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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11698
KCS ENERGY, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 22-2889587
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
5555 SAN FELIPE ROAD, HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
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Registrant's Telephone Number, Including Area Code: (713) 877-8006
Securities Registered Pursuant to Section 12(b) of the Act:
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<CAPTION>
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $0.01 per share New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
Common Stock, par value $0.01 per share
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 12 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. Yes: [X] No: [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 25,550,154 shares of the Common Stock
held by non-affiliates of the Registrant at the $1.375 closing price on March 1,
2000 was $35,131,462.
Number of shares of Common Stock outstanding as of the close of business on
March 1, 2000: 29,268,310
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference to Notice of and Proxy
Statement for the 2000 Annual Meeting of Shareholders to the extent indicated
herein.
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
KCS Energy, Inc. ("KCS" or the "Company") is an independent oil and gas
company engaged in the acquisition, exploration, exploitation and production of
domestic oil and natural gas properties. The Company was formed in 1988 in
connection with the spin-off of the non-utility operations of NUI Corporation, a
New Jersey-based natural gas distribution company that had been engaged in the
oil and gas exploration and production business since the late 1960s. The
Company's properties are located in three regions: the Mid-Continent (which
includes the Rocky Mountain area), onshore Gulf Coast and, primarily through its
Volumetric Production Payment program ("VPP program"), the offshore Gulf of
Mexico.
During 1997 and 1998, due to very low prices for natural gas and crude oil
and, in 1998, due to disappointing performance of certain properties in the
Rocky Mountain area which resulted in non-cash ceiling writedowns of its oil and
gas assets and the reduction to zero of the book value of net deferred tax
assets, the Company incurred significant losses. As a result of these non-cash
adjustments, the Company has negative stockholders' equity and continues to be
in default of certain covenants in its bank credit facilities. As a consequence,
the Company cannot borrow under the revolving credit facilities. The Company's
independent public accountants issued modified reports for 1998 and 1999 with
respect to the ability of the Company to continue as a going concern, which also
constitutes a default under the revolving bank credit agreements. The Company is
also in default with respect to its senior note and senior subordinated note
obligations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and Note 2 to
Consolidated Financial Statements.
In 1999 gas and oil prices strengthened considerably. Average realized gas
prices were 5% higher and average realized oil prices were 41% higher in 1999 as
compared to 1998 (although 1999 average realized gas prices were 9% lower and
1999 oil prices were 14% lower than in 1997). Also in 1998, the Company
implemented a program designed to improve its financial situation and the
overall efficiency of the Company and its subsidiaries. The Company reduced its
workforce by over 30% during the two-year period ending December 31, 1999,
closed its New Jersey corporate office and froze senior management salaries for
1999. Expense reduction initiatives lowered lease operating expenses and general
and administrative expenses by approximately 13% during 1999. Capital
investments were reduced in 1999 and a property divestiture program was
implemented whereby the Company sold non-core properties and raised net proceeds
of approximately $27.7 million. In addition, the Company engaged financial
advisors to pursue a financial restructuring.
On January 18, 2000, the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") entered an order for relief under Chapter 11
of the Bankruptcy Code against KCS Energy, Inc. Also on January 18, 2000, each
of KCS Energy, Inc.'s subsidiaries filed voluntary petitions under Chapter 11 of
the Bankruptcy Code with the Bankruptcy Court. KCS and its subsidiaries are
currently operating their businesses and managing their properties as debtors in
possession under Chapter 11 of the Bankruptcy Code. See Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources and Note 2 to Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
The information discussed in this Form 10-K 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,
increases in oil and gas production, the number of anticipated wells to be
drilled after the date hereof, the Company's financial position, business
strategy and other plans and objectives for 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
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expectations will prove to be 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 changes in
regulatory requirements. Some of these risks (as well as others) are described
more fully elsewhere in this Form 10-K.
All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by such factors.
Oil and Gas Operations
All of the Company's exploration and production activities are located
within the United States. The Company competes with major oil and gas companies,
other independent oil and gas concerns and individual producers and operators in
the areas of reserve and leasehold acquisitions and the exploration,
development, production and marketing of oil and gas, as well as contracting for
equipment and hiring of personnel. Oil and gas prices have been volatile
historically and are expected to continue to be volatile in the future. Prices
for oil and gas are subject to wide fluctuation in response to relatively minor
changes in the supply of and demand for oil and gas, market uncertainty and a
variety of additional factors that are beyond the Company's control. These
factors include political conditions in the Middle East and elsewhere, the
foreign supply of oil and gas, the price of foreign imports, the level of
consumer product demand, weather conditions, domestic and foreign government
regulations and taxes, the price and availability of alternative fuels and
overall economic conditions.
No single customer accounted for more than 10% of the Company's annual
consolidated revenues in the three years ended December 31, 1999.
Exploration and Production Activities
During the three-year period ended December 31, 1999, the Company
participated in drilling 275 gross wells, of which 74% were successful. In 1999
the Company participated in drilling 75 wells, of which 85% were successful.
This included 62 development wells and 13 exploration wells with success rates
of 87% and 77%, respectively.
In 1999, the Company concentrated its drilling programs predominately in
the Mid-Continent and Onshore Gulf Coast regions. In the Mid-Continent region
the Company drilled 7 wells in the Arkoma Basin, 14 wells in the Anadarko Basin,
7 wells in North Louisiana, 17 wells in the Permian Basin and 12 wells at a
non-operated Montana Field. The Company also drilled 18 wells in the Onshore
Gulf Coast region.
In 1999, the Company participated in the acquisition of two properties: one
producing South Texas property and a group of non-producing Niagran Reef wells
in Michigan. The Company intends to continue to focus its 2000 capital drilling
program with low risk stepout and extension wells in the Mid-Continent Region
and medium-risk exploration wells with higher reserve potential in the Gulf
Coast Region. The Company also intends to supplement the drilling programs with
strategic acquisitions.
Volumetric Production Payment Program
The Company augments its working interest ownership of properties with a
VPP program, a method of acquiring oil and gas reserves scheduled to be
delivered in the future at a discount to the current market price in exchange
for an up-front cash payment. A VPP entitles the Company to a priority right to
a specified volume of oil and gas reserves scheduled to be produced and
delivered over a stated time period. Although specific terms of the Company's
VPPs vary, the Company is generally entitled to receive delivery of its
scheduled oil and gas volumes at agreed delivery points, free of drilling and
lease operating costs and, in most cases, free of state severance taxes. The
Company believes that its VPP program diversifies its reserve base and achieves
attractive rates of return while minimizing the Company's exposure to certain
development,
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operating and reserve volume risks. Typically, the estimated proved reserves of
the properties underlying a VPP are substantially greater than the specified
reserve volumes required to be delivered pursuant to the production payment.
Since the inception of the VPP program in August 1994 through December 31,
1999, the Company has invested $207.9 million under the VPP program and has
acquired proved reserves of 117.8 Bcfe of natural gas and oil. The Company has
recognized approximately $201.4 million in revenue from the sale of oil and gas
acquired under the program, with 16.0 Bcfe of conventional VPPs and 14.6 Bcfe of
a Michigan VPP now owned as a working interest scheduled for future deliveries.
During 1999, the Company invested $12.2 million in three separate VPP
transactions and acquired 6.1 Bcfe of natural gas equivalent, located in the
Gulf of Mexico.
Raw Materials
The Company obtains its raw materials (principally natural gas and oil)
from various sources, which are presently considered adequate. While the Company
regards the various sources as important, it does not consider any one source to
be essential to its business as a whole.
Patents and Licenses
There are no patents, trademarks, licenses, franchises or concessions held
by the Company, the expiration of which would have a material adverse effect on
its business.
Seasonality
Demand for natural gas and oil is seasonal, principally related to weather
conditions and access to pipeline transportation.
Oil and Gas Risk Factors
Set forth below, are certain risk factors to which the Company is subject
as a result of its operations in the oil and gas industry.
Volatile Nature of Oil and Gas Markets; Fluctuation in Prices. The
Company's future financial condition and results of operations are highly
dependent on the demand and prices received for the Company's oil and gas
production and on the costs of acquiring, developing and producing reserves. Oil
and gas prices have been volatile historically and are expected by the Company
to continue to be volatile in the future. Prices for oil and gas are subject to
wide fluctuation in response to relatively minor changes in the supply of and
demand for oil and gas, market uncertainty and a variety of additional factors
that are beyond the Company's control. These factors include political
conditions in the Middle East and elsewhere, domestic and foreign supply of oil
and gas, the level of consumer demand, weather conditions, domestic and foreign
government regulations and taxes, the price and availability of alternative
fuels and overall economic conditions. A decline in oil or gas prices may
adversely affect the Company's cash flow, liquidity and profitability. Lower oil
or gas prices also may reduce the amount of the Company's oil and gas that can
be produced economically. It is impossible to predict future oil and gas price
movements with any certainty.
Dependence on Acquiring and Finding Additional Reserves. The Company's
prospects for future growth and profitability will depend primarily on its
ability to replace reserves through acquisitions, development and exploratory
drilling. The decision to purchase, explore or develop an interest or property
will depend in part on the evaluation of data obtained through geophysical and
geological analyses and engineering studies, the results of which are often
inconclusive or subject to varying interpretations. Acquisitions may not be
available at attractive prices, and there can be no assurance that the Company's
acquisition and exploration activities or planned development projects will
result in significant additional reserves, or that the Company will have
continuing success in drilling economically productive wells. Without acquiring
or developing additional reserves, the Company's proved reserves and revenues
will decline.
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Reliance on Estimates of Reserves and Future Net Cash Flows. There are
numerous uncertainties inherent in estimating quantities of proved oil and gas
reserves, including many factors beyond the Company's control. This Form 10-K
includes estimates by independent petroleum engineers of the Company's oil and
gas reserves and future net cash flows. Reserve engineering is a subjective
process of estimating underground accumulations of oil and gas that cannot be
measured in an exact manner. Estimates of oil and gas reserves and of future net
cash flow depend upon a number of variable factors and assumptions, such as
historical production from the area compared with production from other
producing areas, the assumed effects of regulation by government agencies and
assumptions concerning future oil and gas prices, operating costs, severance and
excise taxes, development costs and workover and remedial costs, all of which
may in fact vary considerably from actual results. For these reasons, estimates
of the economically recoverable quantities of oil and gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers at different times may
vary significantly. Actual production, revenues and expenditures with respect to
the Company's reserves likely will vary from estimates, and such variances may
be material. The Company's reserves and future cash flows may be subject to
revisions, based upon production history, oil and gas prices, performance of
counterparties under agreements to which the Company is a party, operating and
development costs and other factors.
The PV-10 values referred to in this Form 10-K should not be construed as
the current market value of the estimated oil and gas reserves attributable to
the Company's properties. In accordance with applicable requirements of the
Securities and Exchange Commission ("SEC"), PV-10 is generally based on prices
and costs as of the date of the estimate, whereas actual future prices and costs
may be materially higher or lower. Actual future net cash flows also will be
affected by factors such as the amount and timing of actual production, supply
and demand for oil and gas, curtailments or increases in consumption by natural
gas purchasers and changes in government regulations or taxation. The present
value will be affected by the timing of both the production and the incurrence
of expenses in connection with development and production of oil and gas
properties. In addition, the 10% discount factor, which is required by the SEC
to be used to calculate present value for reporting purposes, is not necessarily
the most appropriate discount factor based on interest rates in effect from time
to time and risks associated with the Company and its properties or the oil and
gas industry in general.
Exploration Risks. Exploratory drilling activities are subject to many
risks, including the risk that no commercially productive reservoirs will be
encountered, and there can be no assurance that new wells drilled by the Company
will be productive or that the Company will recover all or any portion of its
investment. Drilling for oil and gas may involve unprofitable efforts, not only
from non-productive wells, but from wells that are productive but do not provide
sufficient net revenues to return a profit after drilling, operating and other
costs. The cost of drilling, completing and operating wells is often uncertain.
The Company's drilling operations may be curtailed, delayed or canceled as a
result of numerous factors, many of which are beyond the Company's control,
including title problems, weather conditions, compliance with government
requirements and shortages or delays in the delivery of equipment and services.
Marketing Risks. The Company's ability to market oil and gas at
commercially acceptable prices is dependent on, among other factors, the
availability and capacity of gathering systems and pipelines, federal and state
regulation of production and transportation, general economic conditions and
changes in supply and demand. The Company's inability to respond appropriately
to these changing factors could have a negative effect on the Company's
profitability.
Acquisition Risks. Acquisitions of oil and gas businesses, properties and
volumetric production payments have been an important element of the Company's
business, and the Company will continue to seek acquisitions in the future. Even
though the Company performs a review (including review of title and other
records) of the major properties it seeks to acquire that it believes is
consistent with industry practices, such reviews are inherently incomplete, and
it is generally not feasible for the Company to review in-depth every property
and all records. Even an in-depth review may not reveal existing or potential
problems or permit the Company to become familiar enough with the properties to
assess fully their deficiencies and capabilities, and
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the Company may assume environmental and other liabilities in connection with
acquired businesses and properties.
Operating Risks. The Company's operations are subject to numerous risks
inherent in the oil and gas industry, including the risks of fire, explosions,
blow-outs, pipe failure, abnormally pressured formations and environmental
accidents such as oil spills, natural gas leaks, ruptures or discharges of toxic
gases, the occurrence of any of which could result in substantial losses to the
Company due to injury or loss of life, severe damage to or destruction of
property, natural resources and equipment, pollution or other environmental
damage, clean-up responsibilities, regulatory investigation and penalties and
suspension of operations. The Company's operations may be materially curtailed,
delayed or canceled as a result of numerous factors, including the presence of
unanticipated pressure or irregularities in formations, accidents, title
problems, weather conditions, compliance with government requirements and
shortages or delays in the delivery of equipment. In accordance with customary
industry practice, the Company maintains insurance against some, but not all, of
the risks described above. There can be no assurance that the levels of
insurance maintained by the Company will be adequate to cover any losses or
liabilities. The Company cannot predict the continued availability of insurance,
or availability at commercially acceptable premium levels.
Competitive Industry. The oil and gas industry is highly competitive. The
Company competes for oil and gas business and property acquisitions and for the
exploration, development, production, transportation and marketing of oil and
gas, as well as for equipment and personnel, with major oil and gas companies,
other independent oil and gas concerns and individual producers and operators.
Many of these competitors have financial and other resources, which
substantially exceed those available to the Company.
Government Regulation. The Company's business is subject to certain
federal, state and local laws and regulations relating to the drilling,
production, transportation and marketing of oil and gas, as well as
environmental and safety matters. Such laws and regulations have generally
become more stringent in recent years, often imposing greater liability on an
increasing number of parties. Because the requirements imposed by such laws and
regulations are frequently changed, the Company is unable to predict the effect
or cost of compliance with such requirements or their effects on oil and gas use
or prices. In addition, legislative proposals are frequently introduced in
Congress and state legislatures, which if enacted, might significantly affect
the oil and gas industry. In view of the many uncertainties, which exist with
respect to any legislative proposals, the effect on the Company of any
legislation which might be enacted cannot be predicted.
REGULATION
General. The Company's business is affected by numerous governmental laws
and regulations, including energy, environmental, conservation, tax and other
laws and regulations relating to the energy industry. Changes in any of these
laws and regulations could have a material adverse effect on the Company's
business. In view of the many uncertainties with respect to current and future
laws and regulations, including their applicability to the Company, the Company
cannot predict the overall effect of such laws and regulations on its future
operations.
The Company believes that its operations comply in all material respects
with all applicable laws and regulations and that the existence and enforcement
of such laws and regulations have no more restrictive an effect on the Company's
method of operations than on other similar companies in the energy industry.
The following discussion contains summaries of certain laws and regulations
and is qualified in its entirety by the foregoing.
State Regulations Affecting Production Operations. The Company's onshore
exploration, production and exploitation activities are subject to regulation at
the state level. Such regulation varies from state to state, but generally
includes requiring permits for drilling wells, maintaining bonding requirements
to drill or operate wells, and regulating the location of wells, the method of
drilling and casing wells, the surface use and restoration of properties upon
which wells are drilled, plugging and abandoning wells, and the disposal of
fluids used in connection with operations. The Company's operations are also
subject to various state conservation laws and regulations. These include
regulation of the size of drilling and spacing units or proration units,
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spacing of wells and the unitization or pooling of oil and gas properties. In
addition, state conservation laws establish maximum rates of production from oil
and gas wells, restrict the venting or flaring of gas and impose certain
requirements regarding the ratability of production. These regulations and
requirements may affect the profitability of affected properties or operations,
and the Company is unable to predict the future cost or impact of complying with
such regulations.
Regulations Affecting Sales and Transportation of Oil and Gas. Various
aspects of the Company's oil and gas operations are regulated by agencies of the
federal government. The Federal Energy Regulatory Commission (the "FERC")
regulates the transportation of natural gas in interstate commerce pursuant to
the Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy Act of 1978
(the "NGPA"), including some natural gas produced or marketed by the Company. In
the past, the federal government has regulated the prices at which the Company's
natural gas could be sold. Currently, "first sales" of natural gas by producers
and marketers, and all sales of crude oil, condensate and natural gas liquids,
can be made at uncontrolled market prices, but Congress could reenact price
controls at any time.
Commencing in April 1992, the FERC issued its Order No. 636 and related
clarifying orders ("Order No. 636") which, among other things, restructured the
interstate natural gas industry and required interstate pipelines to provide
transportation services separate, or "unbundled," from the pipelines' purchases
and sales of natural gas. Order No. 636 and certain related "restructuring
proceedings" affecting individual pipelines were the subject of a number of
judicial appeals and orders on remand by the FERC. Order No. 636 has largely
been upheld on appeal. The FERC continues to address Order 636-related issues
(including transportation capacity auctions, alternative and negotiated
ratemaking, policy matters affecting gas markets and gas industry standards) in
a number of pending proceedings. The FERC continues to examine its policies
affecting the natural gas industry. It is not possible for the Company to
predict what effect, if any, the ultimate outcome of the FERC's various
initiatives will have on the Company's operations.
Order No. 636 was issued to foster increased competition within all phases
of the natural gas industry. Although Order No. 636 has provided the Company
with increased access to markets and the ability to utilize new types of
transportation services, the Company is required to comply with pipeline
operating tariffs, including restrictive pipeline imbalance tolerances, and to
respond to penalties for violations of those tariffs. The Company believes that
Order No. 636 has not had any significant impact on the Company.
The FERC continues to authorize the sale and abandonment from NGA
regulation of natural gas gathering facilities previously owned by interstate
pipelines. Such facilities (and services on such systems) may be subject to
regulation by state authorities in accordance with state law. A number of states
either have enacted new laws or are considering the inadequacy of existing laws
affecting gathering rates and/or services. For example, the Railroad Commission
of Texas recently issued a code of conduct governing transportation and
gathering services provided by intrastate pipelines and gatherers, and has
affirmed that services are to be provided to shippers without undue
discrimination. Other states have implemented specific regulations covering
gathering services. In general, state regulation of gathering facilities
includes various safety, environmental and, in some circumstances,
nondiscriminatory take requirements, but does not generally entail regulation of
the gathering rates charged. Natural gas gathering may receive greater
regulatory scrutiny by state agencies in the future, and in that event, the
Company's gathering operations could be adversely affected; however the Company
does not believe that it would be affected by such regulation any differently
from other natural gas producers or gatherers. The effects, if any, of changes
in existing state or FERC policies on the Company's gas gathering or gas
marketing operations are uncertain.
Sales of crude oil, condensate and natural gas liquids by the Company are
not currently regulated and are made at market prices. The price the Company
receives from the sale of these products is affected by the cost of transporting
the products to market. Effective January 1, 1995, the FERC implemented
regulations establishing an indexing system for transportation rates for oil
pipelines, which generally index such rates to inflation, subject to certain
conditions and limitations. The Company is not able to predict with certainty
what effect, if any, these regulations will have on its business, but other
factors being equal, the regulations may tend to increase transportation costs
or reduce wellhead prices under certain conditions.
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Federal Regulations Affecting Production Operations. The Company also
operates federal and Native American oil and gas leases, which are subject to
the regulation of the United States Bureau of Land Management ("BLM"), the
Bureau of Indian Affairs ("BIA") and the United States Minerals Management
Service ("MMS").
MMS, BIA and BLM leases contain relatively standardized terms requiring
compliance with detailed regulations and, in the case of offshore leases, orders
pursuant to the Outer Continental Shelf Lands Act ("OCSLA") (which are subject
to change by the MMS). Such regulations specify, for example, lease operating,
safety and conservation standards, as well as well plugging and abandonment and
surface restoration requirements. To cover the various obligations of lessees of
federal and Native American lands, including lessees of Outer Continental Shelf
("OCS") lands, the BIA, BLM and MMS generally require that lessees to post bonds
or other acceptable assurances that such obligations will be met. The cost of
such bonds or other surety can be substantial and there is no assurance that any
particular lease operator can obtain bonds or other surety in all cases. Under
certain circumstances, the MMS, BIA or BLM may require operations on federal or
Native American leases to be suspended or terminated. Any such suspension or
termination could adversely affect the Company's interests. The MMS has issued a
notice of proposed rulemaking in which it proposes to amend its regulations
governing the calculation of royalties and the valuation of crude oil produced
from federal leases. This proposed rule would modify the valuation procedures
for both arm's length and non-arm's length crude oil transactions to decrease
reliance on oil posted prices and assign a value to crude oil that better
reflects its market value, establish a new MMS form for collecting differential
data, and amend the valuation procedure for the sale of federal royalty oil. The
Company cannot predict what action the MMS will take on this matter, nor can it
predict how the Company will be affected by any change to this regulation. The
MMS also continues to consider changes to the way it values natural gas for
royalty payments. These changes would establish an alternative market-based
method to calculate royalties on certain natural gas sold to affiliates or
pursuant to non-arm's length sales contracts. Discussions among the MMS,
industry officials and Congress are continuing, although it is uncertain whether
and what changes may ultimately be proposed regarding gas royalty valuation.
Additional proposals and proceedings that might affect the oil and gas
industry are pending before Congress, the FERC, the MMS, the BLM, the BIA, state
commissions and the courts. The Company cannot predict when or whether any such
proposals may become effective. Historically, the natural gas industry has been
very heavily regulated. There is no assurance that the current regulatory
approach pursued by various agencies will continue indefinitely. Notwithstanding
the foregoing, it is not anticipated that compliance with existing federal,
state and local laws, rules and regulations will have a material or
significantly adverse effect upon the capital expenditures, earnings or
competitive position of the Company.
Operating Hazards and Environmental Matters. The oil and gas business
involves a variety of operating risks, including the risk of fire, explosions,
blowouts, pipe failure, casing collapse, abnormally pressured formations and
environmental hazards such as oil spills, natural gas leaks, ruptures and
discharge of toxic gases. The occurrence of any of these hazards could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations. Although the Company believes it is
adequately insured, such hazards may hinder or delay drilling, development and
production operations.
Oil and gas operations are subject to extensive federal, state and local
laws and regulations that regulate the discharge of materials into the
environment or otherwise relate to the protection of the environment. These laws
and regulations may require the acquisition of a permit before drilling
commences; restrict or prohibit the types, quantities and concentration of
substances that can be released into the environment or wastes that can be
disposed of in connection with drilling and production activities; prohibit
drilling activities on certain lands lying within wetlands or other protected
areas, and impose substantial liabilities for pollution resulting from drilling
and production operations. Failure to comply with these laws and regulations may
also result in civil and criminal fines and penalties.
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The Company's properties and any wastes generated by the Company that may
have been disposed thereon or on other lands may be subject to federal or state
environmental laws that could require the Company to remove the wastes or
remediate contamination. For example, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law,
imposes liability, without regard to fault or the original conduct, on certain
classes of persons who are considered to be responsible for the release of a
"hazardous substance" into the environment. These persons include the owner or
operator of the disposal site or sites where the release occurred and companies
that disposed or arranged for the disposal of the hazardous substances. Under
CERCLA, such persons may be subject to joint and several liability for the costs
of cleaning up the hazardous substances that have been released into the
environment, for damages to natural resources and for the costs of certain
health studies, and it is not uncommon for neighboring landowners and other
third parties to assert claims for personal injury and property damage allegedly
caused by the release of hazardous substances.
Environment. The Company owns the following two oil and gas leases covering
an aggregate of approximately 11,000 acres in Los Angeles County, California:
a. Oil and Gas Lease dated June 13, 1935, from Newhall Land and
Farming Company, as Lessor, to Barnsdall Oil Company, as Lessee (the "RSF
Lease") and
b. Oil and Gas Lease dated June 6, 1941, from the Newhall Corporation,
as Lessor, to C.G. Willis, as Lessee (the "Ferguson Lease").
The RSF Lease and the Ferguson Lease are herein called "Leases." Oil and gas
production from such lands commenced shortly after the RSF Lease was granted and
has continued to date.
From inception of the Leases until October 30, 1990, the Leases were owned
by entities that through corporate succession and name change ultimately became
Sun Operating Limited Partnership ("Sun L.P."). On October 30, 1990, Sun L.P.
transferred the Leases to DKM Offshore Energy, Inc. ("DKM") and Neste Oil
Services Inc. ("Neste"). In the assignment of the Leases, Sun L.P. indemnified
DKM and Neste from environmental claims resulting from the indemnitors'
operations provided that such environmental claims were made within ten years
from October 30, 1990. Shortly after the transfer to DKM and Neste, DKM acquired
Neste's rights and, subsequently, DKM became Medallion California Properties
Company ("Medallion California"). Later, the Company acquired the stock of
Medallion California . Also, Sun L.P. became Kerr-McGee Oil & Gas Onshore L.P.
("Kerr-McGee L.P."). In connection with the purchase of Medallion California by
KCS, InterCoast Energy Company ("InterCoast") indemnified the Company and
Medallion California for up to 90% of the costs of environmental remediation not
assumed by Kerr-McGee L.P. InterCoast's parent, MidAmerican Capital Company
("MidAmerican"), guaranteed InterCoast's indemnity obligations.
Kerr-McGee L.P. has identified 21 sites for cleanup on the lands covered by
the Leases and has a Remedial Action Plan ("RAP") approved by the Los Angeles
County Regional Water Quality Control Board to effect such cleanup. The primary
contaminant identified for this cleanup is petroleum waste. The Company believes
that Kerr-McGee L.P. will ultimately accomplish the RAP and that the Company has
no exposure for remediation of these 21 sites.
In addition to the 21 sites identified in the RAP, the Company has
identified and analyzed samples from numerous additional sites and has found
that certain of those sites are contaminated with petroleum waste. The Company
has described those sites to the lessors, Kerr-McGee L.P., InterCoast and
MidAmerican. While there can be no assurance, the Company believes that
additional site analysis is required to determine whether unidentified sites may
require remediation.
Litigation is currently pending among Kerr-McGee L.P., InterCoast,
MidAmerican and the Company in which InterCoast and MidAmerican seek a
declaratory judgment declaring the rights and obligations of each party under
the indemnity by Kerr-McGee L.P. and also by InterCoast and MidAmerican.
See"Litigation."
Also, the Company's operations may be subject to the Clean Air Act ("CAA")
and comparable state and local requirements. Amendments to the CAA were adopted
in 1990 and contain provisions that may result
8
<PAGE> 10
in the gradual imposition of certain pollution control requirements with respect
to air emissions from the Company's operations. The EPA and state governments
have been developing regulations to implement these requirements. The Company
may be required to incur certain capital expenditures in the next several years
for air pollution control equipment in connection with maintaining or obtaining
permits and approvals addressing other air emission-related issues. The Company
does not believe that its operations will be materially adversely affected by
any such requirements.
In addition, the U.S. Oil Pollution Act ("OPA") requires owners and
operators of facilities that could be the source of an oil spill into "waters of
the United States" (a term defined to include rivers, creeks, wetlands and
coastal waters) to adopt and implement plans and procedures to prevent any spill
of oil into any waters of the United States. OPA also requires affected facility
owners and operators to demonstrate that they have at least $35 million in
financial resources to pay for the costs of cleaning up an oil spill and
compensating any parties damaged by an oil spill. Such financial assurances may
be increased to as much as $150 million if a formal assessment indicates such an
increase is warranted.
The Company's operations are also subject to the federal Clean Water Act
("CWA") and analogous state laws. The Company may be required to incur certain
capital expenditures in the next several years in order to comply with
prohibitions against the discharge of produced waters into coastal waters or
increased operating expenses in connection with offshore operations in coastal
waters. Pursuant to other requirements of the CWA, the EPA has adopted
regulations concerning discharges of storm water runoff. This program requires
covered facilities to obtain individual permits, participate in a group permit
or seek coverage under an EPA general permit. While certain of its properties
may require permits for discharges of storm water runoff, the Company believes
that it will be able to obtain, or be included under, such permits, where
necessary, and make minor modifications to existing facilities and operations
that would not have a material effect on the Company. Additionally, pursuant to
the Safe Drinking Water Act, the EPA has adopted regulations concerning
permitting and operations of underground injection control ("UIC") wells,
including wells used in enhanced recovery and disposal operations associated
with exploration and production activities. The United States Department of
Justice has alleged that certain of the Company's UIC wells in Toole and Liberty
counties, Montana in the Rocky Mountain Region have not complied with such
regulations in certain instances. The Company has executed a consent decree with
respect to this matter and believes that resolution of this matter will not have
a material adverse effect on the Company.
In addition, the disposal of wastes containing naturally occurring
radioactive material which are commonly generated during oil and gas production
is regulated under state law. Typically, wastes containing naturally occurring
radioactive material can be managed on-site or disposed of at facilities
licensed to receive such waste at costs that are not expected to be material.
EMPLOYEES
The Company and its subsidiaries employed a total of 178 persons on
December 31, 1999.
9
<PAGE> 11
ITEM 2. PROPERTIES.
OIL AND GAS PROPERTIES
The following table sets forth data as of December 31, 1999 regarding the
number of gross producing wells and the estimated quantities of proved oil and
gas reserves attributable to the Company's properties.
<TABLE>
<CAPTION>
ESTIMATED PROVED RESERVES
GROSS -------------------------------
PRODUCING OIL NATURAL GAS TOTAL
LOCATION WELLS (MBBLS) (MMCF) (MMCFE)
- -------- --------- ------- ----------- -------
<S> <C> <C> <C> <C>
Mid-Continent Region:
Sawyer Canyon and Sonora Fields, Texas............ 355 13 34,697 34,773
Newhall-Potrero Field, California................. 43 1,680 1,684 11,767
Hartland Area, Michigan........................... -- 682 12,675 16,768
Elm Grove Field, Louisiana........................ 32 19 13,762 13,876
Shugart, W. Field, New Mexico..................... 8 483 170 3,066
Mayfield/Hayes Properties, Michigan............... 8 374 6,944 9,190
Wilburton Field, Oklahoma......................... 8 -- 3,831 3,831
Pittsburg Field, Texas............................ 32 521 120 3,248
Mills Ranch Field, Texas.......................... 23 56 3,292 3,625
Others............................................ 354 1,488 28,987 37,913
----- ----- ------- -------
Total..................................... 863 5,316 106,162 138,057
----- ----- ------- -------
Rocky Mountain Area:
Manderson Field, Wyoming.......................... 60 241 19,559 21,004
Battle Creek Field, Montana....................... 76 -- 4,416 4,416
Others............................................ 523 1,424 9,687 18,230
----- ----- ------- -------
Total..................................... 659 1,665 33,662 43,650
----- ----- ------- -------
Gulf Coast Region:
Langham Creek Area, Texas......................... 20 202 21,136 22,350
Provident City Field, Texas....................... 47 125 8,521 9,269
Clara, N. Field, Mississippi...................... 1 256 950 2,486
Others............................................ 247 521 33,906 37,032
----- ----- ------- -------
Total..................................... 315 1,104 64,513 71,137
----- ----- ------- -------
Offshore Gulf of Mexico Region:
Working Interest Properties....................... 48 241 6,915 8,361
Volumetric Production Payments (VPPs)............. n/a 15 15,867 15,960
----- ----- ------- -------
Total..................................... 48 256 22,782 24,321
----- ----- ------- -------
Total Company............................. 1,885 8,341 227,119 277,165
===== ===== ======= =======
</TABLE>
MID-CONTINENT REGION
The Mid-Continent Region is primarily comprised of producing properties in
the Anadarko, Ardmore, Arklatex (North Louisiana), Arkoma, Michigan and Permian
basins. The Company views the Mid-Continent Region as providing a solid base of
production replacement and plans to continue to exploit areas within the various
basins that require additional wells for adequate reserve drainage and to drill
low-risk exploration wells. These wells are generally step-out and extension
type wells with moderate reserve potential. The Company endeavors to be the
operator when it holds a majority of the working interest.
Estimated proved reserves in the Mid-Continent Region were 138.1 Bcfe as of
December 31, 1999 representing approximately 50% of the Company's reserves.
During the year ended December 31, 1999, in this Region the Company participated
in drilling 54 gross (28.4 net) development wells and 3 gross (1.6 net)
10
<PAGE> 12
exploratory wells with completion success rates of 87% and 67%, respectively. At
December 31, 1999, the Company owned leasehold interests within the
Mid-Continent Region covering approximately 220,000 gross (139,000 net) acres.
Rocky Mountain Area
In the Rocky Mountain area, the Company's operations are primarily in the
Big Horn Basin in Wyoming. Operationally, this geographic area reports to the
Mid-Continent Division. In mid-1998, because of particularly low commodity
prices and disappointing drilling results, the Company curtailed its capital
spending program and implemented a cost-reduction plan, which has reduced
operating and administrative expenses. Because of restricted capital, the
Company plans no substantial development or exploration activity in the Rocky
Mountain area.
Estimated proved reserves in the Rocky Mountain area were 43.7 Bcfe as of
December 31, 1999 representing approximately 16% of the Company's reserves.
Twelve non-operated wells were drilled in Montana in 1999 and are included in
the Mid-Continent Region drilling statistics. As of December 31, 1999, the
Company owned working interests covering approximately 260,000 gross (208,000
net) acres in the area, primarily in the Big Horn Basin.
ONSHORE GULF COAST REGION
The Onshore Gulf Coast Region is primarily comprised of producing
properties in south Texas, coastal Louisiana and the Mississippi Salt Basin. The
Company conducts development programs and pursues moderate-risk, higher-exposure
exploration drilling programs. The Onshore Gulf Coast Region has prospects,
which are expected to provide the key area of future growth for the Company.
Estimated proved reserves in the region were 71.1 Bcfe as of December 31, 1999,
which represented approximately 25% of the Company's reserves.
During 1999 the Company drilled 8 gross (2.7 net) development wells and 10
gross (5.6 net) exploratory wells in the Onshore Gulf Coast Region. The 1999
success rates were 87% for development wells and 80% for exploratory wells. The
Company owns or controls approximately 135,000 gross (42,000 net) acres in the
Onshore Gulf Coast Region.
OFFSHORE GULF OF MEXICO REGION
The Gulf of Mexico Region includes assets that can be characterized in two
categories. The first category is minor working interest properties obtained
primarily through the Medallion Acquisition. The Company has working interests
ranging from 4% to 14% in 12 offshore fields (including blocks located in the
East Cameron, Eugene Island, Ship Shoal, South Timbalier, Vermilion and West
Cameron areas), which are operated by other companies, primarily Newfield
Exploration Company. The second category is proved reserves acquired through VPP
transactions. Through a series of VPP transactions, the Company has acquired
certain interests in 12 federal leases off the coasts of Texas and Louisiana.
Major fields include the High Island 303/304, the West Cameron 427 and the South
Marsh Island 17.
Proved reserves for these two categories were estimated as of December 31,
1999 to be 24.3 Bcfe, representing approximately 9% of the Company's reserves.
Reserves for conventional VPPs were 16.0 Bcfe, or approximately 6% of the
Company's December 31, 1999 reserves.
Volumetric Production Payment (VPP) Program
The Company augments its working interest ownership of properties with its
VPP program, a method of acquiring proved oil and gas reserves from specified
wells scheduled to be delivered in the future, at a discount to the current
market price, in exchange for an up-front cash payment. Although specific terms
of the Company's volumetric production payments vary, the Company is generally
entitled to receive delivery of its scheduled oil and gas volumes free of
drilling and lease operating costs and, in most cases, free of state severance
taxes. After delivery of the oil and gas volumes, the Company arranges for
further downstream
11
<PAGE> 13
transportation and sells such volumes to available markets. The Company believes
that its VPP program diversifies its reserve base and achieves attractive rates
of return while minimizing the Company's exposure to certain development and
operating risks. Typically, the estimated proved reserves of the properties
underlying a volumetric production payment are substantially greater than the
specified reserve volumes required to be delivered pursuant to the production
payment.
Since the inception of the VPP program in late 1994, the Company had
invested $207.9 million in 28 separate transactions and had acquired proved
reserves of 117.8 Bcfe, consisting of 108.2 Bcf of natural gas and 1.6 MMbbls of
oil. This represents an average net acquisition cost of $1.76 per Mcfe, without
the burden of development and lease operating expenses. Through December 31,
1999, the Company had recovered approximately $201.4 million from the sale of
oil and gas received under its VPP program. The properties which constitute the
VPP program, are principally located in the Gulf of Mexico.
During 1999, the Company invested $12.2 million in three separate VPP
transactions and acquired 6.1 Bcfe of natural gas, located in the Gulf of
Mexico.
Although it has not done so in the past, the Company is exploring the
expansion of the VPP program through joint venture partnerships or similar
arrangements with third parties.
OIL AND GAS RESERVES
The reserve estimates and associated cash flows as of December 31, 1999 for
all properties were prepared by Netherland, Sewell & Associates, Inc.
The reserve estimates and associated cash flows as of December 31, 1998
were prepared by KCS and several independent petroleum engineers. The reports
for the KCS Medallion Resources, Inc.; KCS Mountain Resources, Inc.; KCS
Resources, Inc.; and KCS Michigan Resources, Inc. properties, which collectively
represent 100% of KCS's proved reserves on working interest properties, and
85.4% of KCS's total proved reserves as of December 31, 1998, were audited by
Netherland, Sewell & Associates, Inc. pursuant to the principles set forth in
the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve
Information promulgated by the Society of Petroleum Engineers. The independent
reserve engineers' estimates were based upon a review of production histories
and other geologic, economic, ownership and engineering data provided by the
Company or third-party operators.
The following table sets forth, as of December 31, 1999, summary
information with respect to estimates of the Company's proved oil and gas
reserves. The present value of future net revenues in the table should not be
construed to be the current market value of the estimated oil and gas reserves
owned by the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
PROVED RESERVES:
Natural gas (MMcf).................................. 227,119
Oil (Mbbls)......................................... 8,341
Total (MMcfe)....................................... 277,165
Future net revenues ($000s)......................... $435,988
Present value of future net revenues ($000s)........ $292,790
PROVED DEVELOPED RESERVES:
Natural gas (MMcf).................................. 175,896
Oil (Mbbls)......................................... 7,568
Total (MMcfe)....................................... 221,304
Future net revenues ($000s)......................... $362,378
Present value of future net revenues ($000s)........ $253,943
</TABLE>
There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting future rates of production and
future amounts and timing of development expenditures, including underground
accumulations of crude oil and natural gas that cannot be measured in an exact
manner. The accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological
12
<PAGE> 14
interpretation and judgment. Estimates of proved undeveloped reserves are
inherently less certain than estimates of proved developed reserves. The
quantities of oil and gas that are ultimately recovered, production and
operating costs, the amount and timing of future development expenditures,
geologic success and future oil and gas sales prices all may differ from those
assumed in these estimates. In addition, the Company's reserves may be subject
to downward or upward revision based upon production history, purchases or sales
of properties, results of future development, prevailing oil and gas prices and
other factors. Therefore, the present value shown above should not be construed
as the current market value of the estimated oil and gas reserves attributable
to the Company's properties.
In accordance with SEC guidelines, the estimates of future net revenues
from the Company's proved reserves and the present value thereof are made using
oil and gas sales prices in effect as of the dates of such estimates and are
held constant throughout the life of the properties except where such guidelines
permit alternate treatment, including, in the case of natural gas contracts, the
use of fixed and determinable contractual price escalations. Gas prices are
based on either a contract price or a December 31, 1999 NYMEX price of $2.329
per MMBTU, adjusted by lease for BTU content, transportation fees and regional
price differentials. Oil prices are based on a December 31, 1999 West Texas
Intermediate posted price of $22.75 per barrel, adjusted by lease for gravity,
transportation fees and regional posted price differentials. The prices for
natural gas and oil are subject to substantial seasonal fluctuations, and prices
for each are subject to substantial fluctuations as a result of numerous other
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ACREAGE
The following table sets forth certain information with respect to the
Company's developed and undeveloped leased acreage as of December 31, 1999. The
leases in which the Company has an interest are for varying primary terms, and
many require the payment of delay rentals to continue the primary term. The
leases may be surrendered by the operator at any time by notice to the lessors,
by the cessation of production, fulfillment of commitments, or by failure to
make timely payments of delay rentals. Excluded from the table are the Company's
interests in the properties subject to volumetric production payments.
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
----------------- -----------------
STATE GROSS NET GROSS NET
- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Texas.......................................... 106,083 63,517 71,510 22,742
Louisiana...................................... 33,896 22,026 35,589 25,636
Oklahoma....................................... 56,229 24,425 2,354 1,289
Wyoming........................................ 51,276 47,939 150,000 143,487
Offshore....................................... 84,258 7,040 -- --
Other.......................................... 75,641 24,697 33,127 13,347
------- ------- ------- -------
Total................................ 407,383 189,644 292,580 206,501
======= ======= ======= =======
</TABLE>
13
<PAGE> 15
DRILLING ACTIVITIES
All of the Company's drilling activities are conducted through arrangements
with independent contractors. Certain information with regard to the Company's
drilling activities during the years ended December 31, 1999, 1998 and 1997, is
set forth below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
TYPE OF WELL GROSS NET GROSS NET GROSS NET
- ------------ ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Development:
Oil........................................ 9 7.5 9 6.4 33 33.0
Natural gas................................ 45 19.5 33 16.2 42 29.2
Non-productive............................. 8 4.1 13 9.1 18 16.4
-- ---- -- ---- -- ----
Total.............................. 62 31.1 55 31.7 93 78.6
== ==== == ==== == ====
Exploratory:
Oil........................................ 1 0.5 6 3.5 1 1.0
Natural gas................................ 9 4.4 3 2.2 12 7.2
Non-productive............................. 3 2.3 10 6.2 20 13.9
-- ---- -- ---- -- ----
Total.............................. 13 7.2 19 11.9 33 22.1
== ==== == ==== == ====
</TABLE>
At December 31, 1999, the Company was participating in the drilling of 4
gross (2.0 net) wells.
PRODUCTION AND SALES
The following table presents certain information with respect to oil and
gas production attributable to the Company's properties and average sales prices
during the three years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Production:
Gas (MMcf)............................................ 50,471 50,070 43,700
Oil (Mbbl)............................................ 1,286 1,650 1,696
Liquids (Mbbl)........................................ 122 96 128
Total (MMcfe)................................. 58,919 60,547 54,644
Average Price:
Gas (per Mcf)......................................... $ 2.18 $ 2.08 $ 2.40
Oil (per bbl)......................................... 16.04 11.41 18.57
Liquids (per bbl)..................................... 11.25 7.93 11.02
Total (per Mcfe).............................. 2.24 2.04 2.52
</TABLE>
OTHER FACILITIES
Principal offices of the Company and its operating subsidiaries are leased
in modern office buildings in Houston, Texas and Tulsa, Oklahoma.
The Company believes that all of its property, plant and equipment are well
maintained, in good operating condition and suitable for the purposes for which
they are used.
ITEM 3. LEGAL PROCEEDINGS.
Information with respect to this Item is contained in Note 10 to the
Consolidated Financial Statements on pages 42 through 45 of this Form 10-K.
14
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the three months ended December 31,
1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
In accordance with the terms of its debt agreements, the Company is
currently prohibited from paying cash dividends. See Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources and Notes 2 and 6 to Consolidated Financial Statements. The
Company had been paying regular quarterly dividends from the first quarter of
1992 through the first quarter of 1999. The last dividend for $585,000 was
declared in December 1998 and paid in February 1999. The aggregate amount of
dividends declared in 1998 was $2,345,000.
There were 1,088 stockholders of record of the Company's Common Stock on
March 1, 2000.
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol KCS. Listed below are the high and low closing sales prices for the
periods indicated:
<TABLE>
<CAPTION>
1999
----------------------------------------------
JANUARY -- APRIL -- JULY -- OCTOBER --
MARCH JUNE SEPTEMBER DECEMBER
---------- -------- --------- ----------
<S> <C> <C> <C> <C>
Market Price
High....................................... $ 3.25 $ 1.44 $ 1.25 $1.06
Low........................................ 1.25 0.38 0.63 0.63
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------
JANUARY -- APRIL -- JULY -- OCTOBER --
MARCH JUNE SEPTEMBER DECEMBER
---------- -------- --------- ----------
<S> <C> <C> <C> <C>
Market Price
High....................................... $20.63 $16.00 $11.32 $6.19
Low........................................ 15.31 10.75 3.31 2.94
</TABLE>
15
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth the Company's selected financial data for
each of the five years ended December 31, 1999.
<TABLE>
<CAPTION>
1999 1998(1) 1997(2) 1996 1995
--------- --------- -------- -------- --------
DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue............................... $ 136,491 $ 129,452 $143,689 $108,374 $ 87,115
Income (loss) from continuing
operations.......................... 4,340 (296,520) (97,385) 21,717 23,405
Income (loss) from discontinued
operations.......................... -- -- 5,302 (1,845) (2,099)
Net income (loss)..................... 4,340 (296,520) (92,083) 19,872 21,306
Total assets.......................... 284,932 308,878 502,414 511,820 306,564
Debt.................................. 381,819 410,335 292,445 310,347 165,529
Stockholders' equity (deficit)........ (149,843) (154,204) 145,070 125,622 101,576
Per common share (Basic):
Income (loss) from continuing
operations....................... 0.15 (10.08) (3.37) 0.94 1.02
Income (loss) from discontinued
operations....................... -- -- 0.18 (0.08) (0.09)
Net income (loss)................... 0.15 (10.08) (3.19) 0.86 0.93
Per common share (Diluted):
Income (loss) from continuing
operations....................... 0.15 (10.08) (3.37) 0.92 1.00
Income (loss) from discontinued
operations....................... -- -- 0.18 (0.08) (0.09)
Net income (loss)................... 0.15 (10.08) (3.19) 0.84 0.91
Per common share:
Stockholders' equity (deficit)...... (5.12) (5.27) 4.93 5.42 4.42
Dividends........................... -- 0.08 0.075 0.06 0.06
</TABLE>
- ---------------
(1) 1998 includes $268.5 million pretax ($174.5 million after tax) in non-cash
ceiling test writedowns of oil and gas assets and a $113.9 million reduction
to zero of the book value of net deferred tax assets. Together, these
adjustments accounted for $288.4 million, or $9.80 per share, of the 1998
loss.
(2) Includes a $165.1 million pretax ($107.3 million after tax), or $3.72 per
share, non-cash ceiling test writedown of oil and gas assets.
16
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is a discussion and analysis of the Company's financial
condition and results of operations and should be read in conjunction with the
Company's Consolidated Financial Statements (including the notes thereto)
included elsewhere in this Form 10-K.
GENERAL
During 1997 and 1998, due to very low prices for natural gas and crude oil
and, in 1998, due to disappointing performance of certain properties in the
Rocky Mountain area which resulted in non-cash ceiling writedowns of its oil and
gas assets and the reduction to zero of the book value of net deferred tax
assets, the Company incurred significant losses. As a result of these non-cash
adjustments, the Company has negative stockholders' equity and continues to be
in default of certain covenants in its bank credit facilities. As a consequence,
the Company cannot borrow under the revolving credit facilities. The Company's
independent public accountants issued modified reports in 1998 and 1999 with
respect to the ability of the Company to continue as a going concern, which also
constitutes a default under the revolving bank credit agreements. The Company is
also in default with respect to its senior note and senior subordinated note
obligations. See "Liquidity and Capital Resources" and Note 2 to Consolidated
Financial Statements.
In 1999 gas and oil prices strengthened considerably. Average realized gas
prices were 5% higher and average realized oil prices were 41% higher in 1999 as
compared to 1998 (although 1999 average realized gas prices were 9% lower and
1999 oil prices were 14% lower than in 1997). Also in 1998, the Company
implemented a program designed to improve its financial situation and the
overall efficiency of the Company and its subsidiaries. The Company reduced its
workforce by over 30% during the two-year period ending December 31, 1999,
closed its New Jersey corporate office and froze senior management salaries for
1999. Expense reduction initiatives lowered lease operating expenses and general
and administrative expenses by approximately 13% during 1999. Capital
investments were reduced in 1999 and a property divestiture program was
implemented whereby the Company sold non-core properties and raised net proceeds
of approximately $27.7 million. In addition, the Company engaged financial
advisors to pursue a financial restructuring.
On January 18, 2000, the United States Bankruptcy Court for the District of
Delaware (the"Bankruptcy Court") entered an order for relief under Chapter 11 of
the Bankruptcy Code against KCS Energy, Inc. Also on January 18, 2000, each of
KCS Energy, Inc.'s subsidiaries filed voluntary petitions under Chapter 11 of
the Bankruptcy Code with the Bankruptcy Court. KCS and its subsidiaries are
currently operating their businesses and managing their properties as debtors in
possession under Chapter 11 of the Bankruptcy Code. See "Liquidity and Capital
Resources" and Note 2 to Consolidated Financial Statements.
Prices for oil and natural gas are subject to wide fluctuations in response
to relatively minor changes in the supply of and demand for oil and natural 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 natural gas, the level of
consumer demand, weather conditions and overall economic conditions.
All references in the following discussion related to earnings per share
are based upon the Company's diluted earnings per share.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Results of Operations
Net income for the year ended December 31, 1999 was $4.3 million, or $0.15
per share, compared to a net loss of $296.5 million, or $10.08 per share, for
the year ended December 31, 1998. The net loss in 1998 included a $268.5 million
pretax ($174.5 million after-tax) non-cash ceiling test writedown of oil and gas
properties and a $113.9 million non-cash valuation allowance to reduce to zero
the book value of net deferred tax assets. As a result of these charges, the
1998 net loss was increased by $288.4 million, or $9.80 per share. Excluding the
effect of the 1998 non-cash asset writedowns, the 1998 net loss was $8.1
million, or $0.28 per share. The significant improvement in the 1999 results of
operations reflected higher gas and oil prices
17
<PAGE> 19
together with lower operating costs and the Company's focus on core areas of
operations, partially offset by higher interest expense and restructuring costs.
Net loss for the year ended December 31, 1998 was $296.5 million, or $10.08
per share, compared to a net loss of $92.1 million, or $3.19 per share, for the
year ended December 31, 1997. Depressed oil and gas commodity prices since the
latter part of 1997 combined with the disappointing performance of certain of
the Company's Rocky Mountain properties in 1998 resulted in significant non-cash
ceiling test writedowns of the Company's oil and gas assets in both 1998 and
1997. Ceiling test writedowns in 1998 were $268.5 million pretax ($174.5 million
after-tax) compared to $165.1 million pretax ($107.3 million after-tax) in 1997.
Additionally in 1998, the Company recorded a non-cash valuation allowance of
$113.9 million ($93.9 million of which relates to the 1998 non-cash ceiling test
writedowns) to reduce to zero the book value of net deferred tax assets. As a
result of these charges, the 1998 net loss was increased by $288.4 million, or
$9.80 per share. Excluding the effect of the non-cash asset writedowns, the
Company's net loss was $8.1 million, or $0.28 per share in 1998 compared to
income from continuing operations of $9.9 million, or $0.35 per share, in 1997.
An 11% increase in oil and gas production during 1998 was more than offset by
the impact of significantly lower energy prices and higher net interest costs.
In 1997, income from discontinued operations was $5.3 million, or $0.18 per
share, which was primarily attributable to the net gain on disposition of the
Company's natural gas transportation and marketing operations.
Revenue
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Production:
Gas (MMcf)......................................... 50,471 50,070 43,700
Oil (Mbbl)......................................... 1,286 1,650 1,696
Liquids (Mbbl)..................................... 122 96 128
Total (MMcfe).............................. 58,919 60,547 54,644
Average Price:
Gas (per Mcf)...................................... $ 2.18 $ 2.08 $ 2.40
Oil (per bbl)...................................... 16.04 11.41 18.57
Liquids (per bbl).................................. 11.25 7.93 11.02
Total (per Mcfe)........................... $ 2.24 $ 2.04 $ 2.52
Revenue:
Gas................................................ $110,001 $103,906 $104,932
Oil................................................ 20,624 18,824 31,491
Liquids............................................ 1,372 761 1,414
-------- -------- --------
Total...................................... $131,997 $123,491 $137,837
</TABLE>
Oil and Gas Production. The Company's oil and gas production in 1999
decreased 3% to 58.9 Bcfe, compared to 60.5 Bcfe in 1998. Gas production
increased 1% to 50.5 Bcf, while oil and liquids production decreased 19% to
1,408 Mbbls. The net production decrease was primarily attributable to the sale
of producing properties.
Oil and gas production during 1998 increased 11% to 60.5 Bcfe, compared to
54.6 Bcfe produced during 1997. Gas production increased 15% to 50.1 Bcf, which
was partially offset by a 4% decrease in oil and liquids production to 1,746
Mbbls. The net production increase was primarily attributable to the VPP
program.
Gas Revenue. In 1999, gas revenue increased $6.1 million to $110.0 million.
The 5% increase in average realized gas prices added $5.2 million of gas revenue
in 1999 with the remainder of the increase due to the 1% increase in gas
production.
18
<PAGE> 20
In 1998, gas revenue decreased $1.0 million to $103.9 million, compared to
1997. Production gains of 15% added $13.2 million of gas revenue in 1998 which
was more than offset by a 14% decrease in average realized gas prices.
Oil and Liquids Revenue. In 1999, oil and liquids revenue was $22.0 million
compared to $19.6 million in 1998. A 39% increase in average realized oil and
liquids prices in 1999 added $7.6 million in revenue which was partially offset
by a 19% decrease in production, due to the sale of producing properties and the
restructuring of two contracts.
In 1998, oil and liquids revenue decreased $13.3 million to $19.6 million,
compared to 1997. A 38% decrease in average realized oil and liquids prices for
1998 accounted for approximately $12.5 million of the 1998 decrease with the
remainder attributable to a 4% reduction in production.
Other Revenue, net. Other revenue in 1999 included $1.6 million from
production tax refunds and adjustments, $1.5 million from the settlement of a
production tax dispute, $0.8 million from the sale of emission reduction credits
and $1.1 million from certain marketing and gathering net revenues incidental to
the Company's oil and gas operations. By the end of the third quarter of 1999,
the Company had filed for substantially all of the production tax refunds to
which it was entitled.
Other revenue in 1998 included $4.0 million related to production tax
refunds and approximately $2.0 million from marketing and gathering net revenues
incidental to the Company's oil and gas exploration and production operations.
Lease Operating Expenses
Lease operating expenses decreased $3.8 million to $26.6 million for the
year ended December 31, 1999, compared to $30.4 million in 1998. The lower
expense levels in 1999 reflect cost-reduction initiatives taken by the Company
and the sale of marginal higher-cost oil and gas properties.
For the year ended December 31, 1998, lease operating expenses increased
$1.0 million to $30.4 million, compared to 1997. Higher production and full-time
operation of the gas treatment plant in the Rocky Mountain area and acquisitions
were the primary reasons for the 1998 increase.
Production Taxes
Production taxes, which are generally based on a fixed percentage of
revenue (excluding VPP revenue), decreased $0.5 million to $3.5 million in 1999
compared to 1998 primarily due to lower non-VPP oil and gas revenue and
production tax rates in the Rocky Mountain area.
In 1998, production taxes decreased $1.9 million to $4.0 million, compared
to 1997. Lower oil and gas revenue in 1998 accounted for $1.2 million of the
decrease with the remainder mainly attributable to a lower average production
tax rate.
General and Administrative Expenses
General and administrative expenses ("G&A") decreased $1.5 million to $9.8
million for the year ended December 31, 1999, compared to $11.3 million in 1998.
The significant reduction in the Company's workforce, cost savings associated
with the closing of the New Jersey corporate office, and other cost reduction
initiatives throughout the Company were the primary reasons for the decrease.
The 1999 period includes approximately $0.7 million of non-recurring costs,
primarily associated with the closing of the New Jersey corporate office.
In 1998, G&A expenses increased $0.6 million to $11.3 million, compared to
1997, primarily due to increased administrative activity associated with the
1998 production increases.
19
<PAGE> 21
Restructuring Costs
Restructuring costs in 1999 were $1.9 million and consist primarily of
attorney fees and financial advisory fees incurred in connection with the
pursuit of a restructuring transaction, which would result in deleveraging the
Company's balance sheet.
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. For the year ended December 31, 1999, depreciation, depletion and
amortization ("DD&A") decreased $8.9 million to $51.0 million compared to 1998
mainly as a result of the decline in the average depletion rate to 36.8%
compared to 46.6% in 1998, which was partially offset by higher oil and gas
revenues. The significant decline in the depletion rate in 1999 was largely
attributable to higher oil and gas prices and the 1998 writedown of oil and gas
properties.
For the year ended December 31, 1998, DD&A decreased $0.7 million to $59.9
million compared to 1997, due primarily to the decrease in oil and gas revenue
partially offset by an increase in the DD&A rate, both of which were the result
of the lower energy prices in 1998 compared to 1997.
Writedown of Oil and Gas Properties
In accordance with the full cost accounting method and procedures
prescribed by the Securities and Exchange Commission, capitalized cost of oil
and gas properties net of accumulated amortization are limited to the sum of the
present value of estimated future net revenues from proved oil and gas reserves
at current prices, discounted at 10%, plus the lower of cost or fair value of
unproved properties. To the extent that the capitalized costs exceed this
limitation at the end of any fiscal quarter, such excess costs are charged to
income.
During 1997 and 1998, the Company recorded non-cash ceiling writedowns of
its oil and gas properties mainly due to depressed natural gas and oil commodity
prices and, in 1998, the disappointing performance of certain properties in the
Rocky Mountain area. At December 31, 1997 a $165.1 million pretax writedown was
recorded. Further declines in commodity prices throughout 1998 and into the
first quarter of 1999 resulted in additional writedowns totaling $268.5 million
pretax, including approximately $65 million for price declines subsequent to
December 31, 1998. Average realized natural gas prices were $3.54, $2.46 and
$2.15 per Mcf at December 31, 1996, 1997 and 1998, respectively. During the
first part of 1999, average realized prices fell to $1.67 per Mcf. Average
realized oil prices were $22.45, $15.15 and $8.57 per bbl at December 31, 1996,
1997 and 1998, respectively.
The Company's sour gas processing facility at the Manderson Field, which
was classified as other property, plant and equipment on the balance sheet at
December 31, 1997, was reclassified to oil and gas properties and its net book
value was reduced to fair value of approximately $5 million in connection with
the year-end 1998 ceiling writedown.
Interest Expense
Interest expense increased $4.2 million to $40.0 million in 1999 compared
to 1998. Of this increase, approximately $2.4 million was attributable to higher
average borrowings, $0.4 million was attributable to higher average interest
rates, with the remainder of the increase primarily attributable to less
capitalized interest due to lower drilling activity in 1999 and increased
amortization of deferred financing costs.
Interest expense was $35.8 million in 1998, compared to $21.9 million in
1997. This increase reflects higher average borrowings related to the expansion
of the Company's oil and gas operations, slightly offset by lower average
interest rates.
20
<PAGE> 22
Income Taxes
No income tax expense was recorded in 1999 related to the Company's pretax
book income. The income tax effect of the pretax book income was reflected in
the valuation allowance of the Company's net deferred tax assets. See Note 8 to
Consolidated Financial Statements.
Income tax expense was $16.0 million in 1998, which reflected the
establishment of a valuation allowance to reduce to zero the book value of net
deferred tax assets. Due to the significant losses recorded in 1998 and the
uncertainty of future oil and natural gas commodity prices, management concluded
that this valuation allowance was required in accordance with SFAS 109. In
making its assessment, management considered several factors, including the
uncertainty in the Company's ability to generate sufficient income in order to
realize its future tax benefits, and concluded that the Company could no longer
consider the realization of its net deferred tax assets "more likely than not."
In 1997 the income tax benefit was $52.1 million. See Note 8 for the
reconciliation of the statutory federal income tax rate to the Company's
effective tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Continuation as a Going Concern; Proposed Reorganization
During 1997 and 1998, due to very low prices for natural gas and crude oil
and, in 1998, due to disappointing performance of certain properties in the
Rocky Mountain area, the Company incurred significant losses, primarily due 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 non-cash charges, the net loss in 1998 was
increased by $288.4 million. Also as a result of these adjustments, the Company
has negative stockholders' equity and continues to be in default of certain
covenants in its bank credit facilities. As a consequence, the Company cannot
borrow under the revolving credit facilities. In addition, the Company's
independent public accountants issued modified reports for 1998 and 1999 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
these initial forbearance agreements the Company committed 50% of monthly cash
flow to payments of principal, with a minimum of $2 million monthly. In
addition, a portion of the proceeds from the sale of any of the Company's oil
and gas properties were dedicated to payment of principal under the bank credit
facilities.
On July 7, 1999, the lenders under each of the bank credit facilities reset
the Company's borrowing base, which had been $165 million in the aggregate 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
the $35.7 million additional lump-sum payment, a payment default occurred. The
lenders declared due all amounts owing under the bank loans, demanded payment
and declared in effect the default rate of interest. The bank lenders also
delivered a payment blockage notice to the indenture trustee of the 8.875%
senior subordinated notes. The Company did not make the scheduled July 15, 1999
interest payments on both the 8.875% senior subordinated notes and the 11%
senior notes, totaling $13.8 million. As a result of the payment default under
the bank loans and the interest payment default on the notes, the holders of the
requisite percentage of the Company's senior notes and senior subordinated notes
and the indenture trustees of the senior notes and the senior subordinated notes
have the right to declare the principal amount of the notes immediately due and
payable. On December 28, 1999, holders of the senior notes alleging to hold the
requisite percentage of senior notes provided notice of acceleration of maturity
and declared the principal and interest of the senior notes to be immediately
due and payable. Current liabilities at December 31, 1999 include accrued
interest of $26.4 million on the notes. The outstanding principal amount of the
senior subordinated notes is $125 million and the outstanding principal amount
of the senior notes is $150 million.
21
<PAGE> 23
On July 26, 1999, the Company and its bank lenders entered into new
forbearance agreements (effective as of July 1, 1999) which provided that the
lenders would refrain from exercising their rights and remedies not previously
exercised until October 5, 1999. Subsequently, these new forbearance agreements
were extended twice on the same terms through March 2, 2000. 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
senior subordinated notes. Under the terms of the new forbearance agreements,
the Company committed to make monthly principal payments of $2.5 million. In
addition, the agreements provide that a portion of the proceeds from the sale of
any of the Company's oil and gas properties will be dedicated to payment of
principal under the credit facilities. From the time that the original
forbearance agreements were entered into through December 31, 1999, the Company
made principal repayments to its banks of $43 million, reducing the outstanding
loans from $150 million to $107 million. The new forbearance agreements expired
on March 2, 2000.
As a result of the above factors, there is substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of the asset carrying amounts or the amounts and classifications
of liabilities that might result should the Company be unable to continue as a
going concern.
The Company has taken several steps to improve its financial situation.
Among other things, the Company reduced its workforce by over 30% during the
two-year period ending December 31, 1999, closed its New Jersey corporate office
and froze senior management salaries for 1999. Expense reduction initiatives
lowered lease operating expenses and general and administrative expenses by
approximately 13% during 1999. Planned capital investments were reduced in 1999
and a property divestiture program was implemented whereby the Company sold
non-core properties and raised net proceeds of approximately $27.7 million.
On December 28, 1999, the Company announced that it had reached an
agreement on a proposed restructuring with holders of more than two-thirds in
amount of the senior subordinated notes and holders of a majority in amount of
the senior notes. To effectuate this agreement, the parties agreed that the
Company would commence a case under Chapter 11 of the Bankruptcy Code by January
18, 2000. On January 5, 2000, three holders of senior notes filed an involuntary
petition for relief against KCS Energy, Inc. (the parent company only) under
Chapter 11 of the Bankruptcy Code in the U. S. Bankruptcy Court in Wilmington,
Delaware. On January 18, the Bankruptcy Court signed an order granting KCS
relief under Chapter 11 of the Bankruptcy Code. Also on January 18, 2000, each
of KCS Energy Inc.'s subsidiaries filed voluntary petitions under Chapter 11 of
the Bankruptcy Code with the Bankruptcy Court. On January 18, 2000, the Company
also filed a disclosure statement with the Court with respect to a proposed plan
of reorganization under Chapter 11 of the Bankruptcy Code (the "Plan"). The
disclosure statement and Plan have been amended in subsequent filings with the
Bankruptcy Court. A hearing before the Court to consider the adequacy of the
disclosure statement is currently set for April 11, 2000. The Plan as currently
proposed, if ultimately confirmed by the court, would result in impairment of
the existing common stockholders, holders of the senior subordinated notes and
holders of the Company's warrants and stock options. If the Court approves the
disclosure statement at the April 11 hearing, or shortly thereafter, the Company
intends to promptly begin soliciting votes to accept or reject the Plan.
However, there can be no assurance at this time that the Plan proposed currently
will be confirmed by the Bankruptcy Court.
Since the second quarter of 1999, the Company has been funding its capital
investment program with internally generated cash flow and a portion of the
proceeds from asset sales. The Company intends to fund the 2000 capital
investment program in the same way pending the outcome of the bankruptcy
proceedings.
Since the commencement of the bankruptcy proceedings on January 18, 2000,
the Company has been operating under a cash collateral agreement with its bank
lenders. The agreement provides for, among other things, that the Company make
monthly principal payments of $2.5 million and that the lenders have the right
to review and approve the Company's projected use of cash during the bankruptcy
proceedings.
Since the commencement of the bankruptcy proceedings, the Company has been
paying its post-petition trade obligations in the ordinary course of business.
In addition, the Company petitioned the Bankruptcy
22
<PAGE> 24
Court to allow for the payment of all pre-petition trade obligations in order to
minimize the effect of the bankruptcy proceedings on the Company's operations
and business relationships. The Bankruptcy Court subsequently granted the
Company the authority to pay certain specified pre-petition trade obligations
comprising the substantial majority of its pre-petition trade obligations. Under
the proposed Plan, all pre-petition and post-petition trade obligations would be
paid in full in the ordinary course of business.
The Company believes that its cash flow from operations and the proceeds
from asset sales should be sufficient to meet its short-term operating
requirements. However, there can be no assurance that, given the Company's
limited capital resources, it can continue to maintain its current production
levels through oil and gas reserve replacement.
Cash Flow from Operating Activities
Net income adjusted for non-cash charges increased to $58.2 million for the
year ended December 31, 1999, compared to $53.1 million in 1998. Net cash
provided by operating activities was $71.5 million during 1999, compared to
$44.0 million for 1998. The increase reflects higher average realized natural
gas and oil prices and lower operating and administrative expenses, partially
offset by higher interest and restructuring costs. The remainder of the increase
in 1999 cash flow from operating activities, compared to 1998, was largely
attributable to the non-payment of $13.8 million on July 15, 1999 of accrued
interest on the senior notes and senior subordinated notes and the timing of
cash receipts and disbursements.
Net cash provided by operating activities was $44.0 million during 1998,
compared to $100.2 million for 1997. Net income adjusted for non-cash charges
decreased to $53.1 million for the year ended December 31, 1998, compared to
$77.6 million in 1997. The decrease reflects higher interest costs and the
depressed oil and gas prices which more than offset an 11% increase in
production. The remainder of the reduction in 1998 cash flow from operating
activities, compared to 1997, was largely attributable to the 1997 timing of
cash receipts and disbursements of the discontinued marketing and transportation
operations.
Investing Activities
Capital expenditures for the year ended December 31, 1999 were $60.2
million, of which $25.2 million was for development activities; $25.8 million
for the acquisition of proved reserves $9.0 million for lease acquisitions,
seismic surveys and exploratory drilling, and $0.2 million for other assets.
Capital expenditures for the year ended December 31, 1998 were $165.5
million, of which $66.8 million was for development drilling; $73.5 million for
the acquisition of proved reserves under the Company's VPP program; $23.1
million for lease acquisitions, seismic surveys and exploratory drilling, and
$2.1 million for other assets.
Capital expenditures in 1997 were $226.6 million, of which $107.4 million
was for development drilling; $49.5 million for the purchase of proved reserves
under the Company's VPP program; $54.3 million for lease acquisitions, seismic
surveys and exploratory drilling, and $15.4 million for other assets.
During 1997, the Company sold its principal natural gas transportation
asset and its third-party gas marketing operations realizing proceeds of $28.5
million, which were used to reduce indebtedness under its bank credit
facilities, and an after-tax gain of $5.4 million.
YEAR 2000 ISSUE
The Company completed its Year 2000 implementation plan during the fourth
quarter of 1999 and has not experienced any significant disruptions to its
operations as a result of the Year 2000 issue.
23
<PAGE> 25
NEW ACCOUNTING STANDARDS
In June 1998, SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities" was issued. SFAS 133 establishes new accounting rules and disclosure
requirements for most derivative instruments and for hedging related to those
instruments. In July 1999, the Financial Accounting Standards Board adopted SFAS
137, which defers the required adoption date of SFAS 133 by one year to fiscal
years beginning after June 15, 2000. The Company will adopt this statement
effective January 1, 2001 and is currently assessing the initial effects of
adoption.
24
<PAGE> 26
MARKET RISK DISCLOSURE
The Company has utilized, and may continue to utilize, swaps, futures
contracts and options to manage the price risk associated with the production of
natural gas and oil. Since these contracts qualify as hedges and correlate to
market price movement of natural gas or oil, any gains or losses resulting from
market changes will be offset by losses or gains on corresponding physical sales
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 hedged positions at December
31, 1999. The Company accounts for oil and natural gas futures contracts,
options and commodity price swaps in accordance with FASB Statement No. 80
"Accounting for Futures Contracts". See Notes 1 and 9 to the Consolidated
Financial Statements for a further discussion of the Company's accounting policy
related to these contracts.
<TABLE>
<CAPTION>
NATURAL GAS OIL
--------------------------------------- ----------------------------------
CONTRACT WEIGHTED UNREALIZED WEIGHTED UNREALIZED
MATURITY DATE VOLUME AVG. PRICE GAIN (LOSS) VOLUME AVG. PRICE GAIN (LOSS)
- ------------- --------- ------------- ----------- ------ ----------- -----------
(MMBTU) ($ PER MMBTU) ($000S) (BBL) ($ PER BBL) ($000S)
<S> <C> <C> <C> <C> <C> <C>
2000
First quarter.............. 870,000 $2.055 $ (240,700) 30,200 22.88 $(45,354)
Second quarter............. 870,000 2.055 (248,240) 24,200 22.49 (2,160)
Third quarter.............. 870,000 2.055 (298,410) -- -- --
Fourth quarter............. 870,000 2.055 (443,410) -- -- --
--------- ----------- ------ --------
Total 2000......... 3,480,000 2.055 (1,230,760) 54,400 -- (47,514)
2001......................... 3,000,000 2.055 (1,293,000) -- -- --
2002......................... 2,520,000 2.055 (1,121,400) -- -- --
2003......................... 2,040,000 2.055 (907,800) -- -- --
THEREAFTER................... 2,800,000 2.055 (1,246,000) -- -- --
</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 10.0%. The
weighted average interest rate on its variable rate debt of $107.1 million was
9.0%. 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 Consolidated Financial
Statements.
25
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To KCS Energy, Inc.:
We have audited the accompanying consolidated balance sheets of KCS Energy,
Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1999 and 1998,
and the related statements of consolidated operations, stockholders' (deficit)
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of KCS Energy,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 2 and 6 to the consolidated financial statements, the Company has incurred
significant losses due primarily to non-cash ceiling writedowns of its oil and
gas assets, has negative stockholders' equity, has violated certain financial
covenants within its bank credit facilities and is in default on its senior
notes and senior subordinated notes. In addition, as described in Note 2 to the
consolidated financial statements, in January 2000, the Company was granted an
order of relief under Chapter 11 of the United States Bankruptcy Code and has
filed a proposed plan of reorganization. These matters, among others, raise
substantial doubt about the Company's ability to continue as a going concern. In
the event a plan of reorganization is accepted, continuation of the business
thereafter is dependent on the Company's ability to implement the plan and
achieve successful future operations. The 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.
ARTHUR ANDERSEN LLP
Houston, Texas
March 29, 2000
26
<PAGE> 28
KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
STATEMENTS OF CONSOLIDATED OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Oil and gas revenue........................................ $131,997 $ 123,491 $ 137,837
Other revenue, net......................................... 4,494 5,961 5,852
-------- --------- ---------
Total revenue.................................... 136,491 129,452 143,689
Operating costs and expenses
Lease operating expenses................................. 26,624 30,434 29,393
Production taxes......................................... 3,524 3,996 5,873
General and administrative expenses...................... 9,847 11,327 10,753
Restructuring costs...................................... 1,886 -- --
Depreciation, depletion and amortization................. 50,967 59,888 60,554
Writedown of oil and gas properties...................... -- 268,468 165,149
-------- --------- ---------
Total operating costs and expenses............... 92,848 374,113 271,722
-------- --------- ---------
Operating income (loss).................................... 43,643 (244,661) (128,033)
Interest and other income (expense), net................... 702 (73) 476
Interest expense........................................... (40,005) (35,787) (21,883)
-------- --------- ---------
Income (loss) from continuing operations before income
taxes.................................................... 4,340 (280,521) (149,440)
Federal and state income taxes (benefit)................... -- 15,999 (52,055)
-------- --------- ---------
Income (loss) from continuing operations................... 4,340 (296,520) (97,385)
Discontinued operations
Net loss from operations................................. -- -- (72)
Net gain on disposition.................................. -- -- 5,374
-------- --------- ---------
Net income (loss).......................................... $ 4,340 $(296,520) $ (92,083)
======== ========= =========
Basic earnings (loss) per share of common stock
Continuing operations.................................... $ 0.15 $ (10.08) $ (3.37)
Discontinued operations.................................. -- -- 0.18
-------- --------- ---------
$ 0.15 $ (10.08) $ (3.19)
======== ========= =========
Diluted earnings (loss) per share of common stock
Continuing operations.................................... $ 0.15 $ (10.08) $ (3.37)
Discontinued operations.................................. -- -- 0.18
-------- --------- ---------
$ 0.15 $ (10.08) $ (3.19)
======== ========= =========
Average shares outstanding for computation of earnings per
share
Basic.................................................... 29,263 29,428 28,856
Diluted.................................................. 29,288 29,428 28,856
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 29
KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 10,584 $ 876
Trade accounts receivable................................. 21,941 36,548
Other current assets...................................... 7,571 5,650
--------- ---------
Current assets.................................... 40,096 43,074
--------- ---------
Property, plant and equipment
Oil and gas properties, full cost method, less accumulated
DD&A -- 1999 $731,496; 1998 $682,913................... 232,281 248,582
Other property, plant and equipment, at cost less
accumulated depreciation -- 1999 $5,930; 1998 $4,442... 4,686 7,910
--------- ---------
Property, plant and equipment, net................ 236,967 256,492
--------- ---------
Deferred charges and other assets........................... 7,869 9,312
--------- ---------
$ 284,932 $ 308,878
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
Accounts payable.......................................... $ 13,340 $ 24,267
Accrued interest on public debt........................... 26,444 12,647
Other accrued liabilities................................. 11,262 12,937
Short-term debt........................................... 381,819 135,700
--------- ---------
Current liabilities............................... 432,865 185,551
--------- ---------
Deferred credits and other liabilities...................... 1,910 2,896
--------- ---------
Long-term debt.............................................. -- 274,635
--------- ---------
Commitments and contingencies
--------- ---------
Preferred stock, authorized 5,000,000 shares -- unissued.... -- --
--------- ---------
Stockholders' (deficit) equity
Common stock, par value $0.01 per share, authorized
50,000,000 shares issued 31,435,406 and 31,420,231,
respectively........................................... 314 314
Additional paid-in capital................................ 145,098 145,077
Retained (deficit) earnings............................... (290,514) (294,854)
Less treasury stock, 2,167,096 shares, at cost............ (4,741) (4,741)
--------- ---------
Stockholders' (deficit) equity.................... (149,843) (154,204)
--------- ---------
$ 284,932 $ 308,878
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 30
KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' (DEFICIT) EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN (DEFICIT) TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK (DEFICIT) EQUITY
------ ---------- --------- -------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996.......... $249 $ 30,463 $ 98,298 $(3,388) $ 125,622
Stock issuance -- public offering... 60 110,527 110,587
Stock issuances -- option and
benefit plans.................... 3 2,073 -- -- 2,076
Tax benefit on stock option
exercises........................ -- 1,072 -- -- 1,072
Net loss............................ -- -- (92,083) -- (92,083)
Dividends ($0.075 per share)........ -- -- (2,204) -- (2,204)
---- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1997.......... 312 144,135 4,011 (3,388) 145,070
Stock issuances -- option and
benefit plans.................... 2 489 -- -- 491
Tax benefit on stock option
exercises........................ -- 453 -- -- 453
Net loss............................ -- -- (296,520) -- (296,520)
Dividends ($0.08 per share)......... -- -- (2,345) -- (2,345)
Purchase of treasury stock.......... -- -- -- (1,353) (1,353)
---- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1998.......... 314 145,077 (294,854) (4,741) (154,204)
Stock issuances -- option and
benefit plans.................... -- 21 -- -- 21
Net income.......................... -- -- 4,340 -- 4,340
---- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1999.......... $314 $145,098 $(290,514) $(4,741) $(149,843)
==== ======== ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 31
KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 4,340 $(296,520) $ (92,083)
Non-cash charges (credits):
Depreciation, depletion and amortization.............. 50,967 59,888 60,554
Writedown of oil and gas properties................... -- 268,468 165,149
Deferred income taxes................................. -- (94,992) (52,106)
Tax valuation allowance............................... -- 113,944 --
Gain on sale of discontinued operations............... -- -- (5,374)
Other non-cash charges and credits, net............... 2,862 2,291 1,466
-------- --------- ---------
58,169 53,079 77,606
Net changes in assets and liabilities:
Trade accounts receivable............................. 14,607 3,567 51,824
Other current assets.................................. (1,921) 1,102 2,630
Accounts payable and accrued liabilities.............. 1,779 (14,315) (34,100)
Federal and state income taxes........................ -- 82 1,563
Other, net............................................ (1,171) 517 698
-------- --------- ---------
Net cash provided by operating activities.................. 71,463 44,032 100,221
-------- --------- ---------
Cash flows from investing activities:
Investment in oil and gas properties..................... (60,000) (163,396) (211,228)
Proceeds from the sale of oil and gas properties......... 27,718 6,962 4,940
Proceeds from the sale of pipeline assets................ -- -- 27,907
Investment in other property, plant and equipment, net... 840 (2,082) (15,341)
-------- --------- ---------
Net cash used in investing activities...................... (31,442) (158,516) (193,722)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowings................................. 16,300 276,600 156,800
Repayments of debt....................................... (44,905) (158,800) (174,791)
Issuance of common stock................................. 21 491 112,663
Tax benefit on stock option exercises.................... -- 453 1,072
Purchase of treasury stock............................... -- (1,353) --
Dividends paid........................................... (585) (2,347) (1,962)
Deferred financing costs and other, net.................. (1,144) (4,486) (579)
-------- --------- ---------
Net cash provided by (used in) financing activities........ (30,313) 110,558 93,203
-------- --------- ---------
Increase (decrease) in cash and cash equivalents........... 9,708 (3,926) (298)
Cash and cash equivalents at beginning of year............. 876 4,802 5,100
-------- --------- ---------
Cash and cash equivalents at end of year................... $ 10,584 $ 876 $ 4,802
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE> 32
KCS ENERGY, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
KCS Energy, Inc. is an independent oil and gas company engaged in the
acquisition, exploration, exploitation and production of natural gas and crude
oil.
Basis of Presentation
The consolidated financial statements include the accounts of KCS Energy,
Inc. and its wholly owned subsidiaries ("KCS" or "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain previously reported amounts have been reclassified to conform to current
year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
financial statements have been prepared assuming the Company will continue as a
going concern. As explained in Note 2, it is uncertain that this will be the
case. The financial statements do not include any adjustments that reflect these
uncertainties.
Cash Equivalents
The Company considers as cash equivalents all highly liquid investments
with a maturity of three months from date of purchase. Cash at December 31, 1999
includes $0.8 million restricted for funding expenditures on specific oil and
gas properties.
Hedging Transactions
The Company utilizes oil and natural gas futures contracts and commodity
price swaps for the purpose of hedging the risks associated with fluctuating
crude oil and natural gas prices and accounts for such contracts in accordance
with FASB Statement No. 80 "Accounting for Futures Contracts." These contracts
permit settlement by delivery of commodities and, therefore, are not financial
instruments as defined by FASB Statement Nos. 107 and 119. Changes in the market
value of these transactions are deferred until the sale of the underlying
production is recognized. See Note 9 for further discussion of the Company's
price risk management activities.
In June 1998, SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities" was issued. SFAS 133 establishes new accounting rules and disclosure
requirements for most derivative instruments and for hedging related to those
instruments. In July 1999, the Financial Accounting Standards Board adopted SFAS
137, which defers the required adoption date of SFAS 133 by one year to fiscal
years beginning after June 15, 2000. The Company will adopt this statement
effective January 1, 2001 and is currently assessing the initial effects of
adoption.
Imbalances
The Company follows the sales method of accounting for natural gas revenues
whereby revenues are recognized based on volume sold to the purchaser. The
volume of gas sold may differ from the volume to which KCS is entitled based on
its working interest. There were no material imbalances at December 31, 1999.
31
<PAGE> 33
Property, Plant and Equipment
The Company follows the full cost method of accounting under which all
costs incurred in acquisition, exploration and development activities are
capitalized in a country-wide cost center. Such costs include lease
acquisitions, geological and geophysical services, drilling, completion,
equipment and certain general and administrative costs directly associated with
acquisition, exploration and development activities. General and administrative
costs related to production and general overhead are expensed as incurred. The
Company provides for depreciation, depletion and amortization of evaluated costs
using the future gross revenue method based on recoverable reserves valued at
current prices.
Capitalized costs of oil and gas properties net of accumulated amortization
and related deferred taxes are limited to the sum of the present value of
estimated future net revenues from proved oil and gas reserves at current prices
discounted at 10% plus the lower of cost or fair value of unproved properties.
To the extent that the capitalized costs exceed this limitation at the end of
any quarter, such excess is expensed. For the years ended December 31, 1998 and
1997, respectively, the Company recorded $268.5 million and $165.1 million in
pretax non-cash ceiling writedowns of its oil and gas properties. See Note 2 to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Costs of unevaluated properties excluded from amortization were $8.4
million and $17.7 million at December 31, 1999 and 1998, respectively. Such
costs relate to acquisitions and exploration efforts for which proved reserves
have not been established. The Company will begin to amortize these costs when
proved reserves are established or impairment is determined.
Proceeds from dispositions of oil and gas properties are credited to the
cost center.
Depreciation of other property, plant and equipment is provided on a
straight-line basis over the useful lives of the assets. Repairs of all
property, plant and equipment and replacements and renewals of minor items of
property are charged to expense as incurred.
Income Taxes
The Company accounts for income taxes in accordance with FASB Statement No.
109 "Accounting for Income Taxes." Deferred income taxes are recorded to reflect
the future tax consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end. A valuation
allowance is recognized if it is anticipated that some or all of a deferred tax
asset may not be realized.
For income tax purposes, the Company deducts the difference between market
value and exercise price arising from the exercise of stock options. The tax
effect of this deduction which, for financial reporting purposes, is accounted
for as an increase to additional paid-in capital, amounted to $0.5 million and
$1.1 million in 1998 and 1997, respectively. No stock options were exercised in
1999.
Earnings Per Share
Basic earnings per share were computed by dividing net income by the
weighted average number of common shares outstanding during the year as required
by FASB Statement No. 128 "Earnings per Share". Diluted earnings per share have
been computed by dividing net income by the weighted average number of common
shares outstanding plus the incremental shares that would have been outstanding
assuming the exercise of stock options and stock warrants as applicable. A
reconciliation of shares used for basic earnings per share and those used for
diluted earnings per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Average common stock outstanding........................... 29,263 29,428 28,856
Common stock equivalents................................... 25 248 515
------ ------ ------
Average common stock and common stock equivalents
outstanding.............................................. 29,288 29,676 29,371
====== ====== ======
</TABLE>
32
<PAGE> 34
Common stock equivalents are not applicable for 1998 and 1997 earnings per
share as they would be anti-dilutive.
Segment Reporting
In June 1997, FASB Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information" was issued which requires that the Company
disclose selected information about operating segments in its annual and interim
financial statements, commencing with the fiscal year 1998 financial statements.
The Company operates in one reportable segment, as an independent oil and gas
company engaged in the acquisition, exploration, exploitation and production of
domestic oil and gas properties. The Company's operations are conducted entirely
in the United States. No customer accounted for more than 10% of the Company's
revenues in 1999, 1998 or 1997.
2. FINANCIAL CONDITION AND BANKRUPTCY PROCEEDINGS
During 1997 and 1998, due to very low prices for natural gas and crude oil
and, in 1998, due to disappointing performance of certain properties in the
Rocky Mountain area, the Company incurred significant losses, primarily due 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 non-cash charges, the net loss in 1998 was
increased by $288.4 million. Also as a result of these adjustments, the Company
has negative stockholders' equity and continues to be in default of certain
covenants in its bank credit facilities. As a consequence, the Company cannot
borrow under the revolving credit facilities. In addition, the Company's
independent public accountants issued modified reports for 1998 and 1999 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
these initial forbearance agreements, the Company committed 50% of monthly cash
flow to payments of principal, with a minimum of $2 million monthly. In
addition, a portion of the proceeds from the sale of any of the Company's oil
and gas properties were dedicated to payment of principal under the bank credit
facilities.
On July 7, 1999 the lenders under each of the bank credit facilities reset
the Company's borrowing base, which had been $165 million in the aggregate 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
the $35.7 million additional lump-sum payment, a payment default occurred. The
lenders declared due all amounts owing under the bank loans, demanded payment
and declared in effect the default rate of interest. The bank lenders also
delivered a payment blockage notice to the indenture trustee of the 8.875%
senior subordinated notes. The Company did not make the scheduled July 15, 1999
interest payments on both the 8.875% senior subordinated notes and the 11%
senior notes, totaling $13.8 million. As a result of the payment default under
the bank loans and the interest payment default on the notes, the holders of the
requisite percentage of the Company's senior notes and senior subordinated notes
and the indenture trustees of the senior notes and the senior subordinated notes
have the right to declare the principal amount of the notes immediately due and
payable. On December 28, 1999, holders of the senior notes alleging to hold the
requisite percentage of senior notes provided notice of acceleration of maturity
and declared the principal and interest of the senior notes to be immediately
due and payable. Current liabilities at December 31, 1999 include accrued
interest of $26.4 million on the notes. The outstanding principal amount of the
senior subordinated notes is $125 million and the outstanding principal amount
of the senior notes is $150 million.
On July 26, 1999, the Company and its bank lenders entered into new
forbearance agreements (effective as of July 1, 1999) which provided that the
lenders would refrain from exercising their rights and remedies not previously
exercised until October 5, 1999. Subsequently, these new forbearance agreements
were extended twice on the same terms through March 2, 2000. The lenders did not
waive the payment default but rescinded
33
<PAGE> 35
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 senior 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, the agreements provide that a
portion of the proceeds from the sale of any of the Company's oil and gas
properties will be dedicated to payment of principal under the credit
facilities. From the time that the original forbearance agreements were entered
into through December 31, 1999, the Company made principal repayments to its
banks of $43 million, reducing the outstanding loans from $150 million to $107
million. The new forbearance agreements expired on March 2, 2000.
Since the commencement of the bankruptcy proceedings on January 18, 2000,
the Company has been operating under a cash collateral agreement with its bank
lenders. The agreement provides for, among other things, that the Company make
monthly principal payments of $2.5 million and that the lenders have the right
to review and approve the Company's projected use of cash during the bankruptcy
proceedings.
As a result of the above factors, there is substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of the asset-carrying amounts or the amounts and classifications
of liabilities that might result should the Company be unable to continue as a
going concern.
The Company has taken several steps to improve its financial situation.
Among other things, the Company reduced its workforce by over 30% during the
two-year period ending December 31, 1999, closed its New Jersey corporate office
and froze senior management salaries for 1999. Expense reduction initiatives
lowered lease operating expenses and general and administrative expenses by
approximately 13% during 1999. Planned capital investments were reduced in 1999
and a property divestiture program was implemented whereby the Company sold
non-core properties and raised net proceeds of approximately $27.7 million.
On December 28, 1999, the Company announced that it had reached an
agreement on a proposed restructuring with holders of more than two-thirds in
amount of the senior subordinated notes and holders of a majority in amount of
the senior notes. To effectuate this agreement, the parties agreed that the
Company would commence a case under Chapter 11 of the Bankruptcy Code by January
18, 2000. On January 5, 2000, three holders of senior notes filed an involuntary
petition for relief against KCS Energy, Inc. (the parent company only) under
Chapter 11 of the Bankruptcy Code in the U. S. Bankruptcy Court in Wilmington,
Delaware. On January 18, the Bankruptcy Court signed an order granting KCS
relief under Chapter 11 of the Bankruptcy Code. Also on January 18, 2000, each
of KCS Energy Inc.'s subsidiaries filed voluntary petitions under Chapter 11 of
the Bankruptcy Code with the Bankruptcy Court. On January 18, 2000, the Company
also filed a disclosure statement with the Court with respect to a proposed plan
of reorganization under Chapter 11 of the Bankruptcy Code (the "Plan"). The
disclosure statement and Plan have been amended in subsequent filings with the
Bankruptcy Court. A hearing before the Court to consider the adequacy of the
disclosure statement is currently set for April 11, 2000. The Plan as currently
proposed, if ultimately confirmed by the court, would result in impairment of
the existing common stockholders, holders of the senior subordinated notes and
holders of the Company's warrants and stock options. If the Court approves the
disclosure statement at the April 11 hearing, or shortly thereafter, the Company
intends to promptly begin soliciting votes to accept or reject the Plan.
However, there can be no assurance at this time that the Plan proposed currently
will be confirmed by the Bankruptcy Court.
Since the second quarter of 1999, the Company has been funding its capital
investment program with internally generated cash flow and a portion of the
proceeds from asset sales. The Company intends to fund the 2000 capital
investment program in the same way pending the outcome of the bankruptcy
proceedings.
Since the commencement of the bankruptcy proceedings, the Company has been
paying its post-petition trade obligations in the ordinary course of business.
In addition, the Company petitioned the Bankruptcy Court to allow for the
payment of all pre-petition trade obligations in order to minimize the effect of
the bankruptcy proceedings on the Company's operations and business
relationships. The Bankruptcy Court subsequently granted the Company the
authority to pay certain specified pre-petition trade obligations
34
<PAGE> 36
comprising the substantial majority of its pre-petition trade obligations. Under
the proposed Plan, all pre-petition and post-petition trade obligations would be
paid in full in the ordinary course of business.
The Company believes that its cash flow from operations and the proceeds
from assets sales should be sufficient to meet its short-term operating
requirements. However, there can be no assurance that, given the Company's
limited capital resources, it can continue to maintain its current production
levels through oil and gas reserve replacement.
Under Chapter 11 of the Bankruptcy Code, certain claims against the debtor
in existence prior to the filing of the bankruptcy petitions for relief under
the U.S. bankruptcy laws are stayed while the debtor continues business
operations as debtor in possession. Under AICPA Statement of Position 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,
("SOP 90-7") the Company is required to adjust liabilities subject to compromise
to the amount of the claim allowed by the court. This will result in a write off
of certain deferred debt issuance costs and debt discounts. These adjustments
will be reflected in the Company's results of operations for the quarter ended
March 31, 2000. In addition, SOP 90-7 requires the Company to report interest
expense during the bankruptcy proceedings only to the extent that it will be
paid during the proceeding or that it is probable to be an allowed priority,
secured, or unsecured claim. The Company will adjust its interest expense on a
prospective basis according to these guidelines. The difference between the
reported interest expense and the stated amount of interest will be disclosed in
future filings.
The Company engaged financial and legal advisors in the second quarter of
1999 to assist in developing a restructuring plan that would lead to the
deleveraging of its balance sheet. Costs directly related to these activities
were $1.9 million and are included as "Restructuring costs" in the 1999
Consolidated Statement of Operations.
3. DISCONTINUED OPERATIONS
During the first quarter of 1997, the Board of Directors approved a plan to
discontinue the Company's natural gas transportation and marketing operations in
order to focus on the core oil and gas exploration and production operations.
During 1997, the Company sold its Texas intrastate natural gas pipeline system
and its third-party natural gas marketing operations, realizing proceeds of
$28.5 million and an after-tax gain of $5.4 million. Income taxes associated
with the discontinued operations were $2.8 million.
The summarized results of these operations for the year ended 1997 are as
follows: revenue of $22.0 million and net loss from operations of $0.1 million.
By December 31, 1997, all assets of the discontinued operations were divested.
Discontinued operations have not been segregated in the Statements of
Consolidated Cash Flows and, therefore, amounts for certain captions will not
agree with the respective Statements of Consolidated Operations.
4. RETIREMENT BENEFIT PLANS
The Company sponsors a Savings and Investment Plan ("Savings Plan") under
Section 401(k) of the Internal Revenue Code. Eligible employees may contribute
up to 16% of their base salary to the Savings Plan subject to certain IRS
limitations. The Company may make matching contributions, which have been set by
the Board of Directors at 50% of the employee's contribution (up to 6% of the
employee's annual base salary). The Savings Plan also contains a profit-sharing
component whereby the Board of Directors may declare annual discretionary
profit-sharing contributions. Profit-sharing contributions are allocated to
eligible employees based upon their pro-rata share of total eligible
compensation. Employee and profit-sharing contributions are invested at the
direction of the employee in one or more funds or can be directed to purchase
common stock of the Company at fair market value. Company matching contributions
are invested in shares of KCS common stock. Eligible employees vest in both the
Company matching and discretionary profit-sharing contributions over a four-year
period based upon years of service with the Company. Company contributions to
the Savings Plan were $221,520 in 1999, $393,851 in 1998 and $420,090 in 1997.
These amounts are included in general and administrative expense.
35
<PAGE> 37
5. STOCK OPTION AND INCENTIVE PLANS
Under the 1992 Stock Plan, stock options, stock appreciation rights and
restricted stock may be granted to employees of KCS. The 1992 Stock Plan also
provides that bonus stock may be granted to employees.
The 1994 Directors' Stock Plan provides that each non-employee director be
granted stock options for 2,000 shares annually. This plan also provides that in
lieu of cash, each non-employee director be issued KCS stock with a fair market
value equal to 50% of their annual retainer. In 1999 each non-employee director
waived his annual retainer.
Each plan provides that the option price of shares issued be equal to the
market price on the date of grant. All options expire 10 years after the date of
grant.
Restricted shares awarded under the 1992 Stock Plan have a fixed
restriction period during which ownership of the shares cannot be transferred
and the shares are subject to forfeiture if employment terminates. Restricted
stock has the same dividend and voting rights as other common stock and is
considered to be currently issued and outstanding. The cost of the awards,
determined as the fair market value of the shares at the date of grant, is
expensed ratably over the restricted period. Restricted stock totaling 46,100
shares was outstanding at December 31, 1999.
At December 31, 1999, a total of 395,152 shares were available for future
grants under the 1992 Stock Plan and the 1994 Directors' Stock Plan. No grants
were made pursuant to these plans in 1999.
Under the 1988 KCS Energy, Inc. Employee Stock Purchase Program (the
"Program"), all eligible employees and directors may purchase full shares from
the Company at a price per share equal to 90% of the market value determined by
the closing price on the date of purchase. The minimum purchase is 25 shares.
The maximum annual purchase is the number of shares costing no more than 10% of
the eligible employee's annual base salary, and for directors, 6,000 shares. The
number of shares issued in connection with the Program was 14,775, 44,661 and
14,520 during 1999, 1998 and 1997, respectively. At December 31, 1999, there
were 798,108 shares available for issuance under the Program.
As permitted under FASB Statement No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") the Company has elected to continue to account for
stock-based compensation under the provisions of APB Opinion No. 25. Had
compensation cost for the following plans been determined consistent with SFAS
123, the impact on the Company's net income (loss) would have been $2.3 million
in 1999, $2.3 million in 1998 and $0.7 million in 1997. The impact on basic and
diluted loss per share would have been $0.07 in 1999, $0.08 in 1998 and $0.02 in
1997.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively: risk-free interest
rates of 5.17% and 6.39%; expected dividend yield of 0.00% and 0.46%; expected
lives of 4.0 years and 5.6 years; expected stock price volatility of 70.0% and
50.1%.
36
<PAGE> 38
As required under SFAS 123, a summary of the status of the stock options
under the 1992 Stock Plan and the 1994 Directors' Stock Plan at December 31,
1999, 1998 and 1997 and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING AT BEGINNING OF
YEAR..................... 1,720,230 $10.37 1,063,800 $ 7.76 1,059,150 $ 5.46
Granted.................. -- -- 899,300 12.57 349,400 16.82
Exercised................ -- -- (123,320) 1.48 (236,250) 8.04
Forfeited................ (200,600) 13.34 (119,550) 12.86 (108,500) 13.83
--------- ------ --------- ------ --------- ------
OUTSTANDING AT END OF
YEAR..................... 1,519,630 9.98 1,720,230 10.37 1,063,800 7.76
--------- ------ --------- ------ --------- ------
Exercisable at end of
year.................. 899,355 $ 7.84 645,530 $ 5.93 697,300 $ 4.58
--------- ------ --------- ------ --------- ------
Weighted average fair
value of options
granted............... $ -- $ 7.14 $ 8.79
====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1999 EXERCISE PRICE
- --------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.92-$ 3.12 240,000 1.42 $ 0.94 240,000 $ 0.94
3.13- 4.68 60,000 2.92 3.13 60,000 3.13
4.69- 7.01 385,000 7.98 5.70 173,125 6.05
7.02- 10.52 105,000 4.94 7.33 105,000 7.33
10.53- 18.81 729,630 7.34 16.16 321,230 15.00
------------- --------- ---- ------ ------- ------
$ 0.92-$18.81 1,519,630 4.60 $ 9.98 899,355 $ 7.84
============= ========= ==== ====== ======= ======
</TABLE>
6. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
11% Senior Notes Due 2003................................... $149,724 $149,635
8 7/8% Senior Subordinated Notes due 2008................... 125,000 125,000
Revolving Credit Agreement.................................. 49,501 80,000
Credit Facility............................................. 57,594 55,700
-------- --------
381,819 410,335
Less short-term debt........................................ 381,819 135,700
-------- --------
Long-term debt.............................................. $ -- $274,635
======== ========
</TABLE>
The Company is currently in default under its bank credit facilities and
the indentures concerning its senior notes and senior subordinated notes. See
Note 2.
Senior Subordinated Notes
On January 15, 1998, KCS Energy, Inc. (the "Parent") completed a public
offering of $125 million senior subordinated notes at an interest rate of 8.875%
due January 15, 2008 (the "Subordinated Notes"). The Subordinated Notes are
noncallable for five years and are unsecured subordinated obligations of the
Parent.
37
<PAGE> 39
Prior to January 15, 2001, the Parent may use proceeds from a public equity
offering to redeem up to 33 1/3% of the Subordinated Notes. The subsidiaries of
the Parent have guaranteed the Subordinated Notes on an unsecured subordinated
basis. The net proceeds of approximately $121 million were used to reduce
outstanding indebtedness under the credit agreements discussed below.
The Subordinated Notes contain certain restrictive covenants which, among
other things, limit the Company's ability to incur additional indebtedness,
require the repurchase of the Subordinated Notes upon a change of control and
restrict the aggregate cash dividends paid to 50% of the Company's cumulative
net income, as defined in the indenture covering the Subordinated Notes, during
the period beginning October 1, 1997. A ceiling writedown is not a charge
against net income as defined in the indenture. Currently, these covenants
prohibit the Company from paying dividends and incurring additional Indebtedness
(as defined in the indenture), except for Permitted Indebtedness (also as
defined in the indenture). As a result of the payment default under the
Company's bank loans and the interest payment default on the Subordinated Notes,
the holders of the requisite percentage of the Company's Subordinated Notes and
the indenture trustee have the right to declare the principal amount of the
notes immediately due and payable.
Senior Notes
KCS Energy, Inc. has outstanding $150 million principal amount of 11%
senior notes due 2003 issued pursuant to an indenture governing the Senior Notes
dated January 25, 1996 (the "Senior Notes"). The Senior Notes mature on January
15, 2003 and bear interest at the rate of 11% per annum. The Senior Notes are
redeemable at the option of the Parent, in whole or in part, commencing January
15, 2000, at predetermined redemption prices set forth within the Senior Notes
indenture. The subsidiaries of the Parent have guaranteed the Senior Notes on a
senior unsecured basis.
The Senior Notes contain certain restrictive covenants which, among other
things, limit the Company's ability to incur additional indebtedness, require
the repurchase of the Senior Notes upon a change of control and restrict the
aggregate cash dividends paid to 50% of the Company's cumulative net income, as
defined in the indenture covering the Senior Notes, during the period beginning
October 1, 1995. A ceiling writedown is not a charge against net income as
defined in the indenture. Currently, these covenants prohibit the Company from
paying dividends and incurring additional Indebtedness (as defined in the
indenture), except for Permitted Indebtedness (also as defined in the
indenture). As a result of the payment default under the Company's bank loans
and the interest payment default on the Senior Notes, the holders of the
requisite percentage of the Senior Notes and the indenture trustee have the
right to declare the principal amount of the notes immediately due and payable.
On December 28, 1999, holders of the Senior Notes alleging to hold the requisite
percentage of Senior Notes provided notice of acceleration of maturity and
declared the principal and interest of the senior notes to be immediately due
and payable.
Revolving Credit Agreement
Simultaneous with the consummation of the Medallion acquisition as of
December 31, 1996, the Company entered into a revolving credit agreement
("Revolving Credit Agreement") with a group of banks, which will mature on
September 30, 2000. The Revolving Credit Agreement is used for general corporate
purposes, including working capital, and to support the Company's capital
expenditure program. The Company cannot borrow under the Revolving Credit
Agreement due to the existing defaults. The borrowing base is reviewed at least
semiannually and may be adjusted based on the lenders' valuation of the
borrowers' oil and gas reserves and other factors. In July 1999, the borrowing
base was reset. See "Forbearance Agreements" below. The obligations under the
Revolving Credit Agreement are secured by substantially all of the oil and gas
reserves acquired in the Medallion acquisition, a pledge of the Medallion
entities' common stock and certain VPP assets.
The Revolving Credit Agreement permits the borrowers under this facility to
choose interest rate options based on the bank's prime rate or LIBOR and from
maturities ranging up to 12 months. The applicable spread is based on the
percentage of the borrowing base that is outstanding. A commitment fee ranging
between 0.375% and 0.50% is paid on the unused portion of the borrowing base.
The weighted average effective interest
38
<PAGE> 40
rate during 1999 was 7.87%. As of December 31, 1999, the weighted average
interest rate under the Revolving Credit Agreement was 8.89% and $49.5 million
was outstanding. As of December 31, 1998, the weighted average interest rate
under the Revolving Credit Agreement was 7.5% and $80.0 million was outstanding.
Credit Facility
The Company's revolving credit facility ("Credit Facility"), which matures
on September 30, 2000, is used for general corporate purposes, including working
capital, and to support the Company's capital expenditure program. The company
cannot borrow under the Credit Facility due to the existing defaults. The
borrowing base is reviewed at least semiannually and may be adjusted based on
the lenders' valuation of the borrowers' oil and gas reserves and other factors.
In July 1999, the borrowing base was reset. See "Forbearance Agreements" below.
Substantially all of the Company's oil and gas reserves (excluding those pledged
under the Revolving Credit Agreement) have been pledged to secure the Credit
Facility.
The Credit Facility permits the borrowers to choose interest rate options
based on the bank's prime rate or LIBOR and from maturities ranging up to 12
months. The applicable spread is based on the percentage of the borrowing base
that is outstanding. A commitment fee ranging between 0.375% and 0.50% is paid
on the unused portion of the borrowing base. The weighted average effective
interest rate during 1999 was 8.14%. As of December 31, 1999, the weighted
average interest rate under the Credit Facility was 9.12% and $57.6 million was
outstanding. As of December 31, 1998, the weighted average interest rate under
the Credit Facility was 7.67% and $55.7 million was outstanding.
Forbearance 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
these initial forbearance agreements the Company committed 50% of monthly cash
flow to payments of principal, with a minimum of $2 million monthly. In
addition, a portion of the proceeds from the sale of any of the Company's oil
and gas properties were dedicated to payment of principal under the bank credit
facilities.
On July 7, 1999 the lenders under each of the bank credit facilities reset
the Company's borrowing base, which had been $165 million in the aggregate 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
the $35.7 million additional lump-sum payment, a payment default occurred. The
lenders declared due all amounts owing under the bank loans, demanded payment
and declared in effect the default rate of interest. The bank lenders also
delivered a payment blockage notice to the indenture trustee of the 8.875%
senior subordinated notes. The Company did not make the scheduled July 15, 1999
interest payments on both the 8.875% senior subordinated notes and the 11%
senior notes, totaling $13.8 million. As a result of the payment default under
the bank loans and the interest payment default on the notes, the holders of the
requisite percentage of the Company's senior notes and senior subordinated notes
and the indenture trustees of the senior notes and the senior subordinated notes
have the right to declare the principal amount of the notes immediately due and
payable. On December 28, 1999, holders of the senior notes alleging to hold the
requisite percentage of senior notes provided notice of acceleration of maturity
and declared the principal and interest of the senior notes to be immediately
due and payable.
On July 26, 1999, the Company and its bank lenders entered into new
forbearance agreements (effective as of July 1, 1999) which provided that the
lenders would refrain from exercising their rights and remedies not previously
exercised until October 5, 1999. Subsequently, these forbearance agreements were
extended twice on the same terms through March 2, 2000. 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
precluded the Company from making interest payments on its senior notes and its
senior subordinated notes. Under the terms of the new forbearance agreements,
the Company committed to make monthly principal payments of $2.5 million. In
addition, the agreements provide that a portion of the proceeds from the sale of
any of the Company's oil and gas properties be dedicated to payment of principal
under the credit facilities. The forbearance agreements expired on March 2,
2000.
39
<PAGE> 41
Since the commencement of the bankruptcy proceedings on January 18, 2000,
the Company has been operating under a cash collateral agreement with its bank
lenders. The agreement provides for, among other things, that the Company make
monthly principal payments of $2.5 million and that the lenders have the right
to review and approve the Company's projected use of cash during the bankruptcy
proceedings.
Other Information
The estimated fair value of the Company's Senior Notes and Senior
Subordinated Notes at December 31, 1999 were $120.0 million and $34.4 million,
respectively. These values were estimated based upon the December 31, 1999
quoted market price of $80.00 for the Senior Notes and $27.50 for the
Subordinated Notes. Subsequent to year end the Senior Notes and the Senior
Subordinated Notes have traded as low as $78.00 and $25.00, respectively.
The estimated fair value of the Company's Senior Notes and Subordinated
Notes at December 31, 1998 were $132.0 million and $68.8 million, respectively.
These values were estimated based upon the December 31, 1998 quoted market price
of $88.00 for the Senior Notes and $55.00 for the Subordinated Notes. The
carrying amounts of the remaining debt at year-end 1999 and 1998 approximate
fair value.
Without providing for the effect of bankruptcy, the scheduled maturities of
the Company's debt during the next five years is as follows: 2000 $107.17
million, 2001 $-0- million, 2002 $-0- million, 2003 $150 million and 2004 $-0-.
Interest payments were $25.4 million in 1999, $30.0 million in 1998 and $22.5
million in 1997.
7. LEASES
Future minimum lease payments under non-cancelable operating leases are as
follows: $0.7 million in 2000, $0.7 million in 2001, $0.5 million in 2002, $0.3
million in 2003 and $0.3 million in 2004. Lease payments charged to operating
expenses amounted to $0.7 million, $0.8 million and $0.8 million during 1999,
1998 and 1997, respectively.
8. INCOME TAXES
Federal and state income tax provision (benefit) includes the following
components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current (benefit) provision....................... $ -- $ (3,248) $ --
Deferred provision (benefit), net................. -- 19,702 (52,406)
------- --------- ---------
Federal income tax expense (benefit).............. -- 16,454 (52,406)
State income tax benefit (provision) (deferred
provision $0 in 1999, $750 in 1998, and $300 in
1997)........................................... -- (455) 351
------- --------- ---------
$ -- $ 15,999 $ (52,055)
======= ========= =========
Reconciliation of federal income tax expense
(benefit) at statutory rate to provision for
income taxes:
Income (loss) before income taxes................. $ 4,340 $(280,521) $(149,440)
------- --------- ---------
Tax provision (benefit) at 35% statutory rate..... 1,519 (98,183) (52,304)
State income tax, net of federal income tax
benefit......................................... -- (296) 228
Statutory depletion............................... -- (20) (23)
Reversal of prior year Section 29 credits......... -- 529 --
Valuation allowance............................... (1,532) 113,944 --
Other, net........................................ 13 25 44
------- --------- ---------
$ -- $ 15,999 $ (52,055)
======= ========= =========
</TABLE>
40
<PAGE> 42
The primary differences giving rise to the Company's net deferred tax
assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Income tax effects of:
Ceiling test writedowns and other property
related items............................... $ 24,865
Alternative minimum tax credit carry
forwards.................................... 2,776
Net operating loss carry forward............... 84,771
Valuation allowance............................ (112,412)
---------
$ --
=========
</TABLE>
Income tax payments were $-0- million in 1999, $0.3 million in 1998 and
$0.5 million in 1997. Also, in 1998, the Company received a federal income tax
refund of $3.2 million.
Historically, the Company has recorded tax benefits relating to its pretax
book losses even though it has been in a net operating loss carryforward
position for federal income purposes. SFAS 109 allows for such tax benefits to
be recorded as deferred tax assets if management believes that it is "more
likely than not" that these assets will be realized through the generation of
future taxable income. Due to the significant losses recorded in 1998 and the
uncertainty of future oil and natural gas commodity prices, management concluded
that a valuation allowance against net deferred tax assets is required in
accordance with SFAS 109. In making its assessment, management considered
several factors, including uncertainty of the Company's ability to generate
sufficient income in order to realize its future tax benefits. Accordingly, the
Company recorded a valuation allowance at December 31, 1998 to reduce to zero
its deferred tax assets. The valuation allowance was $112.4 million and $113.9
million at December 31, 1999 and 1998, respectively. The valuation allowance
will be monitored for potential adjustments as future events so indicate.
Deferred tax assets relate primarily to the Company's pre-tax book losses,
the net operating loss and alternative minimum tax credit carryforwards. At
December 31, 1999, the Company had tax net operating losses ("NOLs") of
approximately $242.2 million available to offset future taxable income, of which
approximately $14.5 million will expire in 2011, $82.7 million will expire in
2012, $73.8 million will expire in 2018 and $71.2 will expire in 2019.
9. FINANCIAL INSTRUMENTS
The Company has, at times, utilized swaps, futures contracts and options to
manage risks associated with fluctuations in the prices of its natural gas and
oil production.
Commodity Price Swaps. Commodity price swap agreements require the Company
to make or receive payments from the counterparties based upon the differential
between a specified fixed price and a price related to those quoted on the New
York Mercantile Exchange. The Company accounts for these transactions as hedges
and, accordingly, gains or losses are deferred until the time the underlying
product is produced. At December 31, 1999, the Company was party to commodity
price swap agreements covering approximately 3.5 million MMBtu, 3.0 million
MMBtu and 7.3 million MMBtu of natural gas production for the years 2000 and
2001, and for the period 2002 through 2005, respectively. At December 31, 1999,
the unrealized loss on these contracts was $5.8 million. Additionally, the
Company had deferred losses of $0.4 million from closed swap contracts relating
to gas production in the year 2000.
The Company also utilized swap agreements to lock in the price of 36,200
barrels of oil production in the first half of the year 2000. At December 31,
1999, the unrealized loss was negligible.
Futures and Options Contracts. Oil or natural gas futures contracts require
the Company to sell oil or natural gas at a future time at a fixed price.
Periodically, the Company uses these futures contracts to hedge price risk on a
portion of its production. Option contracts provide the right, not the
requirement, to buy or sell a commodity at a fixed price. By buying a "put"
option, the Company is able to set a floor price for a specified quantity of its
oil or gas production. By selling a "call" option, the Company receives an
upfront premium to
41
<PAGE> 43
sell its oil or gas production at a fixed price. By selling call options and
buying put options, the Company, at little or no cost, effectively places a
"collar" on the price it will receive for that quantity of future production.
At December 31, 1999, the Company had no open futures contracts, but had
collars in place covering 18,200 barrels of production in the second quarter of
the year 2000 with a negligible unrealized loss. At December 31, 1998, the
Company had no open futures contracts.
The Company realized $0.8 million in net hedging gains during 1999.
None of the outstanding agreements impose cash margin requirements on the
Company.
10. LITIGATION
Royalty Suits
The Company was a party to six lawsuits in the Texas State Courts involving
various claims asserted by various holders of royalty interests under leases on
the acreage that was dedicated to the Tennessee Gas Contract or pooled
therewith. One suit involves claims by the holder of an overriding royalty
interest in the dedicated acreage of certain rights in the Tennessee Gas
Contract. Of the other five (the "Royalty Basis Suits"), one seeks a declaratory
judgment on the royalty payment basis for non-dedicated acreage in which the
Company owns no interest. The other four suits seek declaratory judgments to
determine whether royalties payable to the holders of landowner royalty
interests in the dedicated acreage should be based on the net proceeds received
by the Company for gas sales under the Tennessee Gas Contract or on the spot
market price. The Company paid royalties based upon the spot market price to the
holders of royalty interests (other than the overriding royalty interest)
because the Company's leases, which cover only dedicated acreage, have market
value royalty provisions.
Initially, there were three Royalty Basis Suits, one in Dallas County,
Texas, in which the Company is a co-plaintiff and two subsequently filed suits
in Zapata County, Texas, in which the Company is a co-defendant (the "Las
Blancas Suit" and the "Gonzalez Suit"). The Dallas suit was subsequently split
into four separate lawsuits, based on issues concerning 1) the dedicated acreage
in the Guerra "A" and Guerra "B" Units (the "Los Santos Suit"); 2) the
non-dedicated acreage in those Units (the "Collins Suit"), in which the Company
has no interests; 3) the Jesus Yzaguirre Unit, which consists entirely of
dedicated acreage owned only by the Company (the "Jesus Yzaguirre Suit"), and 4)
the overriding royalty interest in the dedicated acreage (the "Matthews Suit").
On March 4, 1997, the holder of an overriding royalty interest filed a
claim against the Company and its co-lessees in the Matthews Suit, alleging
breach of duties arising from the termination of the Tennessee Gas Contract and
for certain tortious acts. Effective January 23, 1998, the Company and the
royalty holder settled their disputes. On February 3, 1998, the Company and its
co-lessees were dismissed from the Matthews Suit. In addition, in May 1997, the
Gonzalez Suit was dismissed and in October 1997 the Las Blancas Suit was
dismissed.
The Los Santos Suit and the Jesus Yzaguirre Suit have resulted in separate
summary judgments in favor of the Company's position that royalty payments based
upon the spot market price are all that is required to be paid under the leases
and granting dismissal of the royalty owners' counterclaims and affirmative
defenses. In early 1997, the summary judgment in the Los Santos Suit was
appealed to the Fifth Court of Appeals in Dallas by the royalty holders, who
requested oral argument on 11 points of error. These points of error concern the
granting of summary judgment against them on issues of lease provisions on
market value royalties and on their counterclaims and affirmative defenses of
fraud, negligent misrepresentations, conspiracy and estoppel; for denial of
their efforts to supplement summary judgment evidence; for denial of efforts to
transfer venue to Zapata County; for failure to abate the Dallas lawsuit in
favor of the two suits filed later by them in Zapata County, and for the entry
of final judgment in favor of the Company and its co-plaintiffs. Supplemental
briefs to present recent Texas Supreme Court decisions relevant to the appeal
were filed with the Fifth Court of Appeals by the Company and its co-plaintiffs
on December 18, 1998, and responded to by Appellants on January 6, 1999. On
January 12, 1999, oral argument was held, and on April 27, 1999, the Fifth Court
of Appeals overruled the royalty owners' 11 points of error and affirmed the
trial court's judgment in favor of the
42
<PAGE> 44
Company's position. On May 10, 1999, the royalty holders moved for a rehearing.
The Company and its co-appellees filed their response on May 24, 1999, and on
August 17, 1999, the Fifth Court of Appeals issued an opinion nunc pro tunc and
judgment that affirmed the trial court's judgment. A subsequent motion for
rehearing was denied on September 21, 1999, and the royalty holders applied to
the Texas Supreme Court for review on September 28, 1999. On November 12, 1999,
their petition for review was denied by the Texas Supreme Court. However, the
royalty holders moved the Supreme Court for a rehearing and several friend-of-
court briefs were filed in support of a rehearing by the Supreme Court. On
December 27, 1999, the Company and the other respondents were requested to file
a response to the motion for rehearing, which was done on January 11, 2000. The
royalty holders filed a reply to this response on January 20, 2000, and on
January 26, 2000, the Texas Supreme Court requested that the parties file briefs
on the merits of the matter, but stated that the petition for review had not
been granted and remained under consideration. The royalty holders' brief was
filed on February 25, 2000, and the response brief by the Company and the other
respondents was filed on March 16, 2000. Any reply brief by the royalty holders
must be filed with the Texas Supreme Court by March 31, 2000.
In the Jesus Yzaguirre Suit, certain of the royalty owners counterclaimed
against the Company, asserting that the largest lease contained therein had
terminated in December 1975, and that they were entitled to the Tennessee Gas
Contract price because of the execution of certain division orders in 1992 that
allegedly varied the market value royalty provision of their lease. On May 30,
1997, the Company and these royalty owners reached a settlement of the lease
termination claims, and on June 2, 1997, this issue was dismissed from the Jesus
Yzaguirre Suit. On June 17, 1997, the Company and the royalty owners moved for
summary judgment on the issue of the effect of division orders. The trial judge
granted the Company's motion and denied the competing motion on August 12, 1997.
On October 29, 1997, a final judgment was signed, and on November 19, 1997, the
royalty owners gave notice of their appeal to the Fifth Court of Appeals in
Dallas, Texas, and caused the appellate record to be filed. The royalty owners'
brief was filed with the Fifth Court of Appeals on March 18, 1998. The Company
filed its brief in response on April 16, 1998. The parties requested oral
argument on the Appellants' issues that it was an error for the trial court to
grant summary judgment for the Company on the unambiguous lease provisions
requiring the Company to pay market value royalties and against them on their
contention that the implied duty to market required the Company to pay royalties
based upon the higher contract price; to grant summary judgment to the Company
that the 1992 division orders did not override the express royalty provisions of
their leases under Texas law; to grant summary judgment declaring that their
counterclaims and affirmative defenses of fraud, negligent misrepresentations,
conspiracy and estoppel, as well as allegations of oral promises and a course of
conduct by the Company, did not change the unambiguous terms of the written
leases; to exclude Appellants' expert witness testimony on "market value" as
being inadmissible; to deny Appellants' efforts to transfer venue from Dallas
County to Zapata County; and to refuse to abate this suit in favor of
Appellants' later-filed suit against the Company in Zapata County. On October
28, 1999, the parties were notified that the Fifth Court of Appeals in Dallas
had determined that oral argument would not significantly aid it in determining
the legal and factual issues presented. Accordingly, the royalty owners' appeal
was submitted for decision on January 4, 2000, without oral argument.
Given the inherent uncertainties of appellate matters and notwithstanding
that the Company's position on the market value and other issues is based upon
established decisional law in Texas, the Company is unable to provide any
assurance of a favorable outcome of the Texas Supreme Court's ongoing
consideration of the royalty owners' petition for review in the Los Santos Suit
or of their appeal before the Fifth Court of Appeals from the summary judgments
and evidentiary rulings in the Jesus Yzaguirre Suit, inasmuch as the royalty
owners can obtain a reversal and remand for plenary trial, in each instance,
upon showing that summary judgment was improper because there exists an issue of
material fact.
The aggregate amount at issue in the Los Santos and Jesus Yzaguirre Suits,
apart from certain tort counterclaims and affirmative defenses alleged by the
landowner royalty holders, is a function of the quantity of natural gas for
which Tennessee Gas paid at the contract price. As of January 1, 1997 (the date
of the termination of the Tennessee Gas Contract) the amount of natural gas
taken by Tennessee Gas attributable to the royalty interests involved in the
Royalty Basis Suits was approximately 3.8 Bcf for which royalties have
43
<PAGE> 45
been paid by the Company at the average price of approximately $1.63 per Mcf,
net of severance tax, compared to the average Tennessee Gas Contract price of
approximately $7.60 per Mcf, net of severance tax. Consequently, if the Company
loses in its litigation with these royalty interest owners on these claims, the
Company faces a maximum liability in the Royalty Basis Suits of approximately
$22.7 million, plus interest thereon.
Site Restoration
The Company is a defendant in a lawsuit brought by InterCoast Energy
Company and MidAmerican Capital Company ("Plaintiffs) against KCS Energy, Inc.,
KCS Medallion Resources, Inc. and Medallion California Properties Company ("KCS
Defendants"), and Kerr-McGee Oil & Gas Onshore LP and Kerr-McGee Corporation
("Kerr-McGee Defendants") currently pending in the 234th Judicial District Court
of Harris County, Texas under Cause Number 1999-45998. The suit seeks a
declaratory judgment declaring the rights and obligations of each of Plaintiffs,
the KCS Defendants and the Kerr-McGee Defendants in connection with
environmental damages and surface restoration on lands covered by the following
two oil and gas leases:
a. Oil and Gas Lease dated June 13, 1935, from Newhall Land and
Farming Company, as Lessor, to Barnsdall Oil Company, as Lessee (the "RSF
Lease") and
b. Oil and Gas Lease dated June 6, 1941, from the Newhall Corporation,
as Lessor, to C.G. Willis, as Lessee (the "Ferguson Lease").
The RSF Lease and the Ferguson Lease are herein called "Leases." Oil and
gas production from such lands commenced shortly after the RSF Lease was granted
and has continued to date.
From inception of the Leases until October 30, 1990, the Leases were owned
by entities that through corporate succession and name change ultimately became
Sun Operating Limited Partnership ("Sun L.P."). On October 30, 1990, Sun L.P.
transferred the Leases to DKM Offshore Energy, Inc. ("DKM") and Neste Oil
Services Inc. ("Neste"). In the assignment of the Leases, Sun L.P. indemnified
DKM and Neste from environmental claims resulting from the indemnitors'
operations provided that such environmental claims were made within ten years
from October 30, 1990. Shortly after the transfer to DKM and Neste, DKM acquired
Neste's rights and, subsequently, DKM became Medallion California Properties
Company ("Medallion California"). Later, the Company acquired the stock of
Medallion California Properties Company. Also, Sun L.P. became Kerr-McGee Oil &
Gas Onshore L.P. ("Kerr-McGee L.P."). In connection with the sale of Medallion
California to KCS, InterCoast Energy Company ("InterCoast") indemnified the
Company and Medallion California for up to 90% of the costs of environmental
remediation not assumed by Kerr-McGee L.P., and InterCoast's parent, MidAmerican
Capital Company ("MidAmerican"), guaranteed InterCoast's indemnity obligations.
For a more in-depth discussion of the environmental condition of the
property, see "Regulation."
Other
The Company and several of its subsidiaries have been named as
co-defendants along with numerous other industry parties in an action brought by
Jack Grynberg on behalf of the Government of the United States. The complaint,
filed under the Federal False Claims Act, alleges underpayment of royalties to
the Government of the United States as a result of alleged mismeasurement of the
volume and wrongful analysis of the heating content of natural gas produced from
federal and Native American lands. The complaint is substantially similar to
other complaints filed by Jack Grynberg on behalf of the Government of the
United States against multiple other industry parties. All of the complaints
have been consolidated in one proceeding. In April 1999, the Government of the
United States filed notice that it had decided not to intervene in these
actions. The Company believes that the allegations in the complaint are without
merit.
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.
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<PAGE> 46
KCS Energy, Inc. has been named as a co-defendant in a lawsuit that is
pending in District Court in Ector County, Texas. The litigation involves claims
by the plaintiff against KCS and the co-defendant for damages allegedly caused
by drainage to an oil and gas lease. The plaintiff seeks damages of up to $18.1
million. KCS is considering possible counterclaims.
The Company is also a party to various other lawsuits and governmental
proceedings, all arising in the ordinary course of business. Although the
outcome of all of the above proceedings cannot be predicted with certainty,
management does not expect such matters to have a material adverse effect,
either singly or in the aggregate, on the financial position or results of
operations of the Company.
11. NEW YORK STOCK EXCHANGE LISTING
In October 1999, the Company reported that it does not currently meet the
newly effective New York Stock Exchange (NYSE) continued listing standards.
These standards require total market capitalization of not less than $50 million
and total stockholders' equity of not less than $50 million. At the close of
business on March 28, 2000, the Company's total market capitalization was
approximately $40.2 million. As a result of the non-cash ceiling writedown at
December 31, 1998, the Company currently has negative stockholders' equity.
The Company has submitted a plan to the NYSE's Listings and Compliance
Committee that sets forth a strategy to enable the Company to comply with the
new standards by the deadline established by the NYSE. That plan was accepted by
the NYSE in November 1999. The Company will be monitored quarterly for
compliance with the plan. Should the Company not meet its compliance objectives,
it will be subject to trading suspension and delisting procedures.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS
---------------------------------------------
FIRST SECOND THIRD FOURTH
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999
Revenue........................................... $33,005 $ 33,355 $35,605 $ 34,526
Operating income.................................. 7,946 10,034 14,678 10,985
Income (loss) from continuing operations.......... (1,918) 219 4,756 1,283
Net income (loss)................................. $(1,918) $ 219 $ 4,756 $ 1,283
Basic earnings (loss) per common share............ $ (0.07) $ 0.01 $ 0.16 $ 0.04
Diluted earnings (loss) per common share.......... $ (0.07) $ 0.01 $ 0.16 $ 0.04
</TABLE>
<TABLE>
<CAPTION>
QUARTERS
---------------------------------------------
FIRST SECOND(A) THIRD FOURTH(B)
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998
Revenue........................................... $31,309 $ 33,663 $32,277 $ 32,203
Operating income (loss)........................... 7,556 (51,158) 4,801 (205,860)
Loss from continuing operations................... (140) (38,877) (3,581) (253,922)
Net loss.......................................... $ (140) $(38,877) $ 3,581) $(253,922)
Basic loss per common share....................... $ -- $ (1.32) $ (0.12) $ (8.68)
Diluted loss per common share..................... $ -- $ (1.32) $ (0.12) $ (8.68)
</TABLE>
- ---------------
(A) Includes a $57.6 million pretax, $37.5 million after-tax, or $1.27 per
share, non-cash ceiling writedown of oil and gas assets.
(B) Includes a $210.8 million pretax, $137.0 million after-tax, non-cash
ceiling writedown and a $113.9 million non-cash tax valuation allowance
aggregating $8.58 per share.
45
<PAGE> 47
The total of the earnings per share for the quarters does not equal the
earnings per share elsewhere in the Consolidated Financial Statements as a
result of the change in the number of shares outstanding during the applicable
periods.
13. OIL AND GAS PRODUCING OPERATIONS
The following data is presented pursuant to FASB Statement No. 69 with
respect to oil and gas acquisition, exploration, development and producing
activities, which is based on estimates of year-end oil and gas reserve
quantities and forecasts of future development costs and production schedules.
These estimates and forecasts are inherently imprecise and subject to
substantial revision as a result of changes in estimates of remaining volumes,
prices, costs and production rates.
Except where otherwise provided by contractual agreement, future cash
inflows are estimated using year-end prices. Oil and gas prices at December 31,
1999 are not necessarily reflective of the prices the Company expects to receive
in the future. Other than gas sold under contractual arrangements, including
swaps, futures contracts and options, gas prices were based on NYMEX prices of
$2.33, $2.15 and $2.50 at December 31, 1999, 1998 and 1997, respectively, and
oil prices were based on West Texas Intermediate (WTI) prices of $22.75, $8.57
and $15.15 at December 31, 1999, 1998 and 1997, respectively.
VPP volumes represent oil and gas reserves purchased from third parties
which generally entitle the Company to a specified volume of oil and gas to be
delivered over a stated time period. The related volumes stated herein reflect
scheduled amounts of oil and gas to be delivered to the Company at agreed
delivery points and future cash inflows are estimated at year-end prices.
Although specific terms of the Company's VPPs vary, the Company is generally
entitled to receive delivery of its scheduled oil and gas volumes, free of
drilling and lease operating costs.
46
<PAGE> 48
PRODUCTION REVENUES AND COSTS
Information with respect to production revenues and costs related to oil
and gas producing activities is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenue........................................... $ 131,997 $ 123,491 $ 137,837
Production (lifting) costs........................ 30,148 34,430 35,266
Technical support and other....................... 4,432 7,113 6,978
Depreciation, depletion and amortization.......... 50,816 59,746 58,465
Writedown of oil and gas properties............... -- 268,468 165,149
--------- --------- ---------
Total expenses.......................... 85,396 369,757 265,858
--------- --------- ---------
Pretax income (loss) from producing activities.... 46,601 (246,266) (128,021)
Income tax benefit................................ -- -- (48,344)
--------- --------- ---------
Results of oil and gas producing activities
(excluding corporate overhead and interest)..... $ 46,601 $(246,266) $ (79,677)
========= ========= =========
Capitalized costs incurred:
Property acquisition............................ $ 25,847 $ 80,741 $ 70,364
Exploration..................................... 8,949 15,865 33,440
Development..................................... 25,204 66,790 107,424
--------- --------- ---------
Total capitalized costs incurred........ $ 60,000 $ 163,396 $ 211,228
========= ========= =========
Capitalized costs at year end:
Proved properties............................... $ 955,340 $ 913,777 $ 739,551
Unproved properties............................. 8,437 17,718 21,080
--------- --------- ---------
963,777 931,495 760,631
Less accumulated depreciation, depletion and
amortization.................................... (731,496) (682,913) (356,877)
--------- --------- ---------
Net investment in oil and gas properties.......... $ 232,281 $ 248,582 $ 403,754
========= ========= =========
</TABLE>
DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
The following information relating to discounted future net cash flows has
been prepared on the basis of the Company's estimated net proved oil and gas
reserves in accordance with FASB Statement No. 69.
DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Future cash inflows......................................... $ 713,067 $ 639,062
Future costs:
Production................................................ (235,328) (183,550)
Development............................................... (41,751) (40,827)
Discount -- 10% annually.................................. (143,198) (120,926)
--------- ---------
Present value of future net revenues...................... 292,790 293,759
Future income taxes, discounted at 10%.................... -- --
--------- ---------
Standardized measure of discounted future net cash flows.... $ 292,790 $ 293,759
========= =========
</TABLE>
47
<PAGE> 49
CHANGES IN DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVE QUANTITIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE, BEGINNING OF YEAR................................ $ 293,759 $ 374,882 $ 437,599
Increases (decreases)
Sales, net of production costs.......................... (101,849) (89,061) (102,571)
Net change in prices, net of production costs........... 41,610 (104,375) (201,580)
Discoveries and extensions, net of future production and
development costs.................................... 25,402 40,599 101,004
Changes in estimated future development costs........... 344 18,774 (18,912)
Change due to acquisition of reserves in place.......... 41,142 93,200 40,509
Development costs incurred during the period............ 8,400 25,291 34,674
Revisions of quantity estimates......................... (10,666) (110,677) (19,160)
Accretion of discount................................... 28,068 41,049 55,761
Net change in income taxes.............................. -- 35,624 84,390
Sales of reserves in place.............................. (24,345) (5,918) (2,225)
Changes in production rates (timing) and other.......... (9,075) (25,629) (34,607)
--------- --------- ---------
Net increase (decrease)................................. (969) (81,123) (62,717)
--------- --------- ---------
BALANCE, END OF YEAR...................................... $ 292,790 $ 293,759 $ 374,882
========= ========= =========
</TABLE>
RESERVE INFORMATION (UNAUDITED)
The following information with respect to the Company's 1999 net proved oil
and gas reserves are estimates prepared by Netherland, Sewell & Associates, Inc.
Proved developed reserves represent only those reserves expected to be recovered
through existing wells using equipment currently in place. Proved undeveloped
reserves represent proved reserves expected to be recovered from new wells or
from existing wells after material recompletion expenditures. All of the
Company's reserves are located within the United States.
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ----------------- ----------------
GAS OIL GAS OIL GAS OIL
MMCF MBBL MMCF MBBL MMCF MBBL
------- ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped
reserves
BALANCE, BEGINNING OF YEAR............ 257,690 8,693 326,168 19,063 268,025 14,631
Production............................ (50,471) (1,408) (50,070) (1,746) (43,700) (1,824)
Discoveries, extensions, etc.......... 13,953 777 38,783 1,413 110,010 6,172
Acquisition of reserves in place...... 31,857 906 50,705 557 23,281 155
Sales of reserves in place............ (18,118) (604) (8,948) (260) (698) (23)
Revisions of estimates................ (7,792) (23) (98,948) (10,334) (30,750) (48)
------- ------ ------- ------- ------- ------
BALANCE, END OF YEAR.................. 227,119 8,341 257,690 8,693 326,168 19,063
======= ====== ======= ======= ======= ======
Proved developed reserves
BALANCE, BEGINNING OF YEAR.......... 204,327 6,963 234,091 13,008 236,454 12,133
------- ------ ------- ------- ------- ------
BALANCE, END OF YEAR................ 175,896 7,568 204,327 6,963 234,091 13,008
------- ------ ------- ------- ------- ------
</TABLE>
48
<PAGE> 50
PART III
Item 10 -- Directors and Executive Officers of the Registrant, Item
11 -- Executive Compensation, Item 12 -- Security Ownership of Certain
Beneficial Owners and Management, and Item 13 -- Certain Relationships and
Related Transactions are incorporated by reference from the Company's definitive
proxy statement relating to its 2000 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial statements, financial statement schedules and exhibits.
(1) The following consolidated financial statements of KCS and its
subsidiaries are presented in Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants.................... 26
Statements of Consolidated Operations for the years ended
December 31, 1999, 1998 and 1997.......................... 27
Consolidated Balance Sheets at December 31, 1999 and 1998... 28
Statements of Consolidated Stockholders' (Deficit) Equity
for the years ended December 31, 1999, 1998 and 1997...... 29
Statements of Consolidated Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 30
Notes to Consolidated Financial Statements.................. 31-48
</TABLE>
(3) Exhibits
See "Exhibit Index" located on pages 51-53 of this Form 10-K for a listing
of all exhibits filed herein or incorporated by reference to a previously filed
registration statement or report with the Securities and Exchange Commission
("SEC").
(b) Reports on Form 8-K.
On December 28, 1999, the registrant reported, under Item 5 of Form 8-K,
that it had entered into a restructuring agreement with certain of its senior
noteholders and senior subordinated noteholders.
On January 31, 2000, the registrant reported, under Item 3 of Form 8-K,
that on January 18, 2000 the Bankruptcy Court for the District of Delaware had
signed an order granting the registrant and its subsidiaries relief under
Chapter 11 of the Bankruptcy Code.
49
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
------------------------------------
(Registrant)
By: /s/ FREDERICK DWYER
----------------------------------
Frederick Dwyer
Vice President, Controller
and Secretary
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES W. CHRISTMAS President & Chief Executive March 29, 2000
- ----------------------------------------------------- Officer and Director
James W. Christmas
/s/ STEWART B. KEAN Chairman and Director March 29, 2000
- -----------------------------------------------------
Stewart B. Kean
/s/ G. STANTON GEARY Director March 29, 2000
- -----------------------------------------------------
G. Stanton Geary
/s/ JAMES E. MURPHY, JR. Director March 29, 2000
- -----------------------------------------------------
James E. Murphy, Jr.
Director
- -----------------------------------------------------
Robert G. Raynolds
/s/ JOEL D. SIEGEL Director March 29, 2000
- -----------------------------------------------------
Joel D. Siegel
/s/ CHRISTOPHER A. VIGGIANO Director March 29, 2000
- -----------------------------------------------------
Christopher A. Viggiano
/s/ FREDERICK DWYER March 29, 2000
- -----------------------------------------------------
Frederick Dwyer
Vice President, Controller
and Secretary
</TABLE>
50
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(3)i -- Certificate of Incorporation of KCS filed as Exhibit 4.3
to Form S-8 Registration Statement No. 33-63982 filed
with SEC June 8, 1993.
ii -- By-Laws of KCS filed as Exhibit 4.4 to Form S-8
Registration Statement No. 33-63982 filed with SEC June
8, 1993.
(4)i -- Form of Common Stock Certificate, $0.01 par Value, filed
as Exhibit 4 of Registrant's Form 10-K Report for Fiscal
1988.
ii -- Form of Common Stock Certificate, $0.01 par Value, filed
as Exhibit 5 of Registrant's Form 8-A Registration
Statement No. 1-11698 filed with the SEC, January 27,
1993.
iii -- Indenture dated as of January 15, 1996 between KCS,
certain of its subsidiaries and Fleet National Bank of
Connecticut, Trustee, filed as Exhibit 4 to Current
Report on Form 8-K dated January 25, 1996.
iv -- Form of 11% Senior Note due 2003 (included in Exhibit
(4)(iii)).
(10)i -- Performance Unit Plan filed as Exhibit 10B of
Registrant's Form 10 filed with the SEC May 13, 1988.*
ii -- 1988 KCS Group, Inc. Employee Stock Purchase Program
filed as Exhibit 4.1 to Form S-8 Registration Statement
No. 33-24147 filed with the SEC on September 1, 1988.*
iii -- Amendments to 1988 KCS Energy, Inc. Employee Stock
Purchase Program filed as Exhibit 4.2 to Form S-8
Registration Statement No. 33-63982 filed with SEC June
8, 1993.*
iv -- 1988 Stock Plan filed as Exhibit 10A of Registrant's Form
10 filed with the SEC May 13, 1988 and as Exhibit 4.1 to
Form S-8 Registration Statement No. 33-25707 filed with
the SEC on November 21, 1988.*
v -- KCS Group, Inc. Savings and Investment Plan filed as
Exhibit 4.1 to Form S-8 Registration Statement No.
33-28899 filed with the SEC on May 16, 1989.*
vi -- 1992 Stock Plan filed as Exhibit 4.1 to Form S-8
Registration Statement No. 33-45923 filed with the SEC on
February 24, 1992.*
vii -- Purchase and Sale Agreement dated as of November 30, 1995
between the Company and Hawkins Oil of Michigan, Inc.
(formerly Savoy Oil & Gas, Inc.), Conveyance of
Production Payment dated as of November 30, 1995,
Production and Delivery Agreement dated as of November
30, 1995, Option Agreement dated as of November 30, 1995,
Drilling Participation Agreement dated December 7, 1995,
Assignment and Bill of Sale (Working Interests) filed
with the SEC as Exhibits 2.1 through 2.6 to Form 8-K on
December 22, 1995.
viii -- Purchase and Sale Agreement dated September 8, 1995 by
and between Natural Gas Processing Co., a Wyoming
corporation, and KCS Resources, Inc., a Delaware
corporation filed with the SEC as Exhibit 2.1 to Form 8-K
on November 22, 1995.
ix -- Stock Purchase Agreement by, between and among KCS
Energy, Inc., InterCoast Energy Company, and InterCoast
Gas Services Company dated November 14, 1996 filed with
the SEC as Exhibit 2.1 to Form 8-K/A on November 15,
1996.
</TABLE>
51
<PAGE> 1
EXHIBIT 10(XVII)
SECOND AMENDMENT TO FORBEARANCE AGREEMENT
THIS SECOND AMENDMENT TO FORBEARANCE AGREEMENT, dated as of December 3,
1999 (herein called this "Amendment"), is entered into by and among KCS
MEDALLION RESOURCES, INC., a Delaware corporation (formerly known as InterCoast
Oil and Gas Company) ("KCS Medallion"), KCS ENERGY, INC., a Delaware corporation
("KCS"), KCS ENERGY SERVICES, INC., a Delaware corporation (formerly known as
InterCoast Gas Services Company) ("Medallion Gas Services" and together with KCS
Medallion, KCS and KCS Energy Services, each individually, a "Borrower" and
collectively, the "Borrowers", each lender that is a signatory hereto or becomes
a party hereto as provided in Sections 9.1 or 2.25 of the Credit Agreement
(hereinafter defined) (individually, together with its successors and assigns, a
"Lender" and, collectively, together with their respective successors and
assigns, the "Lenders"), CANADIAN IMPERIAL BANK OF COMMERCE, acting through its
New York agency (in its individual capacity, "CIBC"), and as agent for the
Lenders (in such capacity, together with its successors in such capacity, the
"Agent"), and CIBC Inc., a Delaware corporation as collateral agent for the
Lenders (in such capacity pursuant to the terms hereof, the "Collateral Agent").
Terms used herein which are defined in the Forbearance Agreement (as hereinafter
defined) are used herein with the meanings given them therein.
W I T N E S S E T H:
WHEREAS, the Borrowers, the Lenders, the Collateral Agent and the Agent
have entered into a Forbearance Agreement dated as of July 26, 1999 but
effective as of July 1, 1999, which Forbearance Agreement was amended by an
Amendment to Forbearance Agreement dated as of September 30, 1999 (such
agreement, as so amended, the "Forbearance Agreement") pursuant to which, on the
terms provided therein, the Lenders have agreed (x) to forbear from exercising
any further rights and remedies as provided in the Loan Documents or otherwise
during the Forbearance Period and (y) to rescind the declaration contained in a
notice of default dated July 12, 1999 that all Obligations of the Borrowers
pursuant to the Loan Documents are immediately due and payable, such rescission
and forbearance to be in effect until termination of the Forbearance Period and
notice to the Borrowers from the Agent accelerating the date for payment of the
Obligations; and
WHEREAS, the Borrowers, the Lenders, the Collateral Agent and the Agent
now wish to amend the Forbearance Agreement in certain respects;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. Amendment to Section 1.2. Section 1.2 of the Forbearance
Agreement is hereby amended by deleting the reference to the date "December 3,
1999" in the ninth line thereof and inserting in lieu thereof the date "March 2,
2000."
<PAGE> 2
SECTION 2. Amendment to Section 2.1. Section 2.1 of the Forbearance
Agreement is hereby amended by the addition of the following definition
immediately after the definition of "Interest Period":
"Specified Value" means, with respect to any Oil and Gas
Property, a value specified by the Agent, with the consent of the
Required Lenders.
SECTION 3. Amendment to Section 3.3. Section 3.3 of the Forbearance
Agreement is hereby amended as follows:
(i) The first sentence of clause (a) of Section 3.3 of the
Forbearance Agreement is amended and restated in its entirety to read
as follows: "(a) Accrued and unpaid interest on each outstanding Base
Rate Loan shall be due and payable on July 31, 1999, August 31, 1999,
September 30, 1999, October 31, 1999, November 30, 1999, December 31,
1999, January 31, 2000 and February 29, 2000."
(ii) The first sentence of clause (b) of Section 3.3 of the
Forbearance Agreement is amended and restated in its entirety to read
as follows: "(b) During the Forbearance Period, payments of principal
of the Tranche A Loans shall be due and payable in the amount of
$1,250,000 on each of July 31, 1999, August 31, 1999, September 30,
1999, October 31, 1999, November 30, 1999, December 31, 1999, January
31, 2000 and February 29, 2000."
SECTION 4. Amendment to Section 3.4. Section 3.4(a) of the Forbearance
Agreement is amended by deleting the reference to the date "December 3, 1999" in
the seventh line thereof and inserting in lieu thereof the date "March 2, 2000".
SECTION 5. Amendment to Section 3.6. Section 3.6 of the Forbearance
Agreement is hereby amended and restated in its entirety to read as follows:
Section 3.6 Sales of Oil and Gas Properties. At any time
during the Forbearance Period that any of the Oil and Gas 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 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, 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
2
<PAGE> 3
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 Oil and Gas
Properties sold pursuant to this Section 3.6 (and Oil and Gas
Properties described in Section 7.1(iii) of this Agreement) so long as
the Net Cash Proceeds equal or exceed the Specified Value.
SECTION 6. Amendment to Section 7.1. Clause (iii) of Section 7.1 of the
Forbearance Agreement is hereby amended and restated to read as follows: "(iii)
have an aggregate value for all such sales during the period beginning December
3, 1999 and continuing thereafter 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. Deletion of Exhibit A. Exhibit A of the Forbearance
Agreement is hereby deleted in its entirety.
SECTION 8. Conditions to Effectiveness. The effectiveness of this
Amendment is conditioned upon receipt by the Agent of all the following
documents, each in form and substance satisfactory to the Agent:
(i) Multiple counterparts of this Amendment as requested by
the Agent; and
(ii) certificates of the secretary or an assistant secretary
of each Borrower, certifying as to resolutions of the board of
directors of such entity authorizing this amendment and the incumbency
and signatures of the officers of such company authorized to execute
this Amendment.
SECTION 9. Effect. This Amendment shall be deemed to be an amendment to
the Forbearance Agreement, and the Forbearance Agreement, as amended hereby, is
hereby ratified, approved and confirmed in each and every respect. All
references to the Forbearance Agreement in any other document, instrument,
agreement or writing shall hereafter be deemed to refer to the Forbearance
Agreement as amended hereby.
SECTION 10. Counterparts. This Amendment may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument, and any party hereto may execute this Amendment by signing one or
more counterparts.
SECTION 11. Successors. This Amendment shall be binding upon each of
the Borrowers, the Lenders, the Collateral Agent and the Agent and their
respective successors and assigns, and shall inure to the benefit of each of the
Borrowers, the Lenders, the Collateral Agent and the Agent and the successors
and assigns of the Lenders, the Collateral Agent and the Agent.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first written above.
BORROWERS:
KCS MEDALLION RESOURCES, INC.
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
KCS ENERGY, INC.
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
KCS ENERGY SERVICES, INC.
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
KCS MEDALLION GAS SERVICES, INC.
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
4
<PAGE> 5
LENDERS:
BANK ONE, TEXAS, NATIONAL ASSOCIATION
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
COMERICA BANK-TEXAS
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
SOCIETE GENERALE, SOUTHWEST AGENCY
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
DEN NORSKE BANK ASA
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 6
PARIBAS
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
GENERAL ELECTRIC CAPITAL CORPORATION
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
CIBC INC., Lender and Collateral Agent
By:
---------------------------------
Authorized Signatory
AGENT:
CANADIAN IMPERIAL BANK OF COMMERCE
By:
---------------------------------
<PAGE> 7
EXHIBIT (10)xx
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: )
) Chapter 11
KCS ENERGY, INC., a Delaware corporation )
) Case No. 00-0310 (PJW)
et al. )
) Jointly Administered
Debtors. )
)
FINAL ORDER AUTHORIZING AND RESTRICTING
USE OF CASH COLLATERAL AND GRANTING ADEQUATE PROTECTION(1)
The Debtors having filed the Motion of Debtors for Entry of Order
Authorizing and Restricting Use of Cash Collateral and Granting Adequate
Protection ("the Motion") seeking entry of an order authorizing and restricting
use of cash collateral and granting adequate protection of (a) the secured
claims of CIBC Inc., as lender, Canadian Imperial Bank of Commerce ("CIBC"), as
Agent for CIBC Inc. and the other Medallion Lenders and Resources Lenders and
CIBC Inc., as Collateral Agent for itself and the other Medallion Lenders and
Resources Lenders, and (b) the secured claims of the Medallion Hedging Lender
(CIBC, CIBC Inc., the Medallion Lenders, the Resources Lenders and the
Medallion Hedging Lender, together with their successors and permitted assigns,
are hereinafter referred to as the "Lenders"); the Debtors and the Lenders
having stipulated and agreed to the entry of the Interim Order; the Court
having reviewed the Motion, having held a preliminary hearing on the Motion and
having entered the Interim Order; objections having been raised to the Motion
by certain holders of 11%
- ----------------------
(1) All terms not otherwise defined herein shall have the meaning ascribed to
them in the Order Authorizing and Restricting Use of Cash Collateral and
Granting Adequate Protection dated as of January 19, 2000 (the "Interim Order").
<PAGE> 8
Senior Notes due in 2003 and such objections having been overruled by the Court;
the Debtors having provided due and adequate notice of the Motion and Order on
the parties entitled to such notice; the Interim Order providing that if no
objection is timely filed and served, the Court may enter an order continuing
the Interim Order as a final order without conducting a final hearing; and no
objections to the Motion or Order having been filed by any party.
IT IS HEREBY ORDERED THAT:
1. The Motion is granted in its entirety.
2. The Interim Order is continued as a final order effective as of
February 7, 2000 and is incorporated herein in its entirety.
Dated: February 7, 2000 /s/ PETER J. WALSH
---------------- ------------------------------
UNITED STATES BANKRUPTCY JUDGE
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<PAGE> 1
EXHIBIT 10(XVIII)
SECOND AMENDMENT TO FORBEARANCE AGREEMENT
THIS SECOND AMENDMENT TO FORBEARANCE AGREEMENT, dated as of December 3,
1999 (herein called this "Amendment"), is entered into by and among KCS Energy,
Inc., a Delaware corporation ("KCS"), KCS RESOURCES, INC., a Delaware
corporation ("KRI") for itself and as successor by merger to KCS Pipeline
Systems, Inc., a Delaware corporation; KCS MICHIGAN RESOURCES, INC., a Delaware
corporation ("KCS Michigan"); and KCS ENERGY MARKETING, INC., a New Jersey
corporation ("KCS Marketing," and together with KRI and KCS Michigan, each
individually, a "Borrower" and collectively, the "Borrowers"), each lender that
is a signatory hereto or becomes a party hereto as provided in Sections 9.1 or
2.25 of the Credit Agreement (hereinafter defined) (individually, together with
its successors and assigns, a "Lender" and, collectively, together with their
respective successors and assigns, the "Lenders"), CANADIAN IMPERIAL BANK OF
COMMERCE, acting through its New York agency (in its individual capacity,
"CIBC"), and as agent for the Lenders (in such capacity, together with its
successors in such capacity, the "Agent"), BANK ONE, TEXAS, NATIONAL
ASSOCIATION, a national banking association, as co-agent for the Lenders, and
BANK OF AMERICA, N.A., formerly known as NationsBank, N.A., as co-agent for the
Lenders, and CIBC Inc., a Delaware corporation as collateral agent for the
Lenders (in such capacity pursuant to the terms hereof, the "Collateral Agent").
Terms used herein which are defined in the Forbearance Agreement (as hereinafter
defined) are used herein with the meanings given them therein.
W I T N E S S E T H:
WHEREAS, KCS, the Borrowers, the Lenders, the Collateral Agent and the
Agent have entered into a Forbearance Agreement dated as of July 26, 1999 but
effective as of July 1, 1999, which Forbearance Agreement was amended by an
Amendment to Forbearance Agreement dated as of September 30, 1999, (such
agreement, as so amended, the "Forbearance Agreement") pursuant to which, on the
terms provided therein, the Lenders have agreed (x) to forbear from exercising
any further rights and remedies as provided in the Loan Documents or otherwise
during the Forbearance Period and (y) to rescind the declaration contained in a
notice of default dated July 12, 1999 that all Obligations of KCS and the
Borrowers pursuant to the Loan Documents are immediately due and payable, such
rescission and forbearance to be in effect until termination of the Forbearance
Period and notice to the Borrowers from the Agent accelerating the date for
payment of the Obligations; and
WHEREAS, KCS, the Borrowers, the Lenders, the Collateral Agent and the
Agent now wish to amend the Forbearance Agreement in certain respects;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
<PAGE> 2
SECTION 1. Amendment to Section 1.2. Section 1.2 of the Forbearance
Agreement is hereby amended by deleting the reference to the date "December 3,
1999" in the ninth line thereof and inserting in lieu thereof the date "March 2,
2000."
SECTION 2. Amendment to Section 2.1. Section 2.1 of the Forbearance
Agreement is hereby amended by the addition of the following definition
immediately after the definition of "Interest Period":
"Specified Value" means, with respect to any Oil and Gas
Property, a value specified by the Agent, with the consent of the
Required Lenders.
SECTION 3. Amendment to Section 3.3. Section 3.3 of the Forbearance
Agreement is hereby amended as follows:
(i) The first sentence of clause (a) of Section 3.3 of the
Forbearance Agreement is amended and restated in its entirety to read
as follows: "(a) Accrued and unpaid interest on each outstanding Base
Rate Loan shall be due and payable on July 31, 1999, August 31, 1999,
September 30, 1999, October 31, 1999, November 30, 1999, December 31,
1999, January 31, 2000 and February 29, 2000."
(ii) The first sentence of clause (b) of Section 3.3 of the
Forbearance Agreement is amended and restated in its entirety to read
as follows: "(b) During the Forbearance Period, payments of principal
of the Tranche A Loans shall be due and payable in the amount of
$1,250,000 on each of July 31, 1999, August 31, 1999, September 30,
1999, October 31, 1999, November 30, 1999, December 31, 1999, January
31, 2000 and February 29, 2000."
SECTION 4. Amendment to Section 3.4. Section 3.4(a) of the Forbearance
Agreement is amended by deleting the reference to the date "December 3, 1999" in
the ninth line thereof and inserting in lieu thereof the date "March 2, 2000".
SECTION 5. Amendment to Section 3.6. Section 3.6 of the Forbearance
Agreement is hereby amended and restated in its entirety to read as follows:
Section 3.6 Sales of Oil and Gas Properties. At any time
during the Forbearance Period that any of the Oil and Gas 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 the Specified Value until the
principal of the 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, 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
2
<PAGE> 3
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 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 Oil and Gas Properties sold pursuant to this Section 3.6 (and
Oil and Gas Properties described in Section 7.1(iii) of this Agreement)
so long as the Net Cash Proceeds equal or exceed the Specified Value.
SECTION 6. Amendment to Section 7.1. Clause (iii) of Section 7.1 of the
Forbearance Agreement is hereby amended and restated to read as follows: "(iii)
have an aggregate value for all such sales during the period beginning December
3, 1999 and continuing thereafter 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. Deletion of Exhibit A. Exhibit A of the Forbearance
Agreement is hereby deleted in its entirety.
SECTION 8. Conditions to Effectiveness. The effectiveness of this
Amendment is conditioned upon receipt by the Agent of all the following
documents, each in form and substance satisfactory to the Agent:
(i) Multiple counterparts of this Amendment as requested by
the Agent; and
(ii) certificates of the secretary or an assistant secretary
of KCS and each Borrower, certifying as to resolutions of the board of
directors of such entity authorizing this amendment and the incumbency
and signatures of the officers of such company authorized to execute
this Amendment.
SECTION 9. Effect. This Amendment shall be deemed to be an amendment to
the Forbearance Agreement, and the Forbearance Agreement, as amended hereby, is
hereby ratified, approved and confirmed in each and every respect. All
references to the Forbearance Agreement in any other document, instrument,
agreement or writing shall hereafter be deemed to refer to the Forbearance
Agreement as amended hereby.
SECTION 10. Counterparts. This Amendment may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument, and any party hereto may execute this Amendment by signing one or
more counterparts.
3
<PAGE> 4
SECTION 11. Successors. This Amendment shall be binding upon each of
KCS and the Borrowers, the Lenders, the Collateral Agent and the Agent and their
respective successors and assigns, and shall inure to the benefit of each of KCS
and the Borrowers, the Lenders, the Collateral Agent and the Agent and the
successors and assigns of the Lenders, the Collateral Agent and the Agent.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first written above.
4
<PAGE> 5
KCS ENERGY, INC.
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
BORROWERS:
KCS RESOURCES, INC.
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
KCS MICHIGAN RESOURCES, INC.
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
KCS ENERGY MARKETING, INC.
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 6
CO-AGENT AND A LENDER:
BANK ONE, TEXAS, NATIONAL ASSOCIATION
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 7
CO-AGENT AND A LENDER:
BANK OF AMERICA, N.A.,
formerly known as NationsBank, N.A.
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 8
LENDERS:
COMERICA BANK-TEXAS
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 9
DEN NORSKE BANK ASA
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 10
GENERAL ELECTRIC CAPITAL CORPORATION
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 11
CIBC INC., Lender and Collateral Agent
By:
-----------------------------------
Authorized Signatory
AGENT:
CANADIAN IMPERIAL BANK OF COMMERCE
By:
-----------------------------------
<PAGE> 1
EXHIBIT (10) xix
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Case Nos. 00-310 through 00-318
)
KCS ENERGY, INC., a Delaware corporation ) Jointly Administered
)
et al. ) Hon. PJW
)
Debtors. )
____________________________________________)
ORDER AUTHORIZING AND RESTRICTING
USE OF CASH COLLATERAL AND GRANTING ADEQUATE PROTECTION
KCS Energy, Inc. ("KCS Energy"), KCS Resources, Inc. ("KCS Resources"),
KCS Energy Marketing, Inc. ("KCS Marketing"), KCS Michigan Resources, Inc.
("KCS Michigan" and with KCS Energy, KCS Resources and KCS Marketing, the
"Resources Borrowers"), Medallion Gas Services, Inc. ("Medallion Gas"), KCS
Energy Services, Inc. ("KCS Energy Services"), KCS Medallion Resources, Inc.
("KCS Medallion," and with KCS Energy, Medallion Gas and KCS Energy Services,
the "Medallion Borrowers"), Medallion California Properties, Inc. ("Medallion
California"), National Enerdrill Corporation ("National") and Proliq, Inc.
("Proliq"), debtors and debtors in possession, (collectively, the "Debtors")
having filed a motion ("the Motion") for entry of an order authorizing and
restricting use of cash collateral and granting adequate protection of (a) the
secured claims of CIBC Inc., as lender, Canadian Imperial Bank of Commerce
("CIBC"), as Agent for CIBC Inc., and the other hereinafter defined Medallion
Lenders and Resources Lenders and CIBC Inc., as Collateral Agent for itself and
the other hereinafter referred to collectively as the "Agent") and (b) the
secured claims of the
<PAGE> 2
hereinafter defined Medallion Hedging Lender) (CIBC, CIBC Inc, the Medallion
Lenders, the Resources Lenders and the Medallion Hedging Lender, together with
their successors and permitted assigns, are hereinafter referred to as the
"Lenders"), the Court having reviewed the Motion, the Debtors and the Lenders
having stipulated and agreed to the entry of this Order, and upon completion of
a preliminary hearing as provided for under Fed. R. Bankr. Pro. 4001(b);
THE PARTIES STIPULATE as follows:
A. On January 5, 2000, an involuntary petition for relief under Chapter
11 of the Bankruptcy Code was filed against KCS Energy by three holders of 11%
senior notes due in 2003. On January 18, 2000, KCS Energy filed a motion in
response to the involuntary petition, in which it did not object to the entry of
an order for relief by this Court, an order for relief was entered as to KCS
Energy and the other Debtors filed voluntary petitions for relief under Chapter
11 of the Bankruptcy Code (the "Petition Date"). Since the Petition Date, each
of the Debtors has remained in possession of its assets and continued to operate
and manage its business as a debtor in possession.
B. No statutory committee of creditors holding unsecured claims or any
other statutory committee has been appointed.
C. As of the Petition Date, the Resources Borrowers (including KCS
Energy, as guarantor) were indebted to the Agent as agent, collateral agent and
lender; Bank One, Texas, National Association, as co-agent and lender; Bank of
America, National Association, successor to NationsBank, N.A., as co agent and
lender; Comerica Bank - Texas; Den Norske Bank ASA and General Electric Capital
Corporation (together with their successors and permitted assigns, the
"Resources Lenders") in the aggregate principal amount of $57,594,200.60, plus
interest
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<PAGE> 3
accrued thereon through the Petition Date, plus other costs and expenses
provided for in the Resources Loan Documents, as hereinafter defined (the
"Resources Indebtedness"), all as evidenced by a First Amended and Restated
Credit Agreement dated as of December 22, 1998 (the "Resources Credit
Agreement") and related notes, security agreements and other instruments (the
"Resources Loan Documents").
D. As of the Petition Date, the Medallion Borrowers were indebted to
the Agent as agent, collateral agent and lender; Bank One, Texas, National
Association; Comerica Bank - Texas; Societe Generale, Southwest Agency; Den
Norske Bank ASA; Paribas and General Electric Capital Corporation (together with
their successors and permitted assigns, the "Medallion Lenders") in the
aggregate principal amount of $49,500,688.30, plus interest accrued thereon
through the Petition Date, plus other costs and expenses provided for in the
Medallion Loan Documents, as hereinafter defined (the "Medallion Indebtedness"),
all as evidenced by a First Amended and Restated Credit Agreement dated as of
December 22, 1998 (the "Medallion Credit Agreement") and related notes, security
agreements and other instruments (the "Medallion Loan Documents").
E. As of the Petition Date, the Medallion Borrowers were parties to
certain commodity hedging agreements (the "Medallion Hedging Agreements") with
CIBC or its affiliates (the "Medallion Hedging Lender") which provide for
monthly reconciliations among the parties thereto, and which require payments to
be made to the Medallion Hedging Lender under certain circumstances (the
"Medallion Hedging Agreement Indebtedness").
F. As security for the payment of the Resources Indebtedness, the
Resources Lenders have, and the Debtors acknowledge and agree that the Resources
Lenders have, valid, perfected,
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<PAGE> 4
and unavoidable liens upon, and security interests in, substantially all of the
real and personal property of the Resources Borrowers as more particularly
described in, and evidenced by, the Resources Loan Documents. The collateral
described in the Resources Loan Documents is hereinafter collectively referred
to as the "Pre-Petition Resources Collateral."
G. As security for the payment of the Medallion Indebtedness, the
Medallion Lenders have, and the Debtors acknowledge and agree that the Medallion
Lenders have, valid, perfected, and unavoidable liens upon, and security
interests in, substantially all of the real and personal property of the
Medallion Borrowers and Medallion California, as more particularly described in,
and evidenced by, the Medallion Loan Documents. The collateral described in the
Medallion Loan Documents is hereinafter collectively referred to as the
"Pre-Petition Medallion Collateral" and with the Pre-Petition Resources
Collateral, the "Pre-Petition Collateral."
H. As security for payment of the Medallion Hedging Agreement
Indebtedness, the Medallion Hedging Lender has, and the Debtors acknowledge and
agree that the Medallion Hedging Lender has, valid, perfected, and unavoidable
liens upon, and security interests in, certain of the Medallion Borrowers' real
and personal property (the "Pre-Petition Medallion Hedging Collateral").
I. The Resources Borrowers and the Medallion Borrowers are in default
under the Resources Loan Documents and the Medallion Loan Documents,
respectively.
J. The Debtors require the use of the Lenders' Pre-Petition Collateral,
the Pre-Petition Medallion Hedging Collateral and the cash and cash equivalent
proceeds of or generated from the Pre-Petition Collateral and the Pre-Petition
Medallion Hedging Collateral ("the Cash Collateral") for the maintenance and
preservation of the Debtors' property, for the operation of
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<PAGE> 5
their businesses in the ordinary course and for payment of the expenses
attendant thereto. The Lenders are willing to consent to the limited use by
the Debtors of the Cash Collateral, but only upon the terms and conditions of
this Order, including the requirements of the budgetary process set forth
herein. The Lenders have also made a good faith request for adequate protection
of their interests in the Pre-Petition Collateral and the Pre-Petition
Medallion Hedging Collateral.
K. Prior to the Petition Date, the Debtors and the Lenders were parties
to certain forbearance agreements, pursuant to which the parties agreed that 50%
of certain payments made under those agreements would be paid to the Resources
Lenders and the remaining 50% would be paid to the Medallion Lenders. The
Debtors and Lenders have likewise agreed that the payment of Excess Cash
Collateral (as hereinafter defined) under this Order will be divided 50/50
between the Resources Lenders and the Medallion Lenders.
L. The terms and conditions of the Debtor's use of funds and Cash
Collateral are fair and reasonable under the circumstances and were negotiated
in good faith at arm's length.
M. There is good cause, and, in the case of each Debtor, it is in the
best interests of the estate and its creditors, that the Debtors be authorized
to use the Pre-Petition Collateral, the Pre-Petition Medallion Hedging
Collateral and the Cash Collateral pursuant to the terms and conditions of this
Order.
N. Notice of the Motion and of the hearing thereon has been given to
creditors holding the 20 largest claims against the Debtors, the United States
Trustee and the Lenders by [fax/overnight mail].
-5-
<PAGE> 6
O. The Court has jurisdiction over the Chapter 11 cases of the Debtors
and the Debtors' Motion pursuant to 28 U.S.C. Sections 1.57 and 1334. This Order
is entered in a core proceeding within the meaning of 28 U.S.C. Section
157(b)(2)(M).
IT IS HEREBY ORDERED as follows:
1. The Debtors shall not use any of their funds, including Cash
Collateral, except as authorized and permitted herein or by subsequent order of
the Court.
2. The Debtors have acknowledged and agreed that as of the Petition
Date (a) the Resources Lenders have valid, perfected and unavoidable liens in
the Pre-Petition Resources Collateral, (b) the Medallion Lenders have valid,
perfected and unavoidable liens in the Pre-Petition Medallion Collateral, (c)
the Medallion Hedging Lender has valid, perfected and unavoidable liens in the
Pre-Petition Medallion Hedging Collateral, (d) the Resources Lenders have an
allowed secured claim within the meaning of Section 506 of the Bankruptcy Code
in an amount that is not less than $57,594,200.60, plus interest, fees and
costs, (e) the Medallion Lenders have an allowed secured claim within the
meaning of Section 506 of the Bankruptcy Code in an amount that is not less than
$49,500,688.30, plus interest, fees and costs, and (f) the Medallion Hedging
Lender has an allowed secured claim within the meaning of Section 506 of the
Bankruptcy Code in an amount that was not less than $5,577,231 as of January 14,
2000, plus interest, fees and costs.
3. The Debtors will furnish to the Lenders not later than the twentieth
(20th) day of the month preceding each calendar month (or if such day is not a
business day, on the next succeeding business day) a budget ("a Budget") for the
Debtors, signed by an appropriate officer, employee or agent of the Debtors, in
form and substance satisfactory to the Lenders, of all
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<PAGE> 7
projected cash receipts and cash disbursements of the Debtors for the next three
months, together with any request for use of Cash Collateral for the next
calendar month. With respect to the period from January 18, 2000 through
February 29, 2000 ("the Initial Budget Period"), the Debtors have furnished an
initial Budget, a copy of which is attached hereto as Exhibit 1. The initial
Budget has been approved by the Lenders.
4. Within five (5) business days after receipt of each Budget, the
Lenders shall notify the Debtors as to whether they will, in the exercise of
their sole discretion, authorize expenditure by the Debtors of any or all of the
amounts proposed to be expended by the Debtors pursuant to such Budget for the
next calendar month. The Lenders may approve or may disapprove any items of
proposed expenditures set forth in a Budget, and the aggregate of items approved
by the Lenders in a Budget for a calendar month shall constitute an "Approved
Budget." Any Budget or item of proposed expenditure not approved or disapproved
by the Lenders in such five (5) business day period shall be deemed approved.
The aggregate expenditures by the Debtors for any calendar month and for the
Initial Budget Period shall not in any event exceed the aggregate amount
budgeted therefor in such Approved Budget or the initial Budget Period's
Approved Budget by more than a factor of five percent (5%) of the budgeted
amount. Additionally, the expenditures of the Debtors for any calendar month
shall not, for each line item, exceed the amount budgeted for that line item in
that Approved Budget by more than a factor of ten percent (10%) of the budgeted
amount.
As to any calendar month and the Initial Budget Period, the Debtors
shall not be authorized to expend any funds for an item or expenditure not
included in the Approved Budget for such calendar month or Initial Budget
Period; provided, however, (a) any item or expenditure
-7-
<PAGE> 8
contained and authorized in any prior Approved Budget may be paid in a
subsequent budget period if (i) a contractual commitment was actually incurred
by the Debtors during the period covered by such prior Approved Budget with
respect to said item or expenditure, and (ii) said item or expenditure has been
rebudgeted and listed in the budget for the period during which the Debtors
proposes to pay said item or expenditure, and (b) the Lenders, in their sole
discretion, may approve in writing any such additional expenditure not included
in the Approved Budget for such budget period.
5. The Debtors, in their sole discretion, may seek permission from the
Court to use funds and Cash Collateral on terms and conditions other than those
set forth in this Order at any time which is five (5) business days after actual
receipt of a written notice to the Agent and the Lenders of their intent to do
so, provided that the terms and conditions of this Order shall govern the use of
any funds or Cash Collateral by the Debtors until the entry of any new order by
the Court with respect thereto.
6. The Debtors shall submit to the Court and to the Lenders, on or
before the twentieth (20th) day of each calendar month, a detailed report, in a
form satisfactory to the Lenders, of the source, use and application of funds
expended by the Debtors during the previous calendar month pursuant to that
Approved Budget for the previous budget period, and a reconciliation, including
a line by line item comparison of budgeted to actual expenditures setting forth
in reasonable detail an explanation of any differences between budgeted and
actual amounts, of funds received or used and expended by the Debtors during
said calendar month.
7. In order (a) adequately to protect the Lenders for the use of Cash
Collateral by the Debtors under this Order, and (b) to provide the Lenders with
adequate protection in respect to
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<PAGE> 9
any decrease in the value of their interest in the Pre-Petition Collateral and
the Pre-Petition Medallion Hedging Collateral resulting from the stay imposed
under Section 362 of the Bankruptcy Code, or the use of such property by the
Debtors, (i) the Resources Lenders shall have, and hereby are granted to the
extent not heretofore granted, a lien against and security interest in all
presently owned and hereafter-acquired property, assets, and rights, of any kind
or nature, of the Resources Borrowers, wherever located (which, in the case of
presently owned property, is already encumbered by the Pre-Petition Liens of the
Resources Lenders) to secure the Resources Indebtedness and any diminution in
value of the Pre-Petition Resources Collateral, (ii) the Medallion Lenders and
the Medallion Hedging Lender shall have, and hereby are granted to the extent
not heretofore granted, a lien against and security interest in all presently
owned and hereafter-acquired property, assets, and rights, of any kind or
nature, of the Medallion Borrowers, wherever located (which, in the case of
presently owned property, is already encumbered by the Pre-Petition Liens of the
Medallion Lenders and the Medallion Hedging Lenders) to secure the Medallion
Indebtedness and the Medallion Hedging Indebtedness and any diminution in value
of the Pre-Petition Medallion Collateral and the Pre-Petition Medallion Hedging
Collateral and (iii) the Resources Lenders, the Medallion Lenders and the
Medallion Hedging Lender shall have and hereby are granted to the extent not
heretofore granted, a lien against and security interest in all presently owned
and hereafter-acquired property, assets and rights, of any kind or nature, of
Medallion California, National and Proliq, wherever located to be shared pro
rata between the Resources Lenders, the Medallion Lenders and the Medallion
Hedging Lender based upon amount of the Resources Indebtedness, the Medallion
Indebtedness, and the Medallion Hedging Indebtedness as of the Petition Date.
Such liens and security interests shall be a first and prior
-9-
<PAGE> 10
lien on and security interest in the aforesaid property, assets, and rights of
each of the Resources Borrowers and the Medallion Borrowers and Medallion
California, National and Proliq, subject only to valid and enforceable liens and
security interests existing on said property, assets, or rights of the Resources
Borrowers and the Medallion Borrowers and Medallion California, National and
Proliq at the time of the commencement of these bankruptcy cases or, in the case
of property, assets or rights acquired Post-Petition, at the time the Debtors'
estates acquire the property, assets or rights; provided, however, that the
proceeds of or generated from the sale, use, lease, or operation of any property
subject to such a preexisting lien or security interest shall first secure the
return to the Resources Lenders, the Medallion Lenders and the Medallion Hedging
Lender, as applicable, of any amounts of Cash Collateral which have been used by
the Debtors in connection with such property and would be recoverable from such
property or the proceeds thereof under section 506(c) of the Bankruptcy Code. As
additional adequate protection for the Medallion Hedging Lender, and
notwithstanding the foregoing, the Debtors are authorized and directed to make
any payment to the Medallion Hedging Lender that is required under the Medallion
Hedging Agreements provided that such payments are contained in an Approved
Budget and are not triggered by any bankruptcy terminations or the like. The
Debtors may continue, without further order of this Court, but subject to the
prior consent of the Medallion Lenders or the Resources Lenders, as applicable,
to enter into additional hedging transactions and to grant counterparties first
liens to secure such transactions.
8. (a) As further adequate protection for the Resource Lenders'
interests in the Pre-Petition Resources Collateral, and consistent with Section
552 of the Bankruptcy Code, proceeds, products, rents and profits of the
Pre-Petition Resources Collateral, and all property
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<PAGE> 11
and assets of the Debtors which are of the same type or nature as the
Pre-Petition Resources Collateral, coming into existence or acquired by the
Debtors on or after the commencement of this Bankruptcy case (including, without
limitation, all accounts receivable and inventory generated after the
commencement of these Bankruptcy cases) are hereby deemed to be Pre-Petition
Resources Collateral, subject to the pre-petition mortgages, security interests
and collateral documents of the Resources Lenders.
(b) As further adequate protection for the Medallion Lenders' interests
in the Pre-Petition Medallion Collateral, and consistent with Section 552 of the
Bankruptcy Code, proceeds, products, rents and profits of the Pre-Petition
Medallion Collateral, and all property and assets of the Debtors which are of
the same type or nature as the Pre-Petition Medallion Collateral, coming into
existence or acquired by the Debtors on or after the commencement of this
Bankruptcy case (including, without limitation, all accounts receivable and
inventory generated after the commencement of these Bankruptcy cases) are hereby
deemed to be Pre-Petition Medallion Collateral, subject to the pre-petition
mortgages, security interests and collateral documents of the Medallion Lenders.
(c) As further adequate protection for the Medallion Hedging Lender's
interest in the Pre-Petition Medallion Hedging Collateral, and consistent with
Section 552 of the Bankruptcy Code, proceeds, products, rents and profits of the
Pre-Petition Medallion Hedging Collateral, and all property and assets of the
Debtors which are of the same type or nature as the Pre-Petition Medallion
Hedging Collateral, coming into existence or acquired by the Debtors on or after
the commencement of this Bankruptcy case (including, without limitation, all
accounts receivable and inventory generated after the commencement of these
Bankruptcy cases) are hereby deemed
-11-
<PAGE> 12
to be Pre-Petition Medallion Hedging Collateral, subject to the pre-petition
mortgages, security interests and collateral documents of the Medallion Hedging
Lender.
9. The full amount of any adequate protection claim of any Lender as
determined by the Bankruptcy Court shall be granted and given a secured and
priority status under Section 364(c)(l), (2) and (3) of the Bankruptcy Code. No
costs or expenses of administration which have been or may be incurred in these
proceedings, or in any other proceeding related hereto, and no priority claims
are or will be prior to or on a parity with the adequate protection claims of
the Lenders subject only to (x) all accrued and unpaid professional fees and
expenses of the Debtors and an unsecured creditors' committee from time to time
allowed as an administrative expense by the Court in these Chapter 11 cases and
(y) expenses pursuant to 28 U.S.C. Section 1930, which expenses, when included
in an Approved Budget, or, if disputed, when allowed by the Court, shall be
deemed to be included in the then extant Approved Budget, and may be paid as set
forth in the order allowing such expenses. Except as approved in the Budget no
cost or expense of administration of any kind whatsoever shall be imposed upon
the Lenders, the Pre-Petition Collateral, the Pre-Petition Medallion Hedging
Collateral, or the Cash Collateral.
10. The liens and security interests granted to the Lenders pursuant to
paragraphs 7, 8 and 9 hereof shall be valid and perfected, as of the date of
this Order, without the need for the execution or filing of any further document
or instrument otherwise required to be executed or filed under applicable
nonbankruptcy law. Notwithstanding that no documents need be executed or filed
to create or perfect the liens and security interests granted hereunder, the
Debtors, and their officers and agents on their behalf, are hereby directed to
execute and deliver such further documents as the Lenders may request to
evidence and give notice of the liens granted hereunder.
-12-
<PAGE> 13
11. To enable the Debtors to reduce interest accrual and expense, and
as further adequate protection, on or before the tenth (10th) day of each
calendar month, and more frequently if and as the Debtors and the Lenders may
agree, the Debtors shall make payments to the Lenders in an amount equal to the
excess of the beginning cash balances plus the receipts for the immediately
preceding month over the sum of (i) the actual disbursements (excluding any
disbursements to be made to the Lenders pursuant to this Order) during such
month pursuant to an Approved Budget plus (ii) appropriate reserves agreed to
monthly by the Debtors and the Lenders, including any reserve authorized by the
Medallion and Resources Lenders for the payment of items in subsequent budget
periods pursuant to paragraph 3 hereof ("Excess Cash Collateral"). Such Excess
Cash Collateral payments shall be distributed to the Resources Lenders and the
Medallion Lenders as follows: First to unpaid interest and professional fees and
other costs of the Resources Lenders and the Medallion Lenders, and as to the
remaining Excess Cash Collateral, fifty percent (50%) of the Excess Cash
Collateral shall be paid to and applied by the Resources Lenders against the
Resources Indebtedness in accordance with the provisions of the Resources Loan
Documents and applicable law and fifty percent (50%) of the Excess Cash
Collateral shall be paid to and applied by the Medallion Lenders against the
Medallion Indebtedness in accordance with the provisions of the Medallion Loan
Documents and applicable law; provided, however, that no more than $2.5 million
of Excess Cash Collateral per month shall be paid to the Resources Lenders and
the Medallion Lenders to amortize the principal amounts of the Resources
Indebtedness and the Medallion Indebtedness absent the Debtors' consent. All
amounts of Excess Cash Collateral to be distributed to the Resources Lenders
and to the Medallion Lenders shall be included in the Budgets and Approved
Budgets. As long as
-13-
<PAGE> 14
(a) an Event of Default (as defined in paragraph 20 hereof) has not occurred,
(b) the Debtors make timely payments of interest, professional fees and other
costs of the Resources Lenders and the Medallion Lenders hereunder and (c) the
Debtors make timely principal payments of at least $2.5 million per month from
Excess Cash Collateral to the Resources Lenders and the Medallion Lenders to
amortize the principal amounts of the Resources Indebtedness and the Medallion
Indebtedness, interest on the Resources Indebtedness and the Medallion
Indebtedness shall accrue according to the terms and conditions of the
Forbearance Agreements between the Debtors and the Resources Lenders and the
Medallion Lenders, respectively, dated as of July 26, 1999 and effective as of
July 1, 1999, as amended.
12. All applications as provided for in paragraph 11 hereof are
provisional only and are subject to further order of this Court. Except with
respect to the Debtors as set forth in paragraph 2 above, nothing contained in
this Order shall be deemed to constitute a determination of (i) the validity or
priority of the pre-petition liens and security interests claimed by the Lenders
in the Pre-Petition Collateral, the Pre-Petition Medallion Hedging Collateral
or the Cash Collateral, or (ii) the propriety of the application of any monies
received by the Resources Lenders and the Medallion Lenders pursuant to
paragraph 11 above.
13. The Debtors shall sell or dispose of their oil and gas inventory
and products only in the ordinary course of business consistent with an Approved
Budget upon terms and conditions usual and customary in the industry.
14. The Debtors are hereby prohibited from making any borrowings or
incurring any debt under Sections 363 or 364 of the Bankruptcy Code (other
than trade credit and other
-14-
<PAGE> 15
obligations included in an Approved Budget), except with the consent of the
Lenders or further order of the Court.
15. The terms and provisions of this Order shall be binding upon the
Debtors and their successors and assigns, including, but not limited to, any
trustee appointed in this case, in any superseding case or in any case related
hereto, and shall survive to the benefit of the Lenders and the Debtors.
16. The Agent and any successor agents of the Resources Lenders, the
Medallion Lenders or the Medallion Hedging Lender and their respective agents
shall be given access to the books, records and documents of the Debtors and
their affiliates during normal business hours and without interferring with the
Debtors' operations, including, without limitation, the following: check
registers (general disbursements, other disbursements), general ledgers, journal
entries, payroll journals, cash activity reports, aged accounts receivable, aged
accounts payable, bank reconciliations, canceled checks, bank debit and credit
advices, bank statements, leases, and contracts.
17. The Debtors shall provide to the Lenders the following reports and
information: (i) monthly operating statements, (ii) all documentation and
reports required under the Resources Loan Documents and the Medallion Loan
Documents, and (iii) such other information that the Lenders may from time to
time request.
18. The automatic stay imposed by Section 362 of the Bankruptcy Code
shall be, and hereby is, lifted and vacated to the extent necessary, if any, to
authorize the payments hereunder and to implement and effectuate the terms and
conditions of this Order. The automatic stay, in
-15-
<PAGE> 16
all other respects, shall remain in effect during the pendency of this case
including the stay against enforcement by the Lenders of their claims, pending
further Order of this Court.
19. The authority of the Debtors to use Cash Collateral shall terminate
on the earlier of (i) the date of entry by the Court of an order with respect to
the Final Hearing on the Debtors' request to use cash collateral (pursuant to
paragraph 5 hereof), or (ii) an Event of Default.
20. Each of the following events shall constitute an Event of Default:
(a) Entry of an order converting the Debtors' Chapter 11 cases to
cases under Chapter 7 of the Bankruptcy Code which order is not stayed
within ten (10) days of the entry thereof;
(b) Entry of an order dismissing the Chapter 11 cases of the Debtors
which order is not stayed within ten (10) days of the entry thereof;
and
(c) Failure of any Debtor to comply with any material terms,
conditions, or covenants contained in this Order or the Resources Loan
Documents or Medallion Loan Documents (other than various events and
conditions and Defaults set forth in (i) the Annual Report of KCS
Energy, Inc. on Form 10-K filed with the SEC on March 31, 1999, and in
Forms 10-Q, filed as of the periods ending March 30, 1999, June 30,
1999 and September 30, 1999, (ii) certain notices of default from the
Agent to the Debtors dated April 7, 1999 and July 12, 1999) within five
(5) business days of actual delivery of a written notice of default,
and (iii) the filing of an involuntary bankruptcy petition against KCS
Energy on January 5, 2000).
-16-
<PAGE> 17
21. Upon the occurrence of an Event of Default, the Debtors shall
immediately cease using Cash Collateral, and shall segregate and hold such Cash
Collateral, subject to further order of the Court.
22. The Debtors are authorized and directed to perform all acts and
execute and comply with the terms of such other documents, instruments and
agreements necessary to effectuate the terms and conditions of this Order.
23. Nothing contained herein or in the Budgets shall prejudice the
Lenders, or the Debtors with respect to any contested matter involving relief
from the automatic stay, appointment of a trustee or examiner, the assumption or
rejection or executory contracts, dismissal of the Chapter 11 cases, or with
respect to any other matter whatsoever. This Order shall in no way limit the
rights of (a) the Lenders to seek other or additional adequate protection, to
seek relief from the automatic stay, or to take any action in these bankruptcy
cases, or (b) the Debtors to request the use of funds or Cash Collateral on
other terms. This Order is without prejudice to the Debtors' rights to show that
the Lenders are adequately protected by an equity cushion, without the need for
any monthly payments, replacement liens, or the priority administrative claims
set forth herein, provided that the terms and conditions of any other Order(s)
granting adequate protection to the Lenders different than set forth herein
shall only apply prospectively from the date of said additional Order(s).
24. Nothing in this Order shall terminate, diminish, or otherwise
affect in any way the rights or interests of any person with respect to any
property of the Debtors to the extent such rights or interests in such property
are (a) created pursuant to any applicable law, (b) accorded by such law a
priority equal or senior to that of any right or interest in such Property
asserted by the
-17-
<PAGE> 18
Lenders or their affiliates, and (c) not subject to avoidance pursuant to
Section 545 or any other provision of the Bankruptcy Code.
25. The Debtors shall serve a copy of the Motion and this Order by the
conclusion of the next business day after its entry upon any committee of
creditors appointed in these cases, the twenty largest creditors included on the
lists filed pursuant to Fed. R. Bankr. Pro. 1007(d), any party that has
requested notice in the cases and the United States Trustee by first class mail,
postage pre-paid. Any objection to the continued effectiveness of this Order
shall be in writing and shall be filed with the Court and served by overnight
mail service on the Debtors, care of Fredrick Dwyer, KCS Energy, Inc., Suite
1200, 5555 San Felipe, Houston, Texas, 77056 and their counsel, Martin J.
Bienenstock, Weil, Gotshal & Manges, 767 Fifth Avenue, New York, New York 10153
and on the Agent, care of Robert N. Greer, Canadian Imperial Bank of Commerce,
425 Lexington Ave., New York, New York 10017 and on its counsel, J. Robert
Stoll, Mayer, Brown & Platt, 190 S. LaSalle Street, Chicago, IL 60603 and the
United States Trustee within 15 days of the mailing of a copy of this Order. If
an objection is timely filed and served, a final hearing will be held on
February 7, 2000 at 3:30 p.m., as the same may be continued or adjourned by the
Court, in Room 2, [address] (the "Final Hearing"). If no objection is timely
filed and served, the Court may enter an order continuing this Order as a final
order without conducting the Final Hearing.
Dated: January 19, 2000 PETER J. WALSH
------------------ ------------------------------
UNITED STATES BANKRUPTCY JUDGE
AGREED AND STIPULATED:
-18-
<PAGE> 19
DEBTORS IN POSSESSION:
KCS ENERGY, INC.
By: /s/ FREDERICK DWYER
--------------------
KCS RESOURCES, INC.
By: /s/ FREDERICK DWYER
--------------------
KCS ENERGY MARKETING, INC.
By: /s/ FREDERICK DWYER
--------------------
KCS MICHIGAN RESOURCES, INC.
By: /s/ FREDERICK DWYER
--------------------
MEDALLION GAS SERVICES, INC.
By: /s/ FREDERICK DWYER
--------------------
KCS ENERGY SERVICES, INC.
By: /s/ FREDERICK DWYER
--------------------
KCS MEDALLION RESOURCES, INC.
By: /s/ FREDERICK DWYER
--------------------
MEDALLION CALIFORNIA PROPERTIES, INC.
By: /s/ FREDERICK DWYER
--------------------
-19-
<PAGE> 20
NATIONAL ENERDRILL CORPORATION
By: /s/ FREDERICK DWYER
--------------------
PROLIQ, INC.
By: /s/ FREDERICK DWYER
--------------------
LENDER AND COLLATERAL AGENT:
CIBC, INC.
By: /s/ ROBERT N. GREER
--------------------
AGENT: Robert N. Greer
CANADIAN IMPERIAL BANK OF COMMERCE
/s/ ROBERT N. GREER
ASSISTANT GENERAL MANAGER
By: Robert N. Greer
-20-
<PAGE> 1
EXHIBIT (10)xx
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: )
) Chapter 11
KCS ENERGY, INC., a Delaware corporation )
) Case No. 00-0310 (PJW)
et al. )
) Jointly Administered
Debtors. )
)
FINAL ORDER AUTHORIZING AND RESTRICTING
USE OF CASH COLLATERAL AND GRANTING ADEQUATE PROTECTION(1)
The Debtors having filed the Motion of Debtors for Entry of Order
Authorizing and Restricting Use of Cash Collateral and Granting Adequate
Protection ("the Motion") seeking entry of an order authorizing and restricting
use of cash collateral and granting adequate protection of (a) the secured
claims of CIBC Inc., as lender, Canadian Imperial Bank of Commerce ("CIBC"), as
Agent for CIBC Inc. and the other Medallion Lenders and Resources Lenders and
CIBC Inc., as Collateral Agent for itself and the other Medallion Lenders and
Resources Lenders, and (b) the secured claims of the Medallion Hedging Lender
(CIBC, CIBC Inc., the Medallion Lenders, the Resources Lenders and the
Medallion Hedging Lender, together with their successors and permitted assigns,
are hereinafter referred to as the "Lenders"); the Debtors and the Lenders
having stipulated and agreed to the entry of the Interim Order; the Court
having reviewed the Motion, having held a preliminary hearing on the Motion and
having entered the Interim Order; objections having been raised to the Motion
by certain holders of 11%
- ----------------------
(1) All terms not otherwise defined herein shall have the meaning ascribed to
them in the Order Authorizing and Restricting Use of Cash Collateral and
Granting Adequate Protection dated as of January 19, 2000 (the "Interim Order").
<PAGE> 2
Senior Notes due in 2003 and such objections having been overruled by the Court;
the Debtors having provided due and adequate notice of the Motion and Order on
the parties entitled to such notice; the Interim Order providing that if no
objection is timely filed and served, the Court may enter an order continuing
the Interim Order as a final order without conducting a final hearing; and no
objections to the Motion or Order having been filed by any party.
IT IS HEREBY ORDERED THAT:
1. The Motion is granted in its entirety.
2. The Interim Order is continued as a final order effective as of
February 7, 2000 and is incorporated herein in its entirety.
Dated: February 7, 2000 /s/ PETER J. WALSH
---------------- ------------------------------
UNITED STATES BANKRUPTCY JUDGE
-2-
<PAGE> 1
EXHIBIT 21
KCS ENERGY, INC.
LIST OF WHOLLY-OWNED SUBSIDIARIES
KCS Resources, Inc.
National Enerdrill Corporation
Proliq, Inc.
KCS Energy Marketing, Inc.
KCS Michigan Resources, Inc.
KCS Energy Services, Inc.
KCS Medallion Resources, Inc.
Medallion California Properties, Inc.
Medallion Gas Services, Inc.
<PAGE> 1
EXHIBIT 23(I)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated March 29, 2000 included in KCS Energy, Inc.'s Form 10-K,
for the year ended December 31, 1999, into previously filed Registration
Statement File Nos. 33-25707, 33-28899, 33-45923 and 33-63982.
ARTHUR ANDERSEN LLP
Houston, Texas
March 29, 2000
<PAGE> 1
EXHIBIT 23(II)
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
We hereby consent to the filing of the Annual Report on Form 10-K, for the
year ended December 31, 1999, for KCS Energy, Inc. in accordance with the
requirements of the Securities Act of 1933, with the inclusion in such Annual
Report of our reserve report incorporated therein, and references to our name in
the form and context in which they appear.
NETHERLAND, SEWELL & ASSOCIATES,
INC.
Houston, Texas
March 28, 2000
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