any redetermination of
the Borrowing Base or Tranche B Borrowing Base by reason of a sale of Oil and
Gas Properties pursuant to Section 3.6 of this Agreement, the Agent shall notify
KCS and the Borrowers of the amount of the Borrowing Base and Tranche B
Borrowing Base after such redetermination and the amount of any Borrowing Base
Deficiency or Tranche B Borrowing Base Deficiency which may exist on such date.
Section 3.6 Sales of Oil and Gas Properties. At any time during the
Forbearance Period that (i) any of the Oil and Gas Properties which are
described in Exhibit "A" hereto, or any other Oil and Gas Properties which are
added to Exhibit "A" pursuant to the agreement of the Agent, the
6
<PAGE> 7
Required Lenders, KCS and the Borrowers with respect to a Specified Value
(collectively, the "Scheduled Properties"), or (ii) any other Oil and Gas
Properties owned by any of the Borrowers (the "Unscheduled Properties") are sold
(other than Oil and Gas Properties described in Section 7.1(iii) of this
Agreement), KCS and the Borrowers shall, substantially concurrently with the
sale thereof, pay principal of the Tranche A Obligations in an amount equal to
(i) with respect to Scheduled Properties, the value attributable to such
Scheduled Properties as specified in Exhibit "A" as amended from time to time or
(ii) with respect to the Unscheduled Properties the value specified by the Agent
with the consent of the Required Lenders (collectively, the "Specified Value")
until the principal of such Tranche A Obligations is paid in full and next to
the Tranche B Obligations. In addition, upon the sale of any such Oil and Gas
Properties (whether Scheduled Properties or Unscheduled Properties), if the Net
Cash Proceeds are greater than the Specified Value, KCS and the Borrowers shall
pay an amount equal to twenty percent (20%) of the portion of the Net Cash
Proceeds in excess of the Specified Value which shall be applied (i) first to
the repayment of the principal of the Tranche A Obligations until the principal
amount of such Tranche A Obligations is repaid in full and (ii) next to the
repayment of the principal of Tranche B Obligations until the principal amount
of such Tranche B Obligations is repaid in full. At the time of the making of
each payment hereunder, the Borrowers shall specify to the Agent the Loans to
which such payment is to be applied in accordance with the terms of this
Agreement. In the event the Borrowers fail to so specify, the Agent may apply
such payment to Loans as it may elect in its discretion and in accordance with
the terms of the Credit Agreement and this Agreement. The Agent shall have the
necessary authority to release, and each Lender hereby consents to the Agent
releasing, Liens on the Scheduled Properties and the Unscheduled Properties so
long as the Net Cash Proceeds equal or exceed the Specified Value.
ARTICLE 4
CONDITIONS
Section 4.1 Conditions Precedent to Initial Effectiveness of Agreement.
The Lenders shall have no obligation to forbear from exercising any rights and
remedies under and pursuant to the Loan Documents unless and until the Agent
shall have received the following documentation and other items, appropriately
executed when necessary and, where applicable, acknowledged by one or more
authorized officers of KCS or the Borrowers and dated, where applicable, of even
date herewith or a date prior thereto:
(a) multiple counterparts of this Agreement as requested by the Agent;
(b) certificates of incumbency and copies of corporate resolutions in
the form attached hereto as Exhibit "B" approving and authorizing the
transactions contemplated herein duly adopted by the boards of directors of KCS
and each Borrower accompanied by certificates of the secretary or an assistant
secretary of KCS and each Borrower, as the case may be, to the effect that such
copies are true and correct copies of resolutions duly adopted at a meeting or
by unanimous consent of the
7
<PAGE> 8
board of directors of KCS and each Borrower, as the case may be, and that such
resolutions constitute all the resolutions adopted with respect to such
transactions, have not been amended, modified, or revoked in any respect, and
are in full force and effect as of the date of such certificate; and
(c) the opinion of counsel to KCS and the Borrowers in the form
attached hereto as Exhibit "C".
Section 4.2 Additional Conditions Precedent to Initial Effectiveness of
Agreement. The obligations of the Agent, the Collateral Agent, and the Lenders
to forbear from exercising their rights and remedies under and pursuant to the
Credit Agreement and other Loan Documents are subject to the satisfaction of the
following additional conditions precedent that, as of the date of execution of
this Agreement:
(a) no Default or Event of Default shall exist except for (i) the
Defaults or Events of Default referred to in the Default Letter and the Notice
of Default, (ii) the defaults and events of default existing in connection with
the Affiliate Credit Agreement including, without limitation, the event of
default pursuant to the Affiliate Credit Agreement which is set out in that
notice of default delivered to the borrowers under the Affiliate Credit
Agreement dated July 12, 1999 and any Default or Event of Default pursuant to
Section 7.1(e) of the Credit Agreement by reason of such event of default, (iii)
Defaults existing pursuant to Section 7.1(e) of the Credit Agreement or defaults
pursuant to the 1996 Indenture and 1998 Indenture, in each case by reason of the
non-payment of certain interest obligations in respect of the Public Debt and
(iv) defaults and events of default pursuant to Section 5.1(e) of each of the
1996 Indenture and the 1998 Indenture by reason of the Events of Default and
defaults or events of default set forth in clauses (i) and (ii) above;
(b) no Material Adverse Effect shall have occurred and be continuing
except for those disclosed in the 10-K Report, the Event of Default set forth in
the Notice of Default and the consequent acceleration of the maturities of the
Obligations and those defaults and events of default set forth in clauses (ii)
through (iv) of subsection (a) of this Section 4.2;
(c) each of the representations and warranties contained in the Credit
Agreement and the other Loan Documents shall be true and correct, except for (i)
such representations and warranties which were contained in the Credit Agreement
and the other Loan Documents which are modified and/or supplemented as provided
in Sections 5.2 and 5.3 of this Agreement or (ii) those which are expressly
stated to be made as of a particular date;
(d) the Security Instruments shall be in full force and effect and
provide to the Lenders the security intended thereby;
(e) the consummation of the transactions contemplated hereby shall not
contravene, violate, or conflict with any Requirement of Law; and
8
<PAGE> 9
(f) legal counsel for the Agent shall have received payment (to the
extent invoiced) from KCS and the Borrowers for all reasonable fees and expenses
and legal counsel of any Lender shall have received payment (to the extent
invoiced) from KCS and the Borrowers for all reasonable fees nd expenses for
services rendered after July 1, 1999, in each case as payable by KCS and the
Borrowers pursuant to the Loan Documents.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
KCS and each Borrower hereby represents and warrants to the Agent and
each Lender that:
Section 5.1 Representations Repeated. The representations and
warranties of KCS and the Borrowers contained in the Credit Agreement and the
other Loan Documents and otherwise made in writing by or on behalf of KCS and
the Borrowers pursuant to the Credit Agreement and the other Loan Documents were
true and correct when made, and are true and correct in all material respects at
and as of the Effective Date and the date hereof except for such representations
and warranties (i) which were contained in the Credit Agreement and the other
Loan Documents which are modified or supplemented as provided in Section 5.2 and
5.3 of this Agreement, and (ii) which are expressly stated to be made as of a
particular date which shall remain true and correct as of the date made.
Section 5.2 Scope and Accuracy of Financial Statements. The Financial
Statements of KCS and its Subsidiaries as at December 31, 1998, present fairly
the financial position and results of operations and cash flows of KCS and its
Subsidiaries in accordance with GAAP as at the relevant point in time or for the
period indicated. No event or circumstance has occurred since December 31, 1998,
except for the MAC Events disclosed in the 10-K Report, and the Event of Default
and the consequent acceleration of the maturities of the Obligations as set
forth in the Notice of Default, and other defaults and events of default as set
forth in subsections 4.2(a)(ii) through (iv) of this Agreement which could
reasonably be expected to have a Material Adverse Effect on KCS or KRI.
Section 5.3 Default. Neither KCS nor any of the Borrowers is in default
of, and no event has occurred which, with the lapse of time or giving of notice,
or both, could result in such a default of, (i) any charter document or bylaws
of any Borrower or KCS, or (ii) any agreement, obligation or Debt to which any
Borrower or KCS is a party or by which any Property of any Borrower or KCS may
be bound, pursuant to which the obligations of KCS or any of the Borrowers in
the aggregate under any such agreement, obligation or Debt, or the obligations
secured thereby, exceed $2,500,000, except (x) such as are being contested in
good faith and as to which such reserve as may be required by GAAP shall have
been made therefor or (y) the Defaults and Events of Default pursuant to the
Credit Agreement and the defaults and events of default pursuant to the
Affiliate Credit Agreement, the 1996 Indenture and the 1998 Indenture, in each
case as described in Section 4.2(a) of this Agreement, and KCS and the Borrowers
hereby acknowledge that the Events of Default described in the Default Letter
and the Notice of Default are existing as of the date hereof.
9
<PAGE> 10
Section 5.4 Defenses. As of the date hereof, the outstanding
principal amount of the Tranche A Loans is $61,108,900 and the outstanding
principal amount of the Tranche B Loans is $5,000,000 and neither KCS nor any
Borrower has any defenses, offsets or counterclaims which would limit, reduce or
impair in any manner the obligations and indebtedness of KCS or any Borrower to
pay the full amount of the Obligations.
ARTICLE 6
AFFIRMATIVE COVENANTS
Section 6.1 Monthly Reconciliation Reports. During the Forbearance
Period KCS and the Borrowers shall deliver to the Agent, on or before the last
day of each calendar month, commencing July 31, 1999, Sufficient Copies of a
report prepared by KCS and certified by a Responsible Officer of KCS to be true
and correct as of the close of the immediately preceding calendar month and for
the period indicated with respect to (i) Net Cash Proceeds on a consolidated
basis from sales of Oil and Gas Properties for such period, and (ii) such other
financial information as the Agent or any Lender reasonably requests.
Section 6.2 Fees and Expenses. In addition to the covenants in the
Credit Agreement, during the Forbearance Period, KCS and the Borrowers shall:
(a) promptly pay to or reimburse the Agent or the Collateral Agent, as
applicable, for all reasonable third-party fees, out-of-pocket costs and
expenses of the Agent and the Collateral Agent in connection with the
preparation, negotiation, execution, delivery and enforcement of this Agreement,
the Credit Agreement and the other Loan Documents, and any and all amendments,
restatements and supplements thereof and thereto, the filing and recordation of
the Security Instruments, and the consummation of the transactions contemplated
by the Loan Documents, including reasonable fees and expenses of legal counsel
and auditors and accountants for the Agent and the Collateral Agent.
(b) upon request by the Agent or on the request of any Lender with
notice to the Agent, promptly pay for all amounts reasonably expended, advanced,
or incurred (x) by or on behalf of the Agent and the Collateral Agent or (y)
with respect to services rendered or expenses incurred after July 1, 1999, by or
on behalf of such Lender (i) to satisfy any obligation of KCS and/or any of the
Borrowers under any of the Loan Documents; (ii) to collect the Obligations;
(iii) to enforce the rights of the Agent, the Collateral Agent, and the Lenders
under any of the Loan Documents, including, without limitation, any such
expenses in connection with the preparation, execution, delivery and enforcement
of this Agreement and any instruments and documents executed in connection
herewith, and any amendments, restatements and supplements thereof and thereto;
and, (iv) to protect the Properties or business of KCS and the Borrowers,
including the Collateral, which amounts shall be deemed compensatory in nature
and liquidated as to amount upon notice to KCS and the Borrowers by the Agent or
such Lender and which amounts shall include all court costs and reasonable fees
and
10
<PAGE> 11
expenses of legal counsel, auditors and accountants, petroleum engineers,
and environmental and insurance consultants.
(c) during the Forbearance Period, the Borrowers and KCS will each
permit the Agent, each Lender and Ernst & Young LLP or an alternate independent
public accounting firm designated by the Agent (Ernst & Young LLP or such
alternate independent public accounting firm designated by the Agent, the
"Financial Representative"), upon reasonable prior notice, to visit all of their
respective offices and to discuss the financial matters of each with its
officers and independent public accountant. Each of the Borrowers and KCS hereby
authorizes such independent public accountant to discuss its financial matters
with the Agent and the Financial Representative whether or not any
representative of such Borrower or KCS is present. The Agent, each Lender and
the Financial Representative may, upon reasonable prior notice, examine (and, at
the expense of the Borrowers or KCS, photocopy extracts from) any of its books
or other corporate records. The Borrowers or KCS shall pay the reasonable fees
of the Financial Representative incurred in connection with the Agent's or any
Lender's exercise of its rights pursuant to this clause.
ARTICLE 7
NEGATIVE COVENANTS
Section 7.1 Sales of Assets. Notwithstanding the provisions of Section
6.5 of the Credit Agreement, KCS and the Borrowers shall not, and shall not
permit any of their respective Subsidiaries to sell, transfer, or otherwise
dispose of any Oil and Gas Properties, in one or any series of transactions,
whether now owned or hereafter acquired, or enter into any agreement to do so
unless the proceeds of such sales (i) are of the type described in clauses (a)
and (b) of the first sentence of Section 6.5 of the Credit Agreement, or (ii)
are made subject to and in accordance with the provisions of Section 3.6 of this
Agreement concerning payments upon the sale of certain Oil and Gas Properties,
or (iii) have an aggregate value for all such sales of less than $250,000
(excluding sales of Oil and Gas Properties, the proceeds of which are applied to
the Loans in accordance with other provisions of this Agreement).
Section 7.2 Restricted Payments. During the Forbearance Period (i) none
of the Borrowers, KCS or any Subsidiary of KCS shall make any payment of
principal of or interest on the Public Debt or purchase, redeem or defease any
of the Public Debt or make a deposit for such payment, purchase, redemption or
defeasance and (ii) KCS shall not pay or make any dividend or distribution or
purchase, redeem or otherwise acquire for value, any share of any class of its
capital stock.
ARTICLE 8
TERMINATION
11
<PAGE> 12
Section 8.1 Termination of Agreement. (a) The Forbearance Period shall
automatically terminate upon the occurrence of (i) an Event of Default specified
in the Credit Agreement, other than those described in the Default Letter or the
Notice of Default or arising pursuant to Section 7.1(e) of the Credit Agreement
by reason of a default or event of default pursuant to the Affiliate Credit
Agreement and existing as of the date hereof or any Event of Default pursuant to
Section 7.1(e) of the Credit Agreement arising by reason of a failure to pay or
perform obligations in respect of the Public Debt, or (ii) the termination of
any forbearance by lenders arising under or in connection with the Affiliate
Credit Agreement, or (iii) any default in the payment when due of any sums
payable hereunder or in the due observance or performance of any obligation of
KCS and/or any of the Borrowers hereunder, including, without limitation, the
making of any payment, purchase or deposit or the taking of any other action by
the Borrowers, KCS or any Subsidiary of KCS which is prohibited by Section 7.2
of this Agreement; or (iv) any failure by the Borrowers to deliver to the Agent
on or before August 15, 1999 the engineering reports and data required by
Sections 5.4(b) and (c) of the Credit Agreement, or (v) any representation or
warranty made in this Agreement by KCS and/or any Borrower proving to have been
untrue in any material respect as of the date the facts therein set forth were
stated or certified.
(b) Except as herein expressly provided, upon the termination of the
Forbearance Period, this Agreement shall terminate and be of no further force
and effect and the rights and remedies of the Agent, the Collateral Agent and
the Lenders shall be such as are provided in the Credit Agreement and the other
Loan Documents.
ARTICLE 9
MISCELLANEOUS
Section 9.1 No Waiver; Rights Cumulative. No course of dealing on the
part of the Agent, the Collateral Agent or any of the Lenders or any of their
officers or employees, nor any forbearance, failure or delay by the Agent, the
Collateral Agent or any of the Lenders with respect to exercising any of their
rights under the Credit Agreement or any other Loan Document shall operate as a
waiver thereof including, without limitation, (i) any forbearance by the Agent,
the Collateral Agent and the Lenders with respect to the Events of Default
described in the Default Letter or the Event of Default described in the Notice
of Default or any other Default or Event of Default, (ii) any forbearance by the
Agent, the Collateral Agent and the Lenders from constituting any Default as an
Event of Default and (iii) any and all other actions of the Agent, the
Collateral Agent and the Lenders. The rights of the Agent, the Collateral Agent
and the Lenders under this Agreement, the Credit Agreement and the other Loan
Documents shall be cumulative and the exercise or partial exercise of any such
right shall not preclude the exercise of any other right. Neither the making of
any Loan nor the issuance of a Letter of Credit shall constitute a waiver of any
of the covenants, warranties, or conditions of KCS and/or any of the Borrowers
contained in this Agreement, the Credit Agreement or any other Loan Documents.
In the event any Borrower is unable to satisfy any such covenant, warranty, or
condition, neither the making of any Loan nor the issuance of a Letter of Credit
nor the forbearance from exercising their rights and remedies as
12
<PAGE> 13
provided in the Credit Agreement and other Loan Documents shall have the effect
of precluding the Agent or the Lenders from thereafter declaring such inability
to be a Default or an Event of Default or from exercising their rights and
remedies as provided in the Credit Agreement and other Loan Documents.
Section 9.2 Release. KCS and the Borrowers hereby release the Agent,
the Collateral Agent and the Lenders from any and all claims and causes of
action arising out of or relating in any way to the actions or omissions of such
Persons in connection with the Loans, the Commitments or any of the Loan
Documents.
Section 9.3 Severability. In the event any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal, or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provision of this Agreement.
Section 9.4 No Cure of Default. This Agreement shall not have the
effect of curing or otherwise eliminating the Defaults or Events of Default
described in the Default Letter or the Event of Default described in the Notice
of Default. Unless any Default or Event of Default is waived in writing by the
Lenders, such Default or Event of Default shall continue to exist throughout the
Forbearance Period.
Section 9.5 Extent of Agreement. Except as otherwise expressly provided
herein, the Credit Agreement and the other Loan Documents and the rights and
remedies of the parties thereto are not amended, modified, altered, or affected
by this Agreement. Except as expressly set forth herein, all of the terms,
conditions, covenants, representations, warranties and all other provisions of
the Credit Agreement and the other Loan Documents are herein ratified and
confirmed and shall remain in full force and effect. This Agreement does not
constitute an amendment to the Credit Agreement or the other Loan Documents, but
rather, constitutes a temporary supplement thereto. The terms and provisions of
the Credit Agreement and the other Loan Documents are expressly incorporated
herein except to the extent such terms and provisions conflict with the terms
and provisions of this Agreement, in which case, during the Forbearance Period,
but not otherwise, the terms and provisions of this Agreement shall control.
Section 9.6 Counterparts. This Agreement may be executed in two or more
counterparts, and it shall not be necessary that the signatures of all parties
hereto be contained on any one counterpart hereof; each counterpart shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
Section 9.7 Indemnification. KCS and the Borrowers jointly and
severally agree to indemnify the Agent, the Collateral Agent, the Lenders and
each of their officers, directors, employees, agents, attorneys-in-fact and
affiliates (the "Indemnified Persons") from and against any and all liabilities,
claims, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses and disbursements of any kind whatsoever (individually or
collectively, the "Liabilities") which may at any time be imposed on, incurred
by or asserted against the Indemnified Persons in any
13
<PAGE> 14
way relating to or arising out of this Agreement, the Credit Agreement or any
other Loan Document, or any other document contemplated or referred to herein or
the transactions contemplated hereby or thereby or any action taken or omitted
by any of the Indemnified Persons under or in connection with any of the
foregoing, including any Liabilities incurred or asserted as a result of the
negligence, whether sole or concurrent, of any of the Indemnified Persons;
provided that neither KCS nor any Borrower shall be liable to any Indemnified
Person for the payment of any portion of such Liabilities resulting solely from
the gross negligence or willful misconduct of any such Indemnified Person.
Section 9.8 Survival. Notwithstanding any other provision of this
Agreement, all representations and warranties of KCS and the Borrowers and the
provisions of the penultimate sentence of Sections 1.2 and Sections 2.1, 3.1,
3.2, 3.4, 9.2, 9.7 and this Section 9.8 of this Agreement shall survive the
termination of the Forbearance Period and the termination of this Agreement and
shall remain in force and effect so long as any Obligation is outstanding or any
Commitment exists.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on July 26, 1999; provided that this Agreement shall be effective
as of July 1, 1999.
[SIGNATURE PAGES TO FOLLOW]
14
<PAGE> 15
KCS ENERGY, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address for Notices:
5555 San Felipe, Suite 1200
Houston, Texas 77056
Attention: Kathryn M. Kinnamon
Telecopy: (713) 877-1372
Principal Place of Business
and Chief Executive Office:
5555 San Felipe, Suite 1200
Houston, Texas 77056
Attention: Kathryn M. Kinnamon
Telecopy: (713) 877-1372
BORROWERS:
KCS RESOURCES, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
KCS MICHIGAN RESOURCES, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
S-1
<PAGE> 16
KCS ENERGY MARKETING, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address for Notices:
5555 San Felipe, Suite 1200
Houston, Texas 77056
Attention: Kathryn M. Kinnamon
Telecopy: (713) 877-1372
S-2
<PAGE> 17
CO-AGENT AND A LENDER:
BANK ONE, TEXAS, NATIONAL
ASSOCIATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Applicable Lending Office:
910 Travis
Houston, Texas 77002
Attention: Karen Smith
Telecopy: (713) 751-7894
Address for Notices:
910 Travis Street
Houston, Texas 77002
Attention:
------------
Telecopy: (713) 751-3544
S-3
<PAGE> 18
CO-AGENT AND A LENDER BANK OF
AMERICA, NATIONAL ASSOCIATION,
successor to NationsBank, N.A.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Applicable Lending Office:
901 Main Street, 14th Floor
Dallas, Texas 75202
Attention: Corporate Credit Services
Address for Notices:
901 Main Street, 68th Floor
Dallas, Texas 75202
Attention: William E. Livingstone, IV
Telecopy: (214) 209-3533
S-4
<PAGE> 19
LENDERS:
COMERICA BANK-TEXAS
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Applicable Lending Office:
1508 West Mockingbird
Dallas, Texas 75235
Address for Notices:
1601 Elm Street
Second Floor
Dallas, Texas 75202
Attention:
-------------
Telecopy: (214) 965-8990
with copies to:
COMERICA BANK-TEXAS
One Shell Plaza
910 Louisiana, Suite 410
Houston, Texas 77002
Attention: Daniel G. Steele
Telecopy: (713) 722-6550
S-5
<PAGE> 20
DEN NORSKE BANK ASA
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Applicable Lending Office:
200 Park Avenue, 31st Floor
New York, New York 10166-0396
Address for Notices:
200 Park Avenue, 31st Floor
New York, New York 10166-0396
Attention: Cathleen Buckley
Telecopy: (212) 681-4123
with copies to:
DEN NORSKE BANK ASA
333 Clay Street, Suite 4890
Houston, Texas 77002
Attention: Morten Kreutz
Telecopy: (713) 757-1167
S-6
<PAGE> 21
GENERAL ELECTRIC
CAPITAL CORPORATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address for Notices:
SFG Global Asset Management
120 Long Ridge Road
Stamford, CT 06927
Telecopier No.: (203) 357-4890
Telephone No.: (203) 357-6536
Attention: Peter Fortmann
S-7
<PAGE> 22
CIBC INC., Lender and Collateral Agent
By:
--------------------------------
Authorized Signatory
Address for Notices:
1600 Smith Street, Suite 3100
Houston, Texas 77002
Attention: Mark Wolf
Telecopy: (713) 650-7675
AGENT:
CANADIAN IMPERIAL BANK OF
COMMERCE
By: --------------------------------
Authorized Signatory
Address for Notices:
425 Lexington Avenue
7th Floor
New York, New York 10017
Attention: Marybeth Ross
Syndications Group
Telecopy: (212) 856-3763
with copies to:
CANADIAN IMPERIAL BANK OF COMMERCE
1600 Smith Street
Houston, Texas 77002
Attention: Mark Wolf
Telecopy: (713) 650-7675
S-8
<PAGE> 23
EXHIBIT C
July 26, 1999
To each Lender party
to the Forbearance Agreement
referenced below and
Canadian Imperial Bank
of Commerce, as Agent and
CIBC Inc. as Collateral Agent
Re: Forbearance Agreement dated July 26, 1999 but to be effective as
of July 1, 1999, by and among KCS Energy, Inc., KCS Resources, Inc., KCS
Michigan Resources, Inc. and KCS Energy Marketing, Inc. (collectively, the "KCS
Entities"), Canadian Imperial Bank of Commerce, as Agent, CIBC Inc., as
Collateral Agent and the lenders party thereto from time to time (the
"Forbearance Agreement")
Ladies and Gentlemen:
We have acted as counsel to the KCS Entities in connection with the
transactions contemplated in the Forbearance Agreement. This Opinion is
delivered pursuant to Section 4.1(c) of the Forbearance Agreement, and the Agent
and the Lenders are hereby authorized to rely upon this Opinion in connection
with the transactions contemplated in the Forbearance Agreement. Each
capitalized term used but not defined herein shall have the meaning assigned to
such term in the Forbearance Agreement.
In our representation of the KCS Entities, we have examined an executed
counterpart of the Forbearance Agreement.
We have also examined the originals, or copies certified to our
satisfaction, of such other records of the KCS Entities, certificates of public
officials and officers of the KCS Entities, agreements, instruments, and
documents as we have deemed necessary as a basis for the opinions hereinafter
expressed.
In making such examinations, we have, with your permission, assumed:
(a) the genuineness of all signatures to the Forbearance Agreement
other than those of the KCS Entities;
(b) the authenticity and completeness of all documents submitted to us
as originals and the conformity with the originals of all documents submitted to
us as copies;
<PAGE> 24
(c) the Agent and each Lender is authorized and has the power to enter
into and perform its obligations under the Forbearance Agreement;
(d) the due authorization, execution, and delivery of the Forbearance
Agreement by each party thereto other than the KCS Entities; and
(e) the representations as to factual matters made by the KCS Entities
in the Forbearance Agreement are true and complete.
Based upon the foregoing and subject to the qualifications set forth
herein, we are of the opinion that:
A. The execution and delivery by the KCS Entities of the Forbearance
Agreement and the payment and performance of all obligations of the KCS Entities
thereunder are within the power of each KCS Entity and have been duly authorized
by all necessary corporate action.
B. The Forbearance Agreement constitutes the legal, valid, and binding
obligations of each KCS Entity, enforceable against each KCS Entity in
accordance with its terms.
The opinions expressed herein are subject to the following
qualifications and limitations:
We are licensed to practice law only in the States of New Jersey and
New York and other jurisdictions whose laws are not applicable to the opinions
expressed herein; accordingly, the foregoing opinions are limited solely to the
laws of the State of New Jersey, the State of New York, applicable United States
federal law, and the corporation laws of the State of Delaware.
The validity, binding effect, and enforceability of the Forbearance
Agreement or certain provisions thereof may be limited or affected by
bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization, or
other similar laws affecting rights of creditors generally, including, without
limitation, judicial decisions, statutes or rules of law which limit the effect
of waivers of rights by a debtor and limit the permissible scope of
indemnification agreements, provided, however, that the limitations and other
effects of such statutes or rules of law, as currently in effect, upon the
validity and binding effect of the Forbearance Agreement should not differ
materially from the limitations and other effects of such statutes or rules of
law upon the validity and binding effect of credit agreements and forbearance
agreements generally. No opinion is expressed with respect to the enforceability
of any provisions that may purport to bind the KCS Entities to the waiver of any
right or defense which by virtue of applicable law or equitable principle cannot
be waived.
The enforceability of the respective obligations of the KCS Entities
under the Forbearance Agreement is subject to general principles of equity
(whether such enforceability is considered in a suit in equity or at law).
<PAGE> 25
This Opinion is furnished by us solely for the benefit of the Agent,
the Lenders and the successors and assigns of each in connection with the
transactions contemplated by the Forbearance Agreement and is not to be quoted
in whole or in part or otherwise referred to or disclosed in any other
transaction.
This Opinion speaks as of the date hereof, and we disclaim any
obligation to update this opinion to you.
Very truly yours,
ORLOFF, LOWENBACH, STIFELMAN
& SIEGEL, P.A.
By:
--------------------------------
<PAGE> 1
EXHIBIT 10.2
FORBEARANCE AGREEMENT
THIS FORBEARANCE AGREEMENT (this "Forbearance Agreement") is made and
entered into on July 26, 1999 and effective as of July 1, 1999 (the "Effective
Date"), 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 ("KCS Energy Services"), MEDALLION GAS SERVICES, INC., an
Oklahoma 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").
WITNESSETH:
WHEREAS, on December 22, 1998, the Borrowers, the Lenders, and the
Agent entered into a First Amended and Restated Credit Agreement (the "Credit
Agreement") whereby, upon the terms and conditions therein stated, the Lenders
agreed to make loans to the Borrowers up to the aggregate amount of
$160,000,000.00 to be used by the Borrowers for the purposes set forth in
Section 2.6 of the Credit Agreement; and
WHEREAS, the Annual Report of KCS on Form 10-K filed with the SEC on
March 31, 1999 (the "10-K Report") revealed the existence of certain events and
conditions (the "MAC Events") which are in violation of the terms and provisions
of the Credit Agreement and/or which constitute a Material Adverse Effect; and
WHEREAS, the Agent has advised the Borrowers in a letter dated April 7,
1999 (the "Default Letter") that the existence of each such MAC Event
constitutes a Default; and
WHEREAS, the Borrowers, the Lenders, the Agent and the Collateral Agent
entered into a Forbearance Agreement dated May 14, 1999 but effective April 1,
1999 (the "Prior Forbearance Agreement") and the Prior Forbearance Agreement
terminated pursuant to its terms on June 30, 1999; and
WHEREAS, pursuant to Section 9.4 of the Prior Forbearance Agreement the
Defaults resulting from the MAC Events have become Events of Default pursuant to
which the Agent, the
<PAGE> 2
Collateral Agent and the Lenders have the right to exercise the rights and
remedies available to them under such circumstances, all as set forth in the
Credit Agreement and other Loan Documents; and
WHEREAS, pursuant to the terms of the Credit Agreement and the Prior
Forbearance Agreement, the Lenders and the Agent redetermined the Borrowing Base
on July 1, 1999 and, as of such date, the Tranche A Obligations were in excess
of the Borrowing Base; and
WHEREAS, the Agent in a letter delivered July 7, 1999, notified the
Borrowers of such excess and demanded pursuant to Sections 3.5(a) and 9.8 of the
Prior Forbearance Agreement that payment thereof be made within five days of
receipt of the July 7, 1999 notice; and
WHEREAS, the Borrower failed to pay Obligations in an amount sufficient
to eliminate the excess of the Tranche A Obligations over the Borrowing Base;
and
WHEREAS, the Borrowers' failure to repay Obligations in the amount
required to reduce Tranche A Obligations to an amount equal to the Borrowing
Base on or before July 12, 1999 is an Event of Default pursuant to the Prior
Forbearance Agreement and Section 7.1(a)(i) of the Credit Agreement; and
WHEREAS, the Agent delivered a notice of default dated July 12, 1999
(the "Notice of Default"), pursuant to which (i) all Obligations of the
Borrowers were declared immediately due and payable and (ii) all Commitments of
the Lenders to extend credit or to participate in Letters of Credit and the
Agent's obligation to issue such Letters of Credit were terminated; and
WHEREAS, the Borrowers have requested that, in consideration of the
compliance by the Borrowers with the terms and provisions of this Agreement, the
Agent, the Collateral Agent and the Lenders forbear from exercising any further
rights and remedies pursuant to the Loan Documents or otherwise and the Agent
and the Lenders rescind that declaration contained in the Notice of Default that
all Obligations of the Borrowers pursuant to the Credit Agreement are
immediately due and payable; and
WHEREAS, subject to (i) compliance by the Borrowers with the terms and
provisions of this Agreement applicable to each, and (ii) the other terms and
provisions of this Agreement, 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 the Notice of Default that all Obligations of the Borrowers
pursuant to the Loan Documents are immediately due and payable, such rescission
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.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
2
<PAGE> 3
ARTICLE 1
GENERAL TERMS
Section 1.1 Terms Defined in Agreement. As used in this Agreement,
except as may otherwise be provided in this Agreement, all capitalized terms
which are defined in the Credit Agreement shall have the same meaning herein as
therein, all of such terms and definitions being incorporated herein by
reference.
Section 1.2 Forbearance Period. Subject to (i) satisfaction of the
conditions set forth in Section 4.1 of this Agreement, (ii) continuous
compliance by the Borrowers with the terms and provisions of this Agreement
applicable to each, and (iii) the other terms and provisions of this Agreement,
the Lenders hereby agree to forbear from exercising any rights and remedies not
heretofore exercised which may be available to them as a result of the Events of
Default described in the Default Letter and the Notice of Default and
subsections 4.2(a)(ii) through (iv) of this Agreement during a period commencing
as of the date hereof and ending on the first to occur of (i) any event or
condition pursuant to which the Forbearance Period automatically terminates,
including without limitation, any of the provisions of Section 8.1 of this
Agreement, or (ii) October 5, 1999 (the "Forbearance Termination Date"). The
term "Forbearance Period" means the period of time commencing on the Effective
Date and ending at 11:59 p.m. on the Forbearance Termination Date. The Agent and
the Lenders also agree to rescind, and do hereby rescind, the declaration
contained in the Notice of Default that all Obligations of the Borrowers
pursuant to the Loan Documents are immediately due and payable; provided that
upon the termination of the Forbearance Period, such declaration may be
reinstated by notice to the Borrowers from the Agent; and provided further that
the demand for immediate payment of the Tranche A Obligations in excess of the
Borrowing Base contained in the Notice of Default shall not be deemed to be
modified or altered in any manner hereby and remains in full force and effect.
Except as expressly herein provided, upon termination of the Forbearance Period
(regardless of how such termination occurs), this Agreement shall have no
further force and effect whatsoever, and thereafter the terms and provisions of
the Credit Agreement and the other Loan Documents shall be effective as
expressly therein provided without further reference to the terms and provisions
of this Agreement. Upon termination of the Forbearance Period, the Agent may
declare all Obligations of the Borrowers pursuant to the Loan Documents to be
immediately due and payable, without any grace or cure period that might
otherwise be provided in the Loan Documents, by delivery of a notice to the
Borrowers that such Obligations are due and payable. Nothing herein shall be, or
be construed to be, a waiver of the Events of Default as described in the
Default Letter or Notice of Default, and nothing herein shall be construed to
mean that such Events of Default have been cured or have ceased to exist.
ARTICLE 2
DEFINITIONS
Section 2.1 Definitions. The following terms shall have meanings as follows:
3
<PAGE> 4
"1996 Indenture" means the Indenture dated as of January 15, 1996 by
and among KCS, the Subsidiary Guarantors (as such term is defined therein) and
Fleet National Bank of Connecticut, as Trustee, relating to the sale by KCS of
its eleven percent (11%) Senior Notes due 2003.
"1998 Indenture" means the Indenture dated as of January 15, 1998, by
and among KCS, the Subsidiary Guarantors (as such term is defined therein) and
State Street Bank and Trust Company, as Trustee, relating to the sale by KCS of
its eight and seven-eighths percent (8 7/8%) Senior Subordinated Notes due 2008.
"Applicable Margin" shall mean as to each Tranche A Base Rate Loan and
each Tranche A LIBO Rate Loan, an amount equal to the percentage set forth in
the grid below for such type of Loan:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Applicable Margin
(Tranche A)
- ---------------------------------------------------------------------------------
Base Rate IBO Rate
<S> <C> <C>
Type of Loans
- ---------------------------------------------------------------------------------
Loans in an Aggregate Principal Amount in the 1.5% 2.5%
amount of the Borrowing Base or less
- ---------------------------------------------------------------------------------
Loans in Excess of Borrowing Base 2.0% 3.0%
- ---------------------------------------------------------------------------------
</TABLE>
"Borrowing Base Deficiency" means, at any time, the excess of Tranche A
Obligations over the Borrowing Base in effect as of such date.
"Interest Period" shall mean, subject to the limitations set forth in
Section 2.4 of the Credit Agreement, with respect to any LIBO Rate Loan, a
period commencing on the date such Loan is converted from a Loan of another type
pursuant to the Credit Agreement or the last day of the next preceding Interest
Period with respect to such Loan and ending on the numerically corresponding day
in the calendar month that is one or two months thereafter, as the Borrowers may
request in the Tranche A Borrowing Request or the Tranche B Borrowing Request
for such Loan provided that, the Interest Period for each LIBO Rate Loan shall
end on or before the Forbearance Termination Date.
ARTICLE 3
TERMS AND FACILITIES
Section 3.1 Loans and Continuing Termination of Commitments. Pursuant
to the Notice of Default, the Commitments have been terminated and the Lenders
are not obligated and do not have any commitment whatsoever to make Loans, other
than conversions of LIBO Rate Loans into Base Rate Loans or Base Rate Loans into
LIBO Rate Loans and reborrowings of LIBO Rate Loans
4
<PAGE> 5
which occur at the end of an Interest Period, in each case occurring
during the Forbearance Period. The Borrowers may not reborrow any portion of any
Loan after all or such portion of any such Loan shall have been repaid. The
Lenders shall have no obligation to continue loans as LIBO Rate Loans or to
convert Base Rate Loans into LIBO Rate Loans after the Forbearance Termination
Date.
Section 3.2 Letters of Credit. No Letters of Credit were outstanding as
of the Effective Date and none are outstanding as of the date hereof and the
Agent is not obligated to issue, on behalf of the Lenders or otherwise, and the
Lenders are not obligated to participate in, any Letters of Credit.
Section 3.3 Repayment of Loans and Interest. (a) Accrued and unpaid
interest on each outstanding Base Rate Loan shall be due and payable on July 31,
1999, August 31, 1999 and September 30, 1999. Accrued and outstanding interest
on each LIBO Rate Loan shall be due and payable on the last day of the Interest
Period for such LIBO Rate Loan and, in the case of any Interest Period for LIBO
Rate Loans which is in excess of one month, on the last day of each calendar
month following the commencement of such Interest Period, the payment in each
instance to be the amount of interest which has accrued and remains unpaid in
respect of the relevant Loan. Notwithstanding the Notice of Default and subject
to Section 2.20 of the Credit Agreement, Loans shall bear interest at the
Adjusted Base Rate for each Base Rate Loan and the Adjusted LIBO Rate for each
LIBO Rate Loan; provided that, for purposes of determining the Adjusted Base
Rate and the Adjusted LIBO Rate, the term "Applicable Margin" shall have the
meaning set forth in Section 2.1 of this Agreement.
(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 and September 30, 1999. At the time of the
making of each payment hereunder, the Borrowers shall specify to the Agent the
Tranche A Loans to which such payment is to be applied. In the event the
Borrowers fail to so specify, the Agent may apply such payment to Tranche A
Loans as it may elect in its discretion and in accordance with the terms of the
Credit Agreement and this Agreement.
Section 3.4 Borrowing Base; Mandatory Prepayments. (a) The Borrowing
Base in effect as of the Effective Date is $46,000,000. The Borrowing Base shall
be automatically reduced in the amount of the Specified Value of each of the Oil
and Gas Properties of any of the Borrowers sold in accordance with Section 3.6
hereof. Notwithstanding clauses (b) and (c) of Section 2.12 of the Credit
Agreement, except for redeterminations pursuant to the immediately preceding
sentence, the Borrowing Base in effect as of the Effective Date shall remain in
effect until the first Business Day following the earlier of (x) the Forbearance
Termination Date and (y) September 30, 1999 (the "Redetermination Date") and,
notwithstanding Section 2.12 of the Credit Agreement, such redetermination of
the Borrowing Base shall be the amount agreed to by the Agent and the Tranche A
Lenders on or after the Redetermination Date.
(b) If on or after the Redetermination Date, a Borrowing Base
Deficiency exists after giving effect to such redetermination of the Borrowing
Base, the Borrowers shall, within five days from receiving notice of the
Borrowing Base, prepay Loans in the amount of any increase in
5
<PAGE> 6
the Borrowing Base Deficiency in effect by reason of such determination together
with accrued and unpaid interest thereon.
(c) In addition to the amount payable pursuant to clause (b)
above (if any), upon the termination of the Forbearance Period, Loans in the
amount of any Borrowing Base Deficiency existing prior to the redetermination of
the Borrowing Base as provided in clause (a) above (but such amount not to
exceed the Borrowing Base Deficiency on the Redetermination Date) are
immediately due and payable without any grace or cure period.
Section 3.5 Borrowing Base Deficiency, etc. Upon any redetermination of
the Borrowing Base by reason of a sale of Oil and Gas Properties pursuant to
Section 3.6 of this Agreement, the Agent shall notify the Borrowers of the
amount of the Borrowing Base after such redetermination and the amount of any
Borrowing Base Deficiency which may exist on such date.
Section 3.6 Sales of Oil and Gas Properties. At any time during the
Forbearance Period that (i) any of the Oil and Gas Properties which are
described in Exhibit "A" hereto, or any other Oil and Gas Properties which are
added to Exhibit "A" pursuant to the agreement of the Agent, the Required
Lenders, and the Borrowers with respect to a Specified Value (collectively, the
"Scheduled Properties"), or (ii) any other Oil and Gas Properties owned by any
of the Borrowers (the "Unscheduled Properties") are sold (other than Oil and Gas
Properties described in Section 7.1(iii) of this Agreement), the Borrowers
shall, substantially concurrently with the sale thereof, pay principal of the
Obligations in an amount equal to (i) with respect to Scheduled Properties, the
value attributable to such Scheduled Properties as specified in Exhibit "A" as
amended from time to time or (ii) with respect to the Unscheduled Properties the
value specified by the Agent with the consent of the Required Lenders
(collectively, the "Specified Value") until the principal of the Obligations is
paid in full. In addition, upon the sale of any such Oil and Gas Properties
(whether Scheduled Properties or Unscheduled Properties), if the Net Cash
Proceeds are greater than the Specified Value, the Borrowers shall pay an amount
equal to twenty percent (20%) of the portion of the Net Cash Proceeds in excess
of the Specified Value which shall be applied to the repayment of the principal
of the Obligations until the principal amount of such Obligations is repaid in
full. At the time of the making of each payment hereunder, the Borrowers shall
specify to the Agent the Loans to which such payment is to be applied in
accordance with the terms of this Agreement. In the event the Borrowers fail to
so specify, the Agent may apply such payment to Loans as it may elect in its
discretion and in accordance with the terms of the Credit Agreement and this
Agreement. The Agent shall have the necessary authority to release, and each
Lender hereby consents to the Agent releasing, Liens on the Scheduled Properties
and the Unscheduled Properties so long as the Net Cash Proceeds equal or exceed
the Specified Value.
6
<PAGE> 7
ARTICLE 4
CONDITIONS
Section 4.1 Conditions Precedent to Initial Effectiveness of Agreement.
The Lenders shall have no obligation to forbear from exercising any rights and
remedies under and pursuant to the Loan Documents unless and until the Agent
shall have received the following documentation and other items, appropriately
executed when necessary and, where applicable, acknowledged by one or more
authorized officers of each of the Borrowers and dated, where applicable, of
even date herewith or a date prior thereto:
(a) multiple counterparts of this Agreement as requested by the Agent;
(b) certificates of incumbency and copies of corporate resolutions in
the form attached hereto as Exhibit "B" approving and authorizing the
transactions contemplated herein duly adopted by the boards of directors of each
Borrower accompanied by certificates of the secretary or an assistant secretary
of each Borrower, as the case may be, to the effect that such copies are true
and correct copies of resolutions duly adopted at a meeting or by unanimous
consent of the board of directors of each Borrower, as the case may be, and that
such resolutions constitute all the resolutions adopted with respect to such
transactions, have not been amended, modified, or revoked in any respect, and
are in full force and effect as of the date of such certificate; and
(c) the opinion of counsel to the Borrowers in the form attached hereto
as Exhibit "C".
Section 4.2 Additional Conditions Precedent to Initial Effectiveness of
Agreement. The obligations of the Agent, the Collateral Agent, and the Lenders
to forbear from exercising their rights and remedies under and pursuant to the
Credit Agreement and other Loan Documents are subject to the satisfaction of the
following additional conditions precedent that, as of the date of execution of
this Agreement:
(a) no Default or Event of Default shall exist except for (i) the
Defaults or Events of Default referred to in the Default Letter and the Notice
of Default, (ii) the defaults and events of default existing in connection with
the Affiliate Credit Agreement including, without limitation, the event of
default pursuant to the Affiliate Credit Agreement which is set out in that
notice of default delivered to the borrowers under the Affiliate Credit
Agreement dated July 12, 1999 and any Default or Event of Default pursuant to
Section 7.1(d) of the Credit Agreement by reason of such events of default,
(iii) Defaults existing pursuant to Section 7.1(d) of the Credit Agreement or
pursuant to the 1996 Indenture and 1998 Indenture, in each case by reason of the
non-payment of certain interest obligations in respect of the Public Debt and
(iv) defaults and events of default pursuant to Section 5.1(e) of each of the
1996 Indenture and the 1998 Indenture by reason of the Events of Default and
defaults or events of default set forth in clauses (i) and (ii) above;
7
<PAGE> 8
(b) no Material Adverse Effect shall have occurred and be continuing
except for those disclosed in the 10-K Report, the Event of Default set forth in
the Notice of Default and the consequent acceleration of the maturities of the
Obligations and the defaults and events of defaults set forth above in clauses
(ii) through (iv) of subsection (a) of this Section 4.2;
(c) each of the representations and warranties contained in the Credit
Agreement and the other Loan Documents shall be true and correct, except for (i)
such representations and warranties which were contained in the Credit Agreement
and the other Loan Documents which are modified and/or supplemented as provided
in Sections 5.2 and 5.3 of this Agreement or (ii) those which are expressly
stated to be made as of a particular date;
(d) the Security Instruments shall be in full force and effect and
provide to the Lenders the security intended thereby;
(e) the consummation of the transactions contemplated hereby shall not
contravene, violate, or conflict with any Requirement of Law; and
(f) legal counsel for the Agent shall have received payment (to the
extent invoiced) from the Borrowers for all reasonable fees and expenses and
legal counsel of any Lender shall have received payment (to the extent invoiced)
from the Borrowers for all reasonable fees and expenses for services rendered
after July 1, 1999, in each case as payable by the Borrowers pursuant to the
Loan Documents.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
Each Borrower hereby represents and warrants to the Agent and each
Lender that:
Section 5.1 Representations Repeated. The representations and
warranties of the Borrowers contained in the Credit Agreement and the other Loan
Documents and otherwise made in writing by or on behalf of the Borrowers
pursuant to the Credit Agreement and the other Loan Documents were true and
correct when made, and are true and correct in all material respects at and as
of the Effective Date and the date hereof except for such representations and
warranties (i) which were contained in the Credit Agreement and the other Loan
Documents which are modified or supplemented as provided in Section 5.2 and 5.3
of this Agreement, and (ii) which are expressly stated to be made as of a
particular date which shall remain true and correct as of the date made.
Section 5.2 Scope and Accuracy of Financial Statements. The Financial
Statements of KCS and its Subsidiaries as at December 31, 1998, present fairly
the financial position and results of operations and cash flows of KCS and its
Subsidiaries in accordance with GAAP as at the relevant point in time or for the
period indicated. No event or circumstance has occurred since December 31, 1998,
except for the MAC Events disclosed in the 10-K Report, the Event of Default and
the
8
<PAGE> 9
consequent acceleration of the maturities of the Obligations as set forth in the
Notice of Default and other defaults and events of default set forth in
subsections 4.2(a)(ii) through (iv) of this Agreement which could reasonably be
expected to have a Material Adverse Effect on KCS or KCS Medallion.
Section 5.3 Default. None of the Borrowers is in default of, and no
event has occurred which, with the lapse of time or giving of notice, or both,
could result in such a default of, (i) any charter document or bylaws of any
Borrower, or (ii) any agreement, obligation or Debt to which any Borrower is a
party or by which any Property of any Borrower may be bound, pursuant to which
the obligations of any of the Borrowers in the aggregate under any such
agreement, obligation or Debt, or the obligations secured thereby, exceed
$2,500,000, except (x) such as are being contested in good faith and as to which
such reserve as may be required by GAAP shall have been made therefor or (y)
Defaults and Events of Default pursuant to the Credit Agreement and the defaults
and events of default pursuant to the Affiliate Credit Agreement, the 1996
Indenture and the 1998 Indenture, in each case as described in Section 4.2(a) of
this Agreement, and the Borrowers hereby acknowledge that the Events of Default
described in the Default Letter and the Notice of Default are existing as of the
date hereof.
Section 5.4 Defenses. As of the date hereof, the outstanding principal
amount of the Tranche A Loans is $59,912,362 and no Borrower has any defenses,
offsets or counterclaims which would limit, reduce or impair in any manner the
obligations and indebtedness of any Borrower to pay the full amount of the
Obligations.
ARTICLE 6
AFFIRMATIVE COVENANTS
Section 6.1 Monthly Reconciliation Reports. During the Forbearance
Period the Borrowers shall deliver to the Agent, on or before the last day of
each calendar month, commencing July 31, 1999, Sufficient Copies of a report
prepared by KCS and certified by a Responsible Officer of KCS to be true and
correct as of the close of the immediately preceding calendar month and for the
period indicated with respect to (i) Net Cash Proceeds on a consolidated basis
from sales of Oil and Gas Properties for such period and (ii) such other
financial information as the Agent or any Lender reasonably requests.
Section 6.2 Fees and Expenses. In addition to the covenants in the
Credit Agreement, during the Forbearance Period, the Borrowers shall:
(a) promptly pay to or reimburse the Agent or the Collateral Agent, as
applicable, for all reasonable third-party fees, out-of-pocket costs and
expenses of the Agent and the Collateral Agent in connection with the
preparation, negotiation, execution, delivery and enforcement of this Agreement,
the Credit Agreement and the other Loan Documents, and any and all amendments,
restatements and supplements thereof and thereto, the filing and recordation of
the Security Instruments, and the consummation of the transactions contemplated
by the Loan Documents,
9
<PAGE> 10
including reasonable fees and expenses of legal counsel
and auditors and accountants for the Agent and the Collateral Agent.
(b) upon request by the Agent or on the request of any Lender with
notice to the Agent, promptly pay for all amounts reasonably expended, advanced,
or incurred (x) by or on behalf of the Agent and the Collateral Agent or (y)
with respect to services rendered or expenses incurred after July 1, 1999, by or
on behalf of any Lender (i) to satisfy any obligation of any of the Borrowers
under any of the Loan Documents; (ii) to collect the Obligations; (iii) to
enforce the rights of the Agent, the Collateral Agent, and the Lenders under any
of the Loan Documents, including, without limitation, any such expenses in
connection with the preparation, execution, delivery and enforcement of this
Agreement or any instruments and documents executed in connection herewith, and
any amendments, restatements and supplements thereof and thereto; and, (iv) to
protect the Properties or business of the Borrowers, including the Collateral,
which amounts shall be deemed compensatory in nature and liquidated as to amount
upon notice to the Borrowers by the Agent or such Lender and which amounts shall
include all court costs and reasonable fees and expenses of legal counsel,
auditors and accountants, petroleum engineers, and environmental and insurance
consultants.
(c) during the Forbearance Period, the Borrowers will each permit the
Agent, each Lender and Ernst & Young LLP or an alternate independent public
accounting firm designated by the Agent (Ernst & Young LLP or such alternate
independent public accounting firm designated by the Agent, the "Financial
Representative"), upon reasonable prior notice, to visit all of their respective
offices and to discuss the financial matters of each with its officers and
independent public accountant. Each Borrower hereby authorizes such independent
public accountant to discuss its financial matters with the Agent and the
Financial Representative whether or not any representative of such Borrower is
present. The Agent, each Lender and the Financial Representative may, upon
reasonable prior notice, examine (and, at the expense of the Borrowers,
photocopy extracts from) any of a Borrower's books or other corporate records.
The Borrowers shall pay the reasonable fees of the Financial Representative
incurred in connection with the Agent's or any Lender's exercise of its rights
pursuant to this clause.
ARTICLE 7
NEGATIVE COVENANTS
Section 7.1 Sales of Assets. Notwithstanding the provisions of Section
6.5 of the Credit Agreement, the Borrowers shall not, and shall not permit any
of their respective Subsidiaries to sell, transfer, or otherwise dispose of any
Oil and Gas Properties, in one or any series of transactions, whether now owned
or hereafter acquired, or enter into any agreement to do so unless the proceeds
of such sales (i) are of the type described in clauses (a) and (b) of the first
sentence of Section 6.5 of the Credit Agreement, or (ii) are made subject to and
in accordance with the provisions of Section 3.6 of this Agreement concerning
payments upon the sale of certain Oil and Gas Properties, or (iii) have an
aggregate value for all such sales of less than $250,000 (excluding sales of Oil
and Gas
10
<PAGE> 11
Properties, the proceeds of which are applied to the Loans in accordance with
other provisions of this Agreement).
Section 7.2 Restricted Payments. During the Forbearance Period (i)
none of the Borrowers or any Subsidiary of KCS shall make any payment of
principal of or interest on the Public Debt or purchase, redeem or defease any
of the Public Debt or make a deposit for such payment, purchase, redemption or
defeasance and (ii) KCS shall not pay or make any dividend or distribution or
purchase, redeem or otherwise acquire for value, any share of any class of its
capital stock.
ARTICLE 8
TERMINATION
Section 8.1 Termination of Agreement. (a) The Forbearance Period shall
automatically terminate upon the occurrence of (i) an Event of Default specified
in the Credit Agreement, other than those described in the Default Letter or the
Notice of Default or arising pursuant to Section 7.1(d) of the Credit Agreement
by reason of a default or event of default pursuant to the Affiliate Credit
Agreement and existing as of the date hereof or any Event of Default pursuant to
Section 7.1(d) of the Credit Agreement arising by reason of a failure to pay or
perform its obligations in respect of the Public Debt, or (ii) the termination
of any forbearance by lenders arising under or in connection with the Affiliate
Credit Agreement, or (iii) any default in the payment when due of any sums
payable hereunder or in the due observance or performance of any obligation of
any of the Borrowers hereunder, including, without limitation, the making of any
payment, purchase or deposit or the taking of any other action by the Borrowers,
or any Subsidiary of KCS which is prohibited by Section 7.2 of this Agreement;
or (iv) any failure by the Borrowers to deliver to the Agent on or before August
15, 1999 the engineering reports and data required by Sections 5.4(b) and (c) of
the Credit Agreement, or (v) any representation or warranty made in this
Agreement by any Borrower proving to have been untrue in any material respect as
of the date the facts therein set forth were stated or certified.
(b) Except as herein expressly provided, upon the termination of the
Forbearance Period, this Agreement shall terminate and be of no further force
and effect and the rights and remedies of the Agent, the Collateral Agent and
the Lenders shall be such as are provided in the Credit Agreement and the other
Loan Documents.
ARTICLE 9
MISCELLANEOUS
Section 9.1 No Waiver; Rights Cumulative. No course of dealing on the
part of the Agent, the Collateral Agent or any of the Lenders or any of their
officers or employees, nor any forbearance, failure or delay by the Agent, the
Collateral Agent or any of the Lenders with respect to exercising any of their
rights under the Credit Agreement or any other Loan Document shall
11
<PAGE> 12
operate as a waiver thereof including, without limitation, (i) any forbearance
by the Agent, the Collateral Agent and the Lenders with respect to the Events of
Default described in the Default Letter or the Event of Default described in the
Notice of Default or any other Default or Event of Default, (ii) any forbearance
by the Agent, the Collateral Agent and the Lenders from constituting any Default
as an Event of Default and (iii) any and all other actions of the Agent, the
Collateral Agent and the Lenders. The rights of the Agent, the Collateral Agent
and the Lenders under this Agreement, the Credit Agreement and the other Loan
Documents shall be cumulative and the exercise or partial exercise of any such
right shall not preclude the exercise of any other right. Neither the making of
any Loan nor the issuance of a Letter of Credit shall constitute a waiver of any
of the covenants, warranties, or conditions of any of the Borrowers contained in
this Agreement, the Credit Agreement or any other Loan Documents. In the event
any Borrower is unable to satisfy any such covenant, warranty, or condition,
neither the making of any Loan nor the issuance of a Letter of Credit nor the
forbearance from exercising their rights and remedies as provided in the Credit
Agreement and other Loan Documents shall have the effect of precluding the Agent
or the Lenders from thereafter declaring such inability to be a Default or an
Event of Default or from exercising their rights and remedies as provided in the
Credit Agreement and other Loan Documents.
Section 9.2 Release. The Borrowers hereby release the Agent, the
Collateral Agent and the Lenders from any and all claims and causes of action
arising out of or relating in any way to the actions or omissions of such
Persons in connection with the Loans, the Commitments or any of the Loan
Documents.
Section 9.3 Severability. In the event any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal, or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provision of this Agreement.
Section 9.4 No Cure of Default. This Agreement shall not have the
effect of curing or otherwise eliminating the Defaults or Events of Default
described in the Default Letter or the Event of Default described in the Notice
of Default. Unless any Default or Event of Default is waived in writing by the
Lenders, such Default or Event of Default shall continue to exist throughout the
Forbearance Period.
Section 9.5 Extent of Agreement. Except as otherwise expressly provided
herein, the Credit Agreement and the other Loan Documents and the rights and
remedies of the parties thereto are not amended, modified, altered, or affected
by this Agreement. Except as expressly set forth herein, all of the terms,
conditions, covenants, representations, warranties and all other provisions of
the Credit Agreement and the other Loan Documents are herein ratified and
confirmed and shall remain in full force and effect. This Agreement does not
constitute an amendment to the Credit Agreement or the other Loan Documents, but
rather, constitutes a temporary supplement thereto. The terms and provisions of
the Credit Agreement and the other Loan Documents are expressly incorporated
herein except to the extent such terms and provisions conflict with the terms
and provisions of this Agreement, in which case, during the Forbearance Period,
but not otherwise, the terms and provisions of this Agreement shall control.
12
<PAGE> 13
Section 9.6 Counterparts. This Agreement may be executed in two or
more counterparts, and it shall not be necessary that the signatures of all
parties hereto be contained on any one counterpart hereof; each counterpart
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
Section 9.7 Indemnification. The Borrowers jointly and severally agree
to indemnify the Agent, the Collateral Agent, the Lenders and each of their
officers, directors, employees, agents, attorneys-in-fact and affiliates (the
"Indemnified Persons") from and against any and all liabilities, claims,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses and disbursements of any kind whatsoever (individually or collectively,
the "Liabilities") which may at any time be imposed on, incurred by or asserted
against the Indemnified Persons in any way relating to or arising out of this
Agreement, the Credit Agreement or any other Loan Document, or any other
document contemplated or referred to herein or the transactions contemplated
hereby or thereby or any action taken or omitted by any of the Indemnified
Persons under or in connection with any of the foregoing, including any
Liabilities incurred or asserted as a result of the negligence, whether sole or
concurrent, of any of the Indemnified Persons; provided that no Borrower shall
be liable to any Indemnified Person for the payment of any portion of such
Liabilities resulting solely from the gross negligence or willful misconduct of
any such Indemnified Person.
Section 9.8 Survival. Notwithstanding any other provision of this
Agreement, all representations and warranties of the Borrowers and the
provisions of the penultimate sentence of Section 1.2 and Sections 2.1, 3.1,
3.2, 3.4, 9.2, 9.7 and this Section 9.8 of this Agreement shall survive the
termination of the Forbearance Period and the termination of this Agreement and
shall remain in force and effect so long as any Obligation is outstanding or any
Commitment exists.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on July 26, 1999; provided that this Agreement shall be effective
as of July 1, 1999.
[SIGNATURE PAGES TO FOLLOW]
13
<PAGE> 14
BORROWERS:
KCS MEDALLION RESOURCES, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
KCS ENERGY, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
KCS ENERGY SERVICES, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
MEDALLION GAS SERVICES, INC
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Address for Notices:
5555 San Felipe, Suite 1200
Houston, Texas 77056
Attention: Kathryn M. Kinnamon
Telecopy: (713) 877-1372
S-1
<PAGE> 15
LENDERS:
BANK ONE, TEXAS, NATIONAL
ASSOCIATION
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Applicable Lending Office:
910 Travis
Houston, Texas 77002
Attention: Karen Smith
Telecopy: (713) 751-7894
Address for Notices:
910 Travis Street
Houston, Texas 77002
Attention:
Telecopy: (713) 751-3544
S-2
<PAGE> 16
COMERICA BANK-TEXAS
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Applicable Lending Office:
1508 West Mockingbird
Dallas, Texas 75235
Address for Notices:
1601 Elm Street
Second Floor
Dallas, Texas 75202
Attention:
------------
Telecopy: (214) 965-8990
with copies to:
COMERICA BANK-TEXAS
One Shell Plaza
910 Louisiana, Suite 410
Houston, Texas 77002
Attention: Daniel G. Steele
Telecopy: (713) 722-6550
S-3
<PAGE> 17
SOCIETE GENERALE,
SOUTHWEST AGENCY
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Address for Notices:
1111 Bagby, Suite 2020
Houston, Texas 77002
Attention: Mark Cox
S-4
<PAGE> 18
DEN NORSKE BANK ASA
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Applicable Lending Office:
200 Park Avenue, 31st Floor
New York, New York 10166-0396
Address for Notices:
200 Park Avenue, 31st Floor
New York, New York 10166-0396
Attention: Cathleen Buckley
Telecopy: (212) 681-4123
with copies to:
DEN NORSKE BANK ASA
333 Clay Street, Suite 4890
Houston, Texas 77002
Attention: Morten Kreutz
Telecopy: (713) 757-1167
S-5
<PAGE> 19
PARIBAS
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Address for Notices:
1200 Smith Street, Suite 3100
Houston, Texas 77002
Attention: Douglas R. Liftman
S-6
<PAGE> 20
GENERAL ELECTRIC
CAPITAL CORPORATION
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Address for Notices:
SFG Global Asset Management
120 Long Ridge Road
Stamford, CT 06927
Telecopier No.: (203) 357-4890
Telephone No.: (203) 357-6536
Attention: Peter Fortmann
S-7
<PAGE> 21
CIBC INC., Lender and Collateral Agent
By:
----------------------------------
Authorized Signatory
Address for Notices:
1600 Smith Street, Suite 3100
Houston, Texas 77002
Attention: Mark Wolf
Telecopy: (713) 650-7675
AGENT:
CANADIAN IMPERIAL BANK OF
COMMERCE
By:
----------------------------------
Authorized Signatory
Address for Notices:
425 Lexington Avenue
7th Floor
New York, New York 10017
Attention: Marybeth Ross
Syndications Group
Telecopy: (212) 856-3763
with copies to:
CANADIAN IMPERIAL BANK OF COMMERCE
1600 Smith Street
Houston, Texas 77002
Attention: Mark Wolf
Telecopy: (713) 650-7672
S-8
<PAGE> 22
EXHIBIT C
July 26, 1999
To each Lender party
to the Forbearance Agreement
referenced below and
Canadian Imperial Bank
of Commerce, as Agent and
CIBC Inc. as Collateral Agent
Re: Forbearance Agreement dated July 26, 1999 but to be effective as of
July 1, 1999, by and among KCS Medallion Resources, Inc., KCS Energy, Inc., KCS
Energy Services, Inc. and Medallion Services, Inc. (collectively, the "KCS
Entities"), Canadian Imperial Bank of Commerce, as Agent, CIBC Inc., as
Collateral Agent and the lenders party thereto from time to time (the
"Forbearance Agreement")
Ladies and Gentlemen:
We have acted as counsel to the KCS Entities in connection with the
transactions contemplated in the Forbearance Agreement. This Opinion is
delivered pursuant to Section 4.1(c) of the Forbearance Agreement, and the Agent
and the Lenders are hereby authorized to rely upon this Opinion in connection
with the transactions contemplated in the Forbearance Agreement. Each
capitalized term used but not defined herein shall have the meaning assigned to
such term in the Forbearance Agreement.
In our representation of the KCS Entities, we have examined an executed
counterpart of the Forbearance Agreement.
We have also examined the originals, or copies certified to our
satisfaction, of such other records of the KCS Entities, certificates of public
officials and officers of the KCS Entities, agreements, instruments, and
documents as we have deemed necessary as a basis for the opinions hereinafter
expressed.
In making such examinations, we have, with your permission, assumed:
(a) the genuineness of all signatures to the Forbearance Agreement
other than those of the KCS Entities;
(b) the authenticity and completeness of all documents submitted to us
as originals and the conformity with the originals of all documents submitted to
us as copies;
S-9
<PAGE> 23
(c) the Agent and each Lender is authorized and has the power to enter
into and perform its obligations under the Forbearance Agreement;
(d) the due authorization, execution, and delivery of the Forbearance
Agreement by each party thereto other than the KCS Entities; and
(e) the representations as to factual matters made by the KCS Entities
in the Forbearance Agreement are true and complete.
Based upon the foregoing and subject to the qualifications set forth
herein, we are of the opinion that:
A. The execution and delivery by the KCS Entities of the Forbearance
Agreement and the payment and performance of all obligations of the KCS Entities
thereunder are within the power of each KCS Entity and have been duly authorized
by all necessary corporate action.
B. The Forbearance Agreement constitutes the legal, valid, and binding
obligations of each KCS Entity, enforceable against each KCS Entity in
accordance with its terms.
The opinions expressed herein are subject to the following
qualifications and limitations:
We are licensed to practice law only in the States of New Jersey and
New York and other jurisdictions whose laws are not applicable to the opinions
expressed herein; accordingly, the foregoing opinions are limited solely to the
laws of the State of New Jersey, the State of New York, applicable United States
federal law, and the corporation laws of the State of Delaware.
The validity, binding effect, and enforceability of the Forbearance
Agreement or certain provisions thereof may be limited or affected by
bankruptcy, insolvency, moratorium, fraudulent conveyance, reorganization, or
other similar laws affecting rights of creditors generally, including, without
limitation, judicial decisions, statutes or rules of law which limit the effect
of waivers of rights by a debtor and limit the permissible scope of
indemnification agreements, provided, however, that the limitations and other
effects of such statutes or rules of law, as currently in effect, upon the
validity and binding effect of the Forbearance Agreement should not differ
materially from the limitations and other effects of such statutes or rules of
law upon the validity and binding effect of credit agreements and forbearance
agreements generally. No opinion is expressed with respect to the enforceability
of any provisions that may purport to bind the KCS Entities to the waiver of any
right or defense which by virtue of applicable law or equitable principle cannot
be waived.
The enforceability of the respective obligations of the KCS Entities
under the Forbearance Agreement is subject to general principles of equity
(whether such enforceability is considered in a suit in equity or at law).
<PAGE> 24
This Opinion is furnished by us solely for the benefit of the Agent,
the Lenders and the successors and assigns of each in connection with the
transactions contemplated by the Forbearance Agreement and is not to be quoted
in whole or in part or otherwise referred to or disclosed in any other
transaction.
This Opinion speaks as of the date hereof, and we disclaim any
obligation to update this opinion to you.
Very truly yours,
ORLOFF, LOWENBACH, STIFELMAN
& SIEGEL, P.A.
By:
------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 15,934
<SECURITIES> 0
<RECEIVABLES> 22,830
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 47,263
<PP&E> 943,898
<DEPRECIATION> 714,828
<TOTAL-ASSETS> 284,936
<CURRENT-LIABILITIES> 437,996
<BONDS> 0
0
0
<COMMON> 314
<OTHER-SE> (156,199)
<TOTAL-LIABILITY-AND-EQUITY> 284,936
<SALES> 63,676
<TOTAL-REVENUES> 66,360
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 48,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,901
<INCOME-PRETAX> (1,699)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,699)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
