<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number 0-4597
FOREST OIL CORPORATION
(Exact name of registrant as specified in its charter)
New York 25-0484900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 Colorado National Building
950 - 17th Street
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 592-2400
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
------- -------
Number of Shares
Outstanding
Title of Class of Common Stock April 30, 1995
------------------------------ ---------------
Common Stock, Par Value $.10 Per Share 28,267,702
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<PAGE>
PART I. FINANCIAL INFORMATION
FOREST OIL CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
---------- ------------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,676 2,869
Accounts receivable 15,164 20,418
Other current assets 3,226 2,231
---------- ----------
Total current assets 20,066 25,518
Property and equipment, at cost:
Oil and gas properties - full cost
accounting method 1,178,901 1,171,887
Buildings, transportation and other
equipment 12,681 12,649
---------- ----------
1,191,582 1,184,536
Less accumulated depreciation,
depletion and valuation allowance 920,243 907,927
---------- ----------
Net property and equipment 271,339 276,609
Investment in and advances to affiliate 11,673 11,652
Other assets 11,015 11,053
---------- ----------
$ 314,093 324,832
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 2,581 4,445
Bank debt 45,000 -
Current portion of long-term debt 2,342 1,636
Current portion of gas balancing liability 5,000 5,735
Accounts payable 19,969 26,557
Retirement benefits payable to
executives and directors 630 630
Accrued expenses and other liabilities:
Interest 1,663 4,318
Other 4,457 4,297
---------- ----------
Total current liabilities 81,642 47,618
Long-term debt 172,531 207,054
Gas balancing liability 8,677 8,525
Retirement benefits payable to executives
and directors 3,404 3,505
Other liabilities 16,008 16,136
Deferred revenue 29,289 35,908
Shareholders' equity:
Preferred stock 15,845 15,845
Common stock 2,829 2,829
Capital surplus 188,593 190,074
Accumulated deficit (202,643) (199,499)
Foreign currency translation (1,312) (1,337)
Treasury stock, at cost (770) (1,826)
---------- ----------
Total shareholders' equity 2,542 6,086
---------- ----------
$ 314,093 324,832
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-1-
<PAGE>
FOREST OIL CORPORATION
Condensed Consolidated Statements of Production and Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 31, March 31,
1995 1994
---------- ----------
(In Thousands Except Production
and Per Share Amounts)
<S> <C> <C>
PRODUCTION
Gas (mmcf) 9,297 13,269
------ ------
------ ------
Oil and condensate (thousands of barrels) 349 383
------ ------
------ ------
STATEMENTS OF CONSOLIDATED OPERATIONS
Revenue:
Oil and gas sales:
Gas $ 16,735 27,076
Oil and condensate 5,504 4,458
Products and other 70 122
------ ------
22,309 31,656
Miscellaneous, net 52 887
------ ------
Total revenue 22,361 32,543
Expenses:
Oil and gas production 5,309 5,328
General and administrative 2,100 2,087
Interest 5,794 6,647
Depreciation and depletion 12,309 18,245
------ ------
Total expenses 25,512 32,307
------ ------
Income (loss) before income taxes and
cumulative effects of change in
accounting principle (3,151) 236
Income tax expense (benefit):
Current (7) -
Deferred - -
------ ------
(7) -
------ ------
Income (loss) before cumulative effects of
change in accounting principle (3,144) 236
Cumulative effects of change in accounting
for oil and gas sales - (13,990)
------ ------
Net loss $ (3,144) (13,754)
------ ------
------ ------
Weighted average number of common shares
outstanding 28,233 28,008
------ ------
------ ------
Net loss attributable to common stock $ (3,684) (14,294)
------ ------
------ ------
Primary and fully diluted loss per common
share:
Loss before cumulative effects of
change in accounting principle $ (.13) (.01)
------ ------
------ ------
Net loss $ (.13) (.51)
------ ------
------ ------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
FOREST OIL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 31, March 31,
1995 1994
---------- ----------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Income (loss) before cumulative effects
of change in accounting principle $ (3,144) 236
Adjustments to reconcile income (loss)
before cumulative effects of change in
accounting principle to net cash provided
(used) by operating activities:
Depreciation and depletion 12,309 18,245
Other, net 771 2,322
(Increase) decrease in accounts receivable 5,254 (2,014)
Increase in other current assets (995) (1,247)
Decrease in accounts payable (7,323) (8,450)
Increase (decrease) in accrued expenses
and other liabilities (2,495) 2,426
Amortization of deferred revenue (6,620) (10,107)
------- -------
Net cash provided (used) by operating
activities (2,243) 1,411
Cash flows from investing activities:
Capital expenditures for property and equipment (7,064) (5,663)
Proceeds from sales of property and equipment 28 3,186
Increase in other assets, net (181) (880)
------- -------
Net cash used by investing activities (7,217) (3,357)
Cash flows from financing activities:
Proceeds of bank debt 23,500 9,000
Repayments of bank debt (11,500) -
Repayments of nonrecourse secured loan (624) (378)
Repayments of production payment (630) (986)
Redemptions and purchases of subordinated
debentures - (7,171)
Payment of preferred stock dividends (540) (540)
Deferred debt costs - (199)
Decrease in cash overdraft (1,864) (2,674)
Decrease in other liabilities, net (76) (1,414)
------- -------
Net cash provided (used) by financing
activities 8,266 (4,362)
Effect of exchange rate changes on cash 1 15
------- -------
Net decrease in cash and cash equivalents (1,193) (6,293)
Cash and cash equivalents at beginning of period 2,869 6,949
------- -------
Cash and cash equivalents at end of period $ 1,676 656
------- -------
------- -------
Cash paid during the period for:
Interest $ 8,185 8,254
------- -------
------- -------
Income taxes $ - -
------- -------
------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
FOREST OIL CORPORATION
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 1995 and 1994
(Unaudited)
(1) Basis of Presentation
The condensed consolidated financial statements included herein are
unaudited. In the opinion of management, all adjustments, consisting of
normal recurring accruals, have been made which are necessary for a fair
presentation of the financial position of the Company at March 31, 1995 and
the results of operations for the three month periods ended March 31, 1995
and 1994. Quarterly results are not necessarily indicative of expected
annual results because of the impact of fluctuations in prices received for
oil and natural gas and other factors. For a more complete understanding
of the Company's operations and financial position, reference is made to
the consolidated financial statements of the Company, and related notes
thereto, filed with the Company's annual report on Form 10-K for the year
ended December 31, 1994, previously filed with the Securities and Exchange
Commission.
(2) Long-term Debt
The components of long-term debt are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- ------------
(In Thousands)
<S> <C> <C>
Bank debt $ - 33,000
Nonrecourse secured loan 57,641 57,840
Production payment obligation 17,904 18,534
11-1/4% Subordinated debentures 99,328 99,316
-------- --------
174,873 208,690
Less current portion (2,342) (1,636)
-------- --------
Long-term debt $ 172,531 207,054
-------- --------
-------- --------
</TABLE>
At March 31, 1995 the Company did not satisfy certain tests imposed by the
covenants of its bank debt; compliance with these covenants was waived by
the banks through June 29, 1995. The Company currently anticipates that it
may not satisfy one or more of the tests during the remainder of 1995. As
a result, the $45,000,000 balance outstanding under the Company's credit
facility at March 31, 1995 is included in current liabilities on the
accompanying balance sheet.
(3) Earnings (Loss) Per Share
Primary earnings (loss) per share is computed by dividing net earnings
(loss) attributable to common stock by the weighted average number of
common shares and common share equivalents outstanding during each period,
excluding treasury shares. Net earnings (loss) attributable to common
stock represents net earnings (loss) less preferred stock dividend
requirements. Common share equivalents include, when applicable, dilutive
stock options using the treasury stock method and warrants using the if
converted method.
Fully diluted earnings (loss) per share assumes, in addition to the above,
(i) that convertible debentures were converted at the beginning of each
period or date of issuance, if later, with earnings being increased for
interest expense, net of taxes, that would not have been incurred had
conversion taken place, (ii) that convertible preferred stock was converted
at the beginning of each period or date of issuance, if later, and
(iii) any additional dilutive effect of stock options and warrants. The
assumed exercises and conversions were antidilutive for the three months
ended March 31, 1995 and 1994.
-4-
<PAGE>
(4) Changes in Accounting for Oil and Gas Sales
The Company changed its method of accounting for oil and gas sales from the
sales method to the entitlements method effective January 1, 1994. Under
the sales method previously used by the Company, all proceeds from
production credited to the Company were recorded as revenue until such time
as the Company had produced its share of the related reserves. Under the
entitlements method, revenue is recorded based upon the Company's share of
volumes sold, regardless of whether the Company has taken its proportionate
share of volumes produced.
Under the entitlements method, the Company records a receivable or payable
to the extent it receives less or more than its proportionate share of the
related revenue. The Company believes that the entitlements method is
preferable because it allows for recognition of revenue based on the
Company's actual share of jointly owned production and provides a better
matching of revenue and related expenses.
The cumulative effect of the change for the periods through December 31,
1993 was a charge of $13,990,000 recorded in the first quarter of 1994. As
the Company adopted this change in the fourth quarter of 1994, previously
reported first quarter 1994 information has been restated to reflect the
change effective January 1, 1994.
(5) Subsequent Events
On May 17, 1995, the Company signed definitive agreements with The Anschutz
Corporation (Anschutz) and with Joint Energy Development Investments
Limited Partnership (JEDI), a Delaware limited partnership the general
partner of which is an affiliate of Enron Corp., in each case as described
below. The closing of certain of the transactions contemplated by the
definitive agreements is subject to, among other things, shareholder
approval and consent by certain of the Company's creditors.
The Anschutz agreements contemplate that Anschutz will purchase 18,800,000
shares of the Company's common stock and shares of newly-issued preferred
stock that are convertible into 6,200,000 additional shares of common stock
for a total consideration of $45,000,000, or $1.80 per share. The
preferred stock will have a liquidation preference and will receive
dividends ratably with the common stock. In addition, Anschutz will also
receive warrants to purchase 19,444,444 shares of the Company's common
stock for $2.10 per share. The $2.10 warrants are exercisable during the
first 18 months after the second closing, subject to extension in certain
circumstances to 36 months.
The investment will be made in two closings. In the first closing,
expected to occur in May 1995, Anschutz will loan the Company $9,900,000
for a term of 9 months. The loan will bear interest at 8% per annum for 16
weeks and at 12.5% per annum thereafter. The loan will be nonrecourse to
the Company and will be secured by oil and gas properties owned by the
Company, the preferred stock of Archean Energy Ltd. and a cash collateral
account with an initial balance of $2,000,000. The loan may be converted
into 5,500,000 shares of Forest's common stock at Anschutz's election, but
the loan must be so converted at the second closing. At the second
closing, expected to occur in July 1995 following receipt of shareholder
approval of the transactions contemplated by the definitive agreements,
Anschutz will purchase 13,300,000 shares of common stock and the
convertible preferred stock. At the second closing, Anschutz will also
receive from JEDI an option to purchase from JEDI up to 11,250,000 shares
of Common Stock that JEDI may acquire from the Company upon exercise of the
$2.00 warrants referred to below. This option will terminate 36 months
after the second closing, or earlier upon the conveyance by the Company of
certain property to JEDI in satisfaction of the restructured JEDI loan, as
described below.
In connection with this purchase, Anschutz will agree to certain voting,
acquisition, and transfer limitations regarding shares of common stock for
five years after the second closing, including (a) a limit on voting,
subject to certain exceptions, that would require Anschutz to vote all
equity securities of the Company owned by Anschutz having voting power in
excess of an amount equal to 19.99% of the aggregate voting power of the
equity securities of the Company then outstanding in the same proportion as
all other equity securities of the Company voted with
-5-
<PAGE>
respect to the matter (other than equity securities owned by Anschutz) are
voted, (b) a limit on the number of persons associated with Anschutz that
may at any time be elected as directors of the Company and (c) a limit on
the acquisition of additional shares of common stock by Anschutz (whether
pursuant to the conversion of the new preferred stock, the exercise of the
$2.10 warrants or the option received from JEDI, or otherwise), subject to
certain exceptions, that would prohibit any acquisition by Anschutz that
would result in Anschutz owning 40% or more of the shares of common stock
then issued and outstanding. While the foregoing limitations are in
effect, Anschutz will be entitled to a minority representation on the board
of directors.
The JEDI agreements contemplate that, at the second closing referred to
above, Forest and JEDI will restructure JEDI's existing loan currently
having a principal balance on May 15, 1995 of approximately $62,061,000
before unamortized discount of $4,485,000. JEDI will relinquish the net
profits interest that it holds in certain Forest properties and will reduce
the interest rate relating to the loan. As a result of the loan
restructuring and the issuance of the warrants described below, the Company
anticipates a reduction of the recorded amount of the related liability to
approximately $45,000,000 and a reduction of annual interest expense of
approximately $2,000,000. Subject to certain conditions, the Company may
satisfy the restructured JEDI loan by conveying to JEDI the properties
securing the loan during a 30-day period beginning 18 months after the
second closing or, if the $2.10 warrants have been extended, during a
30-day period beginning 36 months after the second closing. Any such
conveyance during the first 36 months after the second closing must be
approved by Anschutz, if the option from JEDI has not then been exercised
or terminated. Prior to the exercise or termination of the JEDI option,
JEDI has agreed that it will not assign all or any portion of the JEDI loan
or the $2.00 warrants to an unaffiliated person without the approval of the
Company. The Company has agreed to not give such approval without the
consent of Anschutz.
The JEDI agreements also contemplate that, at the second closing, JEDI will
receive warrants to purchase 11,250,000 shares of the Company's common
stock for $2.00 per share. The $2.00 warrants will expire on the earlier
of December 31, 2002 or 36 months following exercise of the Company's
option to convey properties in satisfaction of the JEDI loan (the
Conveyance Option). At the second closing JEDI will grant a 36 month
option to Anschutz to purchase from JEDI up to 11,250,000 shares at a
purchase price per share of $2.00 plus an amount equal to the lesser of
(a) 18% per annum from the second closing date to the date of exercise of
the option, or (b) $3.10. JEDI will satisfy its obligations under the
option to Anschutz by exercising the $2.00 warrants. Provided the
Conveyance Option has not been exercised, the Company may terminate the
$2.00 warrants at any time beginning 36 months after the second closing
if the average closing price of the common stock for both the 90 day and
15 day periods immediately preceding the termination is in excess of
$2.50 per share.
The Company has agreed to use the proceeds from the exercise of the $2.00
warrants and the $2.10 warrants to repay principal and interest on the JEDI
loan.
The agreements require the Company to pay certain expenses incurred by
Anschutz and JEDI and to pay Anschutz certain fees and expenses in
connection with the definitive agreements and the transactions
contemplated thereby in certain circumstances. The Anschutz agreements
require the Company to pay to Anschutz a fee (called a subsequent event
fee) of up to $2,500,000, but not less than $1,000,000, upon the
occurrence of certain events prior to the second closing (or if the second
closing does not occur, by July 1996), such as a merger, consolidation or
other business combination between the Company and a person other than
Anschutz, or the acquisition by any other person of 40% or more of the
Forest common stock. The Company is also obligated in certain
circumstances to pay up to $500,000 of expenses incurred by Anschutz. In
the Anschutz agreements, the Company has agreed not to solicit proposals
for transactions that would require the Company to pay a subsequent event
fee and to keep Anschutz generally informed regarding the receipt and
disposition by the Company of proposals regarding such transactions made by
other persons.
The loan by Anschutz to the Company at the first closing is subject to,
among other things, approval by certain of the Company's creditors. The
transactions contemplated by the Anschutz agreements at the second closing,
the restructure of JEDI's existing loan and the transactions between
Anschutz and JEDI described above are also subject to, among other things,
the prior approval of Forest's shareholders and clearance under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
-6-
<PAGE>
The Company believes that short-term and long-term liquidity would be
significantly improved by the conclusion of the transactions described
above. Although the Company believes that the conditions to the closing of
the transactions can be satisfied, there can be no assurance that the
transactions will close on the dates referred to above, or at all.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto.
RESULTS OF OPERATIONS
NET LOSS
The net loss for the first three months of 1995 was $3,144,000 or $.13 per
common share compared to a net loss of $13,754,000 or $.51 per common share in
the first three months of 1994. The 1994 loss includes a charge of $13,990,000
relating to the change in the method of accounting for oil and gas sales from
the sales method to the entitlements method. See "Changes in Accounting."
Excluding the cumulative effects of the change in accounting principle, the
Company recorded net income of $236,000 for the first quarter 1994. Decreased
oil and natural gas volumes and lower natural gas prices in the first three
months of 1995 contributed to the 1995 loss.
REVENUE
The Company's oil and gas sales revenue decreased by 30% to $22,309,000 in
the first quarter of 1995 from $31,656,000 in the first quarter of 1994.
Production volumes for natural gas and oil in the first quarter of 1995
decreased 30% and 9%, respectively, from the comparable 1994 period due
primarily to normal, anticipated production declines as well as decreased well
performance in certain fields. The average sales price for natural gas in the
first quarter of 1995 was $1.80 per thousand cubic feet of natural gas (MCF), a
decrease of $.24 per MCF or 12% compared to the average sales price in the first
quarter of the previous year. The average sales price for oil in the first
quarter of 1995 of $15.79 per barrel represented an increase of $4.14 per barrel
or 36% compared to the average sales price in the same period of 1994.
Production volumes and weighted average sales prices during the periods
were as follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 31, March 31,
1995 1994
----------- -----------
(In Thousands)
<S> <C> <C>
Natural Gas
Production under long-term fixed
price contracts (MMCF) (1) 3,092 4,766
Average contract sales price (per
MCF) (1) $ 1.80 1.77
Production sold on the spot market
(MMCF) 6,205 8,503
Spot sales price received (per MCF) $ 1.51 2.26
Effects of energy swaps (per MCF) (2) .29 (.07)
-------- --------
Average spot sales price (per MCF) $ 1.80 2.19
Total production (MMCF) 9,297 13,269
Average sales price (per MCF) $ 1.80 2.04
Oil and condensate (3)
Total production (MBBLS) 349 383
Average sales price (per BBL) $ 15.79 11.65
<FN>
(1) Production under long-term fixed price contracts includes scheduled
deliveries under volumetric production payments, net of royalties. See
"Volumetric Production Payments" below.
(2) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuation. Hedged volumes were 3,948 MMCF and 2,546 MMCF
for the three months ended March 31, 1995 and 1994, respectively.
(3) Oil and condensate production is sold primarily on the spot market. An
immaterial amount of production is covered by long-term fixed price
contracts, including scheduled deliveries under volumetric production
payments.
</TABLE>
-8-
<PAGE>
Miscellaneous net revenue decreased to $52,000 in the first quarter of 1995
from $887,000 in the comparable 1994 quarter. The 1994 amount includes income
from the sale of miscellaneous pipeline systems and equipment.
EXPENSES
Oil and gas production expense decreased slightly to $5,309,000 in the
first quarter of 1995 from $5,328,000 in the comparable period of 1994.
Although there were decreases in variable components of oil and gas production
expense as a result of lower production volumes, such decreases were largely
offset by increases in fees paid by the Company to process gas from certain
offshore wells. On an MCFE basis (MCFE means thousands of cubic feet of natural
gas equivalents, using a conversion ratio of one barrel of oil to six MCF of
natural gas), production expense increased 38% in the first quarter of 1995 to
$.47 per MCFE from $.34 per MCFE in the first quarter of 1994. The increased
cost per MCFE is directly attributable to fixed components of oil and gas
production expense being allocated over a smaller production base.
General and administrative expense was $2,100,000 in the first quarter of
1995, a slight increase from $2,087,000 in the comparable period of 1994. Total
overhead costs (capitalized and expensed general and administrative costs) of
$3,743,000 in the first quarter of 1995 decreased 8% from $4,073,000 in the
comparable period of 1994. The Company's salaried workforce was 117 at March
31, 1995 and 134 at March 31, 1994. The decreases in total overhead costs and
personnel were due primarily to a reduction in the size of the Company's
workforce effective March 1, 1995.
The following table summarizes the total overhead costs incurred during the
periods.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 31, March 31,
1995 1994
--------- ---------
(In Thousands)
<S> <C> <C>
Overhead costs capitalized $ 1,643 1,986
General and administrative
costs expensed 2,100 2,087
------- -------
Total overhead costs $ 3,743 4,073
------- -------
------- -------
</TABLE>
Interest expense of $5,794,000 in the first quarter of 1995 decreased 13%
from $6,647,000 in 1994 due primarily to lower effective interest rates related
to the nonrecourse secured loan and the dollar denominated production payment.
Depreciation and depletion expense decreased 33% to $12,309,000 in the
first quarter of 1995 from $18,245,000 in the first quarter of 1994 because of
the decrease in production. The depletion rate per unit of production decreased
to $1.07 per MCFE in the first quarter of 1995 from $1.16 per MCFE in the
comparable 1994 period due to writedowns of the Company's oil and gas properties
taken in the third and fourth quarters of 1994. At March 31, 1995, the Company
had undeveloped properties with a cost basis of approximately $26,000,000 which
were excluded from depletion, compared to $43,000,000 at March 31, 1994. The
decrease is attributable to exploration and development work and, to a lesser
extent, lease expirations and property sales.
The Company was not required to record a writedown of the carrying value of
its oil and gas properties in the first three months of 1995 or 1994. As of
April 1, 1995 the Company was receiving average spot market prices of $1.59
per MCF and $17.25 per barrel.
-9-
<PAGE>
Based upon these prices, the Company would have been required to record a
writedown of its oil and gas properties at March 31, 1995. Due primarily to
subsequent increases in the prices of both natural gas and oil, however, the
Company was able to satisfy the ceiling test for the first quarter of 1995.
Spot prices being received in May 1995, which were incorporated into the ceiling
test computation, were $1.67 per MCF and $18.25 per barrel. Writedowns of the
full cost pool may be required, however, if prices decrease, estimated proved
reserve volumes are revised downward or costs incurred in exploration,
development, or acquisition activities exceed the discounted future net cash
flows from the additional reserves, if any.
As of December 31, 1993, there were no remaining deferred tax liabilities.
No tax benefits for operating loss carryforwards have been recorded in the first
quarter of 1995 or 1994.
CHANGES IN ACCOUNTING
The Company changed its method of accounting for oil and gas sales from the
sales method to the entitlements method effective January 1, 1994. Under the
sales method previously used by the Company, all proceeds from production
credited to the Company were recorded as revenue until such time as the Company
had produced its share of related reserves. Under the entitlements method,
revenue is recorded based upon the Company's share of volumes sold, regardless
of whether the Company has taken its proportionate share of volumes produced.
Under the entitlements method, the Company records a receivable or payable
to the extent it receives less or more than its proportionate share of the
related revenue. The Company believes that the entitlements method is
preferable because it allows for recognition of revenue based on the Company's
actual share of jointly owned production and provides a better matching of
revenue and related expenses.
The cumulative effect of the change for the periods through December 31,
1993, was a charge of $13,990,000. The effect of this change on the first
quarter of 1994 was an increase in earnings from operations of $1,473,000 and an
increase in production volumes of 633,000 MCF. There were no related income tax
effects in 1994. As the Company adopted this change in the fourth quarter of
1994, previously reported first quarter 1994 information has been restated to
reflect the change effective January 1, 1994.
LIQUIDITY AND CAPITAL RESOURCES
RECENT DEVELOPMENTS
On May 17, 1995, the Company signed definitive agreements with The Anschutz
Corporation (Anschutz) and with Joint Energy Development Investments Limited
Partnership (JEDI), a Delaware limited partnership the general partner of which
is an affiliate of Enron Corp., in each case as described below. The closing of
certain of the transactions contemplated by the definitive agreements is subject
to, among other things, shareholder approval and consent by certain of the
Company's creditors.
The Anschutz agreements contemplate that Anschutz will purchase 18,800,000
shares of the Company's common stock and shares of newly-issued preferred stock
that are convertible into 6,200,000 additional shares of common stock for a
total consideration of $45,000,000, or $1.80 per share. The preferred stock
will have a liquidation preference and will receive dividends ratably with the
common stock. In addition, Anschutz will also receive warrants to purchase
19,444,444 shares of the Company's common stock for $2.10 per share. The $2.10
warrants are exercisable during the first 18 months after the second closing,
subject to extension in certain circumstances to 36 months.
The investment will be made in two closings. In the first closing,
expected to occur in May 1995, Anschutz will loan the Company $9,900,000 for a
term of 9 months. The loan will bear interest at 8% per
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<PAGE>
annum for 16 weeks and at 12.5% per annum thereafter. The loan will be
nonrecourse to the Company and will be secured by oil and gas properties owned
by the Company, the preferred stock of Archean Energy Ltd. and a cash collateral
account with an initial balance of $2,000,000. The loan may be converted into
5,500,000 shares of Forest's common stock at Anschutz's election, but the loan
must be so converted at the second closing. At the second closing, expected to
occur in July 1995 following receipt of shareholder approval of the transactions
contemplated by the definitive agreements, Anschutz will purchase 13,300,000
shares of common stock and the convertible preferred stock. At the second
closing, Anschutz will also receive from JEDI an option to purchase from JEDI up
to 11,250,000 shares of Common Stock that JEDI may acquire from the Company upon
exercise of the $2.00 warrants referred to below. This option will terminate 36
months after the second closing, or earlier upon the conveyance by the Company
of certain property to JEDI in satisfaction of the restructured JEDI loan, as
described below.
In connection with this purchase, Anschutz will agree to certain voting,
acquisition, and transfer limitations regarding shares of common stock for five
years after the second closing, including (a) a limit on voting, subject to
certain exceptions, that would require Anschutz to vote all equity securities of
the Company owned by Anschutz having voting power in excess of an amount equal
to 19.99% of the aggregate voting power of the equity securities of the Company
then outstanding in the same proportion as all other equity securities of the
Company voted with respect to the matter (other than equity securities owned by
Anschutz) are voted, (b) a limit on the number of persons associated with
Anschutz that may at any time be elected as directors of the Company and (c) a
limit on the acquisition of additional shares of common stock by Anschutz
(whether pursuant to the conversion of the new preferred stock, the exercise of
the $2.10 warrants or the option received from JEDI, or otherwise), subject to
certain exceptions, that would prohibit any acquisition by Anschutz that would
result in Anschutz owning 40% or more of the shares of common stock then issued
and outstanding. While the foregoing limitations are in effect, Anschutz will
be entitled to a minority representation on the board of directors.
The JEDI agreements contemplate that, at the second closing referred to
above, Forest and JEDI will restructure JEDI's existing loan currently having a
principal balance on May 15, 1995 of approximately $62,061,000 before
unamortized discount of $4,485,000. JEDI will relinquish the net profits
interest that it holds in certain Forest properties and will reduce the interest
rate relating to the loan. As a result of the loan restructuring and the
issuance of the warrants described below, the Company anticipates a reduction
of the recorded amount of the related liability to approximately $45,000,000 and
a reduction of annual interest expense of approximately $2,000,000. Subject to
certain conditions, the Company may satisfy the restructured JEDI loan by
conveying to JEDI the properties securing the loan during a 30-day period
beginning 18 months after the second closing or, if the $2.10 warrants have
been extended, during a 30-day period beginning 36 months after the second
closing. Any such conveyance during the first 36 months after the second
closing must be approved by Anschutz, if the option from JEDI has not then been
exercised or terminated. Prior to the exercise or termination of the JEDI
option, JEDI has agreed that it will not assign all or any portion of the JEDI
loan or the $2.00 warrants to an unaffiliated person without the approval of the
Company. The Company has agreed to not give such approval without the consent
of Anschutz.
The JEDI agreements also contemplate that, at the second closing, JEDI will
receive warrants to purchase 11,250,000 shares of the Company's common stock for
$2.00 per share. The $2.00 warrants will expire on the earlier of December 31,
2002 or 36 months following exercise of the Company's option to convey
properties in satisfaction of the JEDI loan (the Conveyance Option). At the
second closing JEDI will grant a 36 month option to Anschutz to purchase from
JEDI up to 11,250,000 shares at a purchase price per share of $2.00 plus an
amount equal to the lesser of (a) 18% per annum from the second closing date to
the date of exercise of the option, or (b) $3.10. JEDI will satisfy its
obligations under the option to Anschutz by exercising the $2.00 warrants.
Provided the Conveyance Option has not been exercised the Company may terminate
the $2.00 warrants at any time beginning 36 months after the second closing if
the average closing price of the common stock for both the 90 day and 15 day
periods immediately preceding the termination is in excess of $2.50 per share.
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<PAGE>
The Company has agreed to use the proceeds from the exercise of the $2.00
warrants and the $2.10 warrants to repay principal and interest on the JEDI
loan.
The agreements require the Company to pay certain expenses incurred by
Anschutz and JEDI and to pay Anschutz certain fees and expenses in connection
with the definitive agreements and the transactions contemplated thereby in
certain circumstances. The Anschutz agreements require the Company to pay to
Anschutz a fee (called a subsequent event fee) of up to $2,500,000, but not
less than $1,000,000, upon the occurrence of certain events prior to the second
closing (or if the second closing does not occur, by July 1996), such as a
merger, consolidation or other business combination between the Company and a
person other than Anschutz, or the acquisition by any other person of 40% or
more of the Forest common stock. The Company is also obligated in certain
circumstances to pay up to $500,000 of expenses incurred by Anschutz. In the
Anschutz agreements, the Company has agreed not to solicit proposals for
transactions that would require the Company to pay a subsequent event fee and to
keep Anschutz generally informed regarding the receipt and disposition by the
Company of proposals regarding such transactions made by other persons.
The loan by Anschutz to the Company at the first closing is subject to,
among other things, approval by certain of the Company's creditors. The
transactions contemplated by the Anschutz agreements at the second closing, the
restructure of JEDI's existing loan and the transactions between Anschutz and
JEDI described above are also subject to, among other things, the prior approval
of Forest's shareholders and clearance under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.
The Company believes that short-term and long-term liquidity would be
significantly improved by the conclusion of the transactions described above.
Although the Company believes that the conditions to the closing of the
transactions can be satisfied, there can be no assurance that the transactions
will close on the dates referred to above, or at all.
SHORT-TERM LIQUIDITY
During 1994 and the first quarter of 1995, the Company's operating cash
flows and working capital were adversely affected by a severe industry-wide
decline in the price of natural gas. The prices the Company receives for its
future oil and natural gas production will significantly impact future operating
cash flows. No prediction can be made as to the prices the Company will receive
for its future oil and gas production.
Since December 31, 1994, the Company has taken steps and committed to
certain actions to address its short-term liquidity needs, including the recent
developments described above. Key short-term actions taken and committed to are
set forth below.
The Company has reduced its budgeted general and administrative
expenditures for 1995 principally through a workforce reduction effective March
1, 1995. As a result, total overhead for 1995 is expected to decrease by
approximately $4,000,000 compared to 1994 or by approximately 20%.
In response to current market conditions, the Company has reduced its
budgeted capital expenditures to those required to maintain its producing oil
and gas properties as well as certain essential development, drilling and other
activities . The Company's 1995 budgeted expenditures for exploration and
development for the remainder of 1995 are approximately $2,650,000 and
$10,200,000, respectively, including capitalized overhead of $250,000 and
$4,000,000, respectively. The planned levels of capital expenditures could be
further reduced if the Company experiences lower than anticipated net cash
provided by operations or other liquidity needs or could be increased if the
Company experiences increased cash flow.
The Company has a secured credit facility (the Credit Facility) with The
Chase Manhattan Bank, NA. (Chase) as agent for a group of banks. Under the
Credit Facility, the Company may borrow up to $17,500,000 for acquisition or
development of proved oil and gas reserves and up to $32,500,000 for working
capital and general corporate purposes, subject to semi-annual redetermination
at the banks'
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<PAGE>
discretion. The total borrowing capacity of the Company under the Credit
Facility is $50,000,000. In March 1995, the banks completed their most recent
semi-annual redetermination of the Credit Facility and advised the Company that
the maximum borrowing capacity would be maintained at $50,000,000. However, the
amount of the maximum borrowings under the Credit Facility is at the discretion
of the banks and is subject to change at any time.
The Credit Facility is secured by a lien on, and a security interest in, a
majority of the Company's proved oil and gas properties and related assets
(subject to prior security interests granted to holders of volumetric production
payment agreements), a pledge of accounts receivable, material contracts and the
stock of material subsidiaries, and a negative pledge on remaining assets. The
maturity date of the Credit Facility is December 31, 1996. Under the terms of
the Credit Facility, the Company is subject to certain covenants and financial
tests (which may from time to time restrict the Company's activities), including
restrictions or requirements with respect to working capital, net cash flow,
additional debt, asset sales, mergers, cash dividends on capital stock and
reporting responsibilities. At March 31, 1995 the outstanding balance under
this facility was $45,000,000. The Company has used the facility for a
$1,500,000 letter of credit, leaving an available borrowing capacity of
$3,500,000, which the Company intends to use to meet operating cash flow
requirements. At March 31, 1995 the Company did not satisfy the tests imposed
by the working capital, debt coverage ratio and interest coverage ratio
covenants of the Credit Facility; compliance with these covenants has been
waived by the banks through June 29, 1995. The Company currently anticipates
that it may not satisfy one or more of these tests during the remainder of 1995.
As a result, the $45,000,000 balance outstanding under the Credit Facility at
March 31, 1995 is included in current liabilities on the Company's balance
sheet.
Management believes that the working capital test can be satisfied upon the
occurrence of the first closing contemplated by the Anschutz agreements. The
proceeds of the second closing of the Anschutz transaction are expected to be
the same approximate amount as the outstanding balance under the Credit
Facility and will be used to retire such debt to the extent possible. The debt
coverage ratio and the interest coverage ratio, however, are calculated based
on cash flows, interest payments and debt service (as defined) for the
Company's two most recent fiscal quarters. The resulting decrease in interest
expense subsequent to the second closing may not be sufficient to ensure
compliance with the debt coverage and interest coverage ratios throughout the
remainder of 1995 unless cash flows increase substantially in excess of amounts
expected based on current market prices. Management expects to be able to reach
satisfactory agreement with the banks with respect to certain modifications to
the tests required by the terms of the Credit Facility after the Anschutz and
JEDI transactions are completed, such that further waivers with respect to
these tests would not be necessary.
On April 13, 1995 Forest sold to a bank a participation interest in
Forest's claim evidenced by that certain proof of claim dated March 16, 1992
filed by Forest on March 17, 1992 against Columbia Gas Transmission Corp.
(Transmission), a subsidiary of Columbia Gas System (CGS). The Company had two
natural gas sales contracts with Transmission. On July 31, 1991, CGS and
Transmission filed Chapter 11 bankruptcy petitions with the United States
Bankruptcy Court for the District of Delaware. Consideration received from the
bank consisted of a $4,000,000 nonrecourse loan, in exchange for which the bank
will receive, solely from the proceeds of the bankruptcy claim, an amount equal
to the loan principal plus accrued interest at 16.5% per annum plus 25% of the
excess, if any, of the proceeds over the loan principal and interest. The
Company may, under certain conditions, limit the overall cost of financing to
23.5% per annum by exercising its option to repurchase the bank's interest in
the bankruptcy claim prior to receipt of any proceeds of the claim. Proceeds
from this financing transaction will be used for working capital needs.
Based on the Company's actions taken to date and its plans, including the
recent developments described above, management believes the Company will have
adequate sources of short-term liquidity to meet its working capital needs, fund
capital expenditures at reduced levels, and meet its current debt service
obligations.
CASH FLOW
Historically, one of the Company's primary sources of capital has been
funds provided by operations, which has varied dramatically in prior periods,
depending upon factors such as natural gas contract settlements and price
fluctuations which are difficult to predict.
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<PAGE>
The following summary table reflects comparative cash flows for the Company
for the periods ended March 31, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 31, March 31,
1995 1994
--------- ---------
(In Thousands)
<S> <C> <C>
Funds provided by operations (A) $ 9,936 20,803
Net cash provided (used) by operating
activities (2,243) 1,411
Net cash used by investing activities (7,217) (3,357)
Net cash provided (used) by financing
activities 8,266 (4,362)
<FN>
(A) Funds provided by operations consists of net cash provided (used) by
operating activities exclusive of adjustments for working capital items and
amortization of deferred revenue.
</TABLE>
As discussed previously under "Results of Operations," the Company's
production volumes decreased significantly in the first quarter of 1995 compared
to the prior year. Lower production volumes coupled with decreased prices for
natural gas resulted in a 52% decrease in funds provided by operations to
$9,936,000 in the first quarter of 1995 from $20,803,000 in the first quarter
of 1994. The Company experienced a net use of cash for operating activities of
$2,243,000 in the first quarter of 1995 compared to $1,411,000 of net cash
provided by operating activities in the corresponding prior year period. The
Company used $7,217,000 for investing activities in the 1995 period compared
to $3,357,000 in the prior year period due to higher direct expenditures and
lower proceeds from property sales. The increase in cash due to financing
activities of $8,266,000 in the 1995 quarter was the result of drawdowns on
the Company's Credit Facility to fund operating and investing activities. In
the first quarter of 1994, the Company had a net use of cash for financing
activities of $4,362,000.
LONG-TERM LIQUIDITY
The Company has historically addressed its long-term liquidity needs
through the use of nonrecourse production-based financing and through issuance
of debt and common stock when market conditions permit.
On December 30, 1993, the Company entered into a nonrecourse secured loan
agreement with JEDI (the JEDI loan). The terms of the JEDI loan are
anticipated to be restructured based on the terms of certain agreements
described in "Recent Developments". For a further discussion of the JEDI loan,
see "Nonrecourse Secured Loan and Dollar-Denominated Production Payment" below.
This financing provided acquisition capital, and capital to execute Forest's
exploitation strategy.
Many of the factors which may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control, including,
but not limited to, oil and natural gas prices, governmental actions and taxes,
the availability and attractiveness of properties for acquisition, the adequacy
and attractiveness of financing and operational results. The Company continues
to examine alternative sources of long-term liquidity, including public and
private issuances of equity, refinancing debt with equity and sales of non-
strategic assets.
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<PAGE>
VOLUMETRIC PRODUCTION PAYMENTS
As of March 31, 1995, deferred revenue relating to production payments was
$29,289,000 and the annual amortization of deferred revenue and the
corresponding delivery and net sales volumes were as set forth below:
<TABLE>
<CAPTION>
Net sales volumes
Volumes required attributable to
to be delivered production payment
to Enron deliveries (1)
----------------- -------------------
Natural Natural
Annual amortization Oil Gas Oil Gas
of deferred revenue (MBBLS) (MMCF) (MBBLS) (MMCF)
------------------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Remainder of 1995 $ 14,152 127 7,432 106 6,115
1996 7,546 87 3,721 73 3,061
1997 2,439 - 1,410 - 1,160
1998 1,592 - 892 - 734
Thereafter 3,560 - 1,994 - 1,641
------ --- ------ --- ------
$ 29,289 214 15,449 179 12,711
------ --- ------ --- ------
------ --- ------ --- ------
<FN>
(1) Represents volumes required to be delivered to Enron net of estimated
royalty volumes.
</TABLE>
NONRECOURSE SECURED LOAN AND DOLLAR-DENOMINATED PRODUCTION PAYMENT
Under the terms of the JEDI loan and the dollar-denominated production
payment, the Company is required to make payments based on the net proceeds, as
defined, from certain subject properties. The terms of the JEDI loan are
anticipated to be restructured based on the terms of certain agreements
described in "Recent Developments."
The JEDI loan, which bears annual interest at the rate of 12.5%, was
recorded at a discounted amount to reflect the conveyance to the lender of a 20%
interest in the net profits, as defined, of properties located in south Texas.
At March 31, 1995, the principal amount of the loan was $62,101,000 and the
recorded liability was $57,641,000. Under the terms of the JEDI loan,
additional funds may be advanced to fund a portion of the development projects
which will be undertaken by the Company on the properties pledged as security
for the loan. Payments of principal and interest under the JEDI loan are due
monthly and are equal to 90% of total net operating income from the secured
properties, reduced by 80% of allowable capital expenditures, as defined.
The Company's current estimate, based on expected production and prices,
budgeted capital expenditure levels and expected discount amortization, is that
the recorded liability will increase by approximately $1,147,000 during the
remainder of 1995. Under the provisions of the JEDI loan, however, the Company
is required to make periodic principal payments, beginning in February 1996, if
the outstanding balance of the loan exceeds specified balances and the cash flow
(as defined) from the mortgaged properties is less than specified minimums.
Based upon current projections, the Company anticipates that these provisions
will require a significant principal payment in February 1996 to avoid an event
of default. Payments, if any, under the net profits conveyance will commence
upon repayment of the principal amount of the JEDI loan and will cease when the
lender has received an internal rate of return, as defined, of 18% (15.25%
through December 31, 1995). As described above, the Company has signed certain
agreements which anticipate the restructure of the JEDI loan.
The dollar-denominated production payment was entered into in 1992 to
finance property acquisitions. The original amount of the dollar-denominated
production payment was $37,550,000, which was recorded as a liability of
$28,805,000 after a discount to reflect a market rate of interest. At March 31,
1995 the remaining principal amount was $22,659,000 and the recorded liability
was $17,904,000. Under the terms of this production payment, the Company must
make a monthly cash payment which is the greater of a base amount or 85% of the
net proceeds from the subject properties, as
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<PAGE>
defined, except that the amount required to be paid in any given month shall not
exceed 100% of the net proceeds from the subject properties. Forest retains a
management fee equal to 10% of sales from the properties, which is deducted in
the calculation of net proceeds. The Company's current estimate, based on
expected production and prices, budgeted capital expenditure levels and expected
discount amortization, is that the remaining 1995 payments will reduce the
recorded liability by approximately $1,255,000.
HEDGING PROGRAM
In addition to the volumes of natural gas and oil dedicated to volumetric
production payments, the Company has also used energy swaps and other financial
agreements to hedge against the effects of fluctuations in the sales prices for
oil and natural gas. In a typical swap agreement, the Company receives the
difference between a fixed price per unit of production and a price based on an
agreed upon third-party index if the index price is lower. If the index price
is higher, the Company pays the difference. The Company's current swaps are
settled on a monthly basis. At March 31, 1995, the Company had natural gas
swaps and collars for an aggregate of approximately 25.0 BBTU (billion British
Thermal Units) per day of natural gas during the remainder of 1995 at fixed
prices and floors (NYMEX basis) ranging from $1.90 to $2.41 per MMBTU (million
British Thermal Units) and an aggregate of approximately 16.7 BBTU per day of
natural gas during 1996 at fixed prices and floors ranging from $2.00 to $2.48
per MMBTU. At March 31, 1995, the Company had oil swaps for an aggregate of
approximately 1,400 barrels per day of oil during the remainder of 1995 at fixed
prices ranging from $16.70 to $18.90 (NYMEX basis) and an aggregate of
approximately 1,100 barrels per day of oil during 1996 at fixed prices ranging
from $16.70 to $17.75 per barrel.
OPTION AGREEMENT
In 1993, under another agreement (the Option Agreement), the Company paid a
premium of $516,000 in conjunction with the closing of the JEDI loan agreement.
The payment of this premium gave Forest the right to set a floor price of $1.70
per MMBTU on a total of 18,400 BTU of natural gas over a five year period
commencing January 1, 1995. In order to exercise this right to set a floor, the
Company must pay an additional premium of 10 cents per MMBTU, effectively
setting the floor at $1.60 per MMBTU. The option agreement is broken into five
calendar year periods with the option for each calendar year expiring four
trading days prior to the last trading day for the January NYMEX contract for
that year. The Company was able to sell its 1995 option, covering approximately
4,300 BBTU, for $25,000 a few days prior to expiration when the 1995 swap price
was approximately $1.73 per MMBTU. The options for calendar years 1996 through
1999 remain in place.
SUMMARY OF CASH FLOW CONSIDERATIONS AND EXPOSURE TO PRICE AND RESERVE RISK
Pursuant to certain of the Company's financing arrangements, significant
amounts of production are contractually dedicated to production payments and the
repayment of nonrecourse debt over the next five years (dedicated volumes). The
dedicated volumes decrease over the next five years and also decrease as a
percentage of the Company's total production during this period. The production
volumes not contractually dedicated to repayment of nonrecourse debt
(undedicated volumes) are relatively stable but increase as a percentage of the
Company's total production over the next five years. This relative stability of
undedicated volumes is due to the fact that the decrease in dedicated volumes
corresponds generally to the Company's estimates of the decrease in its total
production. In the Company's opinion, the relative stability of undedicated
volumes should provide a more constant level of cash flow available for
corporate purposes other than debt repayment.
As a result of volumetric production payments, energy swaps, and fixed
contracts, the Company currently estimates that approximately 60% of its natural
gas production and 57% of its oil production will not be subject to price
fluctuations from April 1995 through December 1995. It is estimated that
existing volumetric production payments, energy swaps, collars and fixed
contracts currently cover approximately 44% (including the option to purchase
the $1.70 floor described above) of the Company's natural gas production and 23%
of its oil production for the year ending December 31, 1996. Currently, it is
the Company's intention to commit no more than 75% of its anticipated total
production and no more than
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<PAGE>
85% of its anticipated undedicated production to such arrangements at any point
in time. See "Hedging Program" above.
CAPITAL EXPENDITURES
The Company's expenditures for property acquisition, exploration and
development for the first three months of 1995 and 1994, including overhead
related to these activities which was capitalized, were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
Property acquisition costs:
Proved properties $ 51 1,227
Undeveloped properties - -
------- -------
51 1,227
Exploration costs:
Direct costs 3,254 (132)
Overhead capitalized 98 183
------- -------
3,352 51
Development costs:
Direct costs 2,084 2,522
Overhead capitalized 1,545 1,803
------- -------
3,629 4,325
------- -------
$ 7,032 5,603
------- -------
------- -------
</TABLE>
In response to current market conditions, the Company has reduced its
budgeted capital expenditures to those required to maintain its producing oil
and gas properties as well as certain essential development, drilling and other
activities . The Company's 1995 budgeted expenditures for exploration and
development for the remainder of 1995 are approximately $2,650,000 and
$10,200,000, respectively, including capitalized overhead of $250,000 and
$4,000,000, respectively. The planned levels of capital expenditures could be
further reduced if the Company experiences lower than anticipated net cash
provided by operations or other liquidity needs or could be increased if the
Company experiences increased cash flow.
During 1995, the Company intends to continue its strategy of acquiring
reserves that meet its investment criteria; however, no assurance can be given
that the Company can locate or finance any property acquisitions. In order to
finance future acquisitions, the Company is exploring many options including,
but not limited to: a variety of debt instruments; sale of production payments
or other nonrecourse financing; the issuance of net profits interests; sales of
non-strategic properties, prospects and technical information; or joint venture
financing. Availability of these sources of capital and, therefore, the
Company's ability to execute its operating strategy will depend upon a number of
factors, some of which are beyond the control of the Company. If adequate
sources of liquidity are not available to the Company in 1995, the amount
invested in exploration, development and reserve acquisitions may be reduced due
principally to the desire of the Company to protect its capital in the event of
inadequate liquidity.
DIVIDENDS
On February 1, 1995, a cash dividend of $.1875 on its $.75 Convertible
Preferred Stock was paid to holders of record on January 10, 1995. On February
23, 1995 the Board of Directors declared a dividend of 0.094693 shares of Common
Stock on each share of its outstanding $.75 Convertible Preferred Stock, payable
May 1, 1995 to holders of record on April 10, 1995. The Company is currently
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<PAGE>
prohibited from paying cash dividends on its $.75 Convertible Preferred Stock
due to restrictions contained in the Credit Agreement with its lending banks.
The Indenture executed in connection with the 11 1/4% Senior Subordinated Notes
due 2003 and the Credit Facility contain restrictive provisions governing
dividend payments.
GAS BALANCING
It is customary in the industry for various working interest partners to
produce more or less than their entitlement share of natural gas from time to
time. The Company's net overproduced position decreased in the first three
months of 1995 to approximately 8.2 BCF from approximately 8.4 BCF at December
31, 1994. At March 31, 1995 the undiscounted value of this imbalance is
approximately $13,677,000, of which $5,000,000 is reflected on the balance sheet
as a short-term liability and the remaining $8,677,000 is reflected on the
balance sheet as a long-term liability. In the absence of a gas balancing
agreement, the Company is unable to determine when its partners may choose to
make up their share of production. If and when the Company's partners do make
up their share of production, the Company's deliverable natural gas volumes
could decrease, adversely affecting cash flow.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*Exhibit 4.1 Amendment No. 4 dated as of April 13, 1995 to the Credit
Agreement dated as of December 1, 1993 between Forest Oil Corporation and The
Chase Manhattan Bank (National Association), as agent.
Exhibit 10.1 Description of Employee Overriding Royalty Bonuses, incorporated
herein by reference to Exhibit 10.1 to Form 10-K for Forest Oil Corporation for
the year ended December 31, 1990 (File No. 0-4597).
Exhibit 10.2 Description of Executive Life Insurance Plan, incorporated herein
by reference to Exhibit 10.2 to Form 10-K for Forest Oil Corporation for the
year ended December 31, 1991 (File No. 0-4597).
Exhibit 10.3 Form of non-qualified Executive Deferred Compensation Plan (File
No. 0-4597), incorporated herein by reference to Exhibit 10.3 to Form 10-Q for
Forest Oil Corporation for the quarter ended June 30, 1994 (File No. 0-4597).
Exhibit 10.4 Form of non-qualified Supplemental Executive Retirement Plan,
incorporated herein by reference to Exhibit 10.4 to Form 10-K for Forest Oil
Corporation for the year ended December 31, 1990 (File No. 0-4597).
Exhibit 10.5 Form of Executive Retirement Agreement, incorporated herein by
reference to Exhibit 10.5 to Form 10-K for Forest Oil Corporation for the year
ended December 31, 1990 (File No. 0-4597).
Exhibit 10.6 Forest Oil Corporation 1992 Stock Option Plan and Option
Agreement, incorporated herein by reference to Exhibit 10.7 to Form 10-K for
Forest Oil Corporation for the year ended December 31, 1991 (File No. 0-4597).
Exhibit 10.7 Letter Agreement with Richard B. Dorn relating to a revision to
Exhibit 10.5 hereof, incorporated herein by reference to Exhibit 10.11 to Form
10-K for Forest Oil Corporation for the year ended December 31, 1991 (File No.
0-4597).
Exhibit 10.8 Forest Oil Corporation Annual Incentive Plan effective as of
January 1, 1992, incorporated herein by reference to Exhibit 10.8 to Form 10-K
for Forest Oil Corporation for the year ended December 31, 1992 (File No. 0-
4597).
Exhibit 10.9 Form of Executive Severance Agreement, incorporated herein by
reference to Exhibit 10.9 to Form 10-K for Forest Oil Corporation for the year
ended December 31, 1993 (File No. 0-4597).
Exhibit 10.10 Form of Settlement Agreement and General Release between John F.
Dorn and Forest Oil Corporation dated March 7, 1994, incorporated herein by
reference to Exhibit 10.10 to Form 10-K for Forest Oil Corporation for the year
ended December 31, 1993 (File No. 0-4597).
*Exhibit 11 Forest Oil Corporation and Subsidiaries - Calculation of Earnings
per Share of Common Stock.
*Exhibit 27 Financial Data Schedule.
* Filed with this report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Forest during the quarter for which
this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOREST OIL CORPORATION
(Registrant)
Date: May 22, 1995 /s/ Daniel L. McNamara
----------------------------------------
Daniel L. McNamara
Corporate Counsel and Secretary
(Signed on behalf of the registrant)
/s/ David H. Keyte
---------------------------------------
David H. Keyte
Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
<PAGE>
Exhibit 4.1
AMENDMENT NO. 4
AMENDMENT NO. 4 dated as of April 13, 1995, between FOREST OIL
CORPORATION, a corporation duly and validly existing under the laws of the State
of New York (the "Company"); each of the lenders that is a signatory hereto
(individually, a "Bank" and, collectively, the "Banks"); and THE CHASE MANHATTAN
BANK (NATIONAL ASSOCIATION), a national banking association, as agent for the
Banks (in such capacity, together with its successors in such capacity, the
"Agent").
The Company, the Banks and the Agent are parties to a Credit Agreement
dated as of December 1, 1993, as amended by Amendment No. 1 dated as of December
28, 1993, Amendment No. 2 dated as of January 27, 1994 and Amendment No. 3 dated
as of June 3, 1994 (as amended, the "Credit Agreement"), providing, subject to
the terms and conditions thereof, for loans to be made by said Banks to the
Company in an aggregate principal amount not exceeding $50,000,000. The
Company, the Banks and the Agent wish to amend the Credit Agreement to provide
that the Company may incur Indebtedness pursuant to the Participation Agreement
(as defined in Section 2 hereof) and to amend the Credit Agreement in certain
other respects, and accordingly, the parties hereto hereby agree as follows:
Section 1. Definitions. Except as otherwise defined in this
Amendment No. 4, terms defined in the Credit Agreement and are used herein as
defined therein.
Section 2. Amendments. Subject to the satisfaction of the conditions
precedent specified in Section 4 below, but effective as of the date hereof, the
Credit Agreement shall be amended as follows:
A. The following definitions shall be added in alphabetical order in
Section 1.01 of the Credit Agreement:
"Amendment No. 4" shall mean Amendment No. 4 to this Agreement dated
as of April 13, 1995.
"First Chicago" shall mean The First National Bank of Chicago, a
national banking association.
"First Chicago Collateral" shall mean the "Claim" and "Distributions"
each as defined in the Participation Agreement on the date of Amendment No. 4.
"Participation Agreement" shall mean the Participation Agreement dated
as of April 13, 1995 between the Company and First Chicago, as the same shall be
amended, modified and supplemented and in effect from time to time.
B. Section 10(b) of the Credit Agreement shall be amended by
deleting the proviso at the end of such Section and replacing it as follows:
";provided that (i) a default under the JEDI Agreement shall not be an
Event of Default under this Section 10(b) unless such a default has
occurred and a claim is made against the Company by or through the JEDI
Lender
<PAGE>
seeking any recourse against the Company other than with respect to the
Company's interest in the JEDI Collateral and (ii) a default under the
Participation Agreement shall not be an Event of Default under this Section
10(b) unless such a default has occurred and a claim is made against the
Company by or through First Chicago seeking recourse against the Company
other than with respect to the Company's interest in the First Chicago
Collateral."
Section 3. Representations and Warranties. The Company represents
and warrants to the Agent and the Banks that the representations and warranties
set forth in Section 8 of the Credit Agreement are true and complete on the date
hereof as if made on and as of the date hereof and as if each reference in said
Section 8 to "this Agreement" included reference to this Amendment No. 4.
Section 4. Conditions Precedent. As provided in Section 2 above, the
amendments to the Credit Agreement set forth in said Section 2 shall become
effective, as of the date hereof, upon the satisfaction of the following
conditions precedent:
A. Execution by All Parties. This Amendment No. 4 shall have been
executed and delivered by each of the parties hereto.
B. Documents. The Agent shall have received the following documents,
each of which shall be satisfactory to the Agent in form and substance:
(1) Corporate Documents. The following documents, each
certified as indicated below:
(a) a certificate of the Secretary or an Assistant
Secretary of the Company, dated as of a recent date and certifying (i)
that the by-laws of the Company have not been amended since the date
of the certification thereto delivered pursuant to Section 7.01 of the
Credit Agreement, (ii) that the charter of the Company has not been
amended since the date of the certification thereto furnished pursuant
to Section 7.01 of the Credit Agreement and (iii) as to the incumbency
and specimen signature of the officer of the Company executing this
Amendment; and
(b) a certificate of another officer of the Company as to
the incumbency and specimen signature of the Secretary or such
Assistant Secretary of the Company, and a corresponding certificate of
another officer of the Company as to its signing officers.
(2) Opinion of Counsel to the Company. An opinion of Daniel McNamara,
Counsel of each of the Obligors, confirming the opinion set forth in
paragraphs 1 through 5 of Exhibit C of the Credit Agreement, except that
references to the Credit Agreement shall be to the Credit Agreement as
amended by this Amendment No. 4 (and each Obligor hereby instructs such
counsel to deliver such opinion to the Banks and the Agent).
<PAGE>
(3) Participation Agreement. Copies of each document delivered by, on
behalf of or at the request of the Company or First Chicago in connection
with the Participation Agreement.
(4) Other Documents. Such other documents as the Agent or any Bank or
special counsel to the Agent may reasonably request.
Section 5. Consent. Each of the Lenders hereby consents to (i) the
classification of the Indebtedness of the Company under the Participation
Agreement as "Non-Recourse Debt" and (ii) the release by the Agent of the First
Chicago Collateral from the Lien of the Security Agreement.
Section 6. Miscellaneous. Except as herein provided, the Credit
Agreement shall remain unchanged and in full force and effect. This Amendment
No. 4 may be executed in any number of counterparts, all of which taken together
shall constitute one and the same amendatory instrument and any of the parties
hereto may execute this Amendment No. 4 by signing any such counterpart. This
Amendment No. 4 shall be governed by, and construed in accordance with, the law
of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
4 to be duly executed and delivered as of the day and year first above written.
FOREST OIL CORPORATION
By _________________________
Title:
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION)
By_________________________
Title:
CHRISTIANA BANK
(NEW YORK BRANCH)
By:_________________________
Name:
Title:
THE FIRST NATIONAL BANK
OF BOSTON
By:_________________________
Name:
Title:
<PAGE>
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION), as Agent
By_________________________
Title:
<PAGE>
FOREST OIL CORPORATION EXHIBIT 11
Calculation of Loss Per Share of Common Stock
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 31, March 31,
1995 1994
(In Thousands Except Per Share Amounts)
<S> <C> <C>
PRIMARY LOSS PER SHARE:
Net loss $ (3,144) (13,754)
Less dividend requirements on:
$.75 Convertible Preferred Stock (540) (540)
-------- --------
Net loss attributable to common stock
for primary loss per share calculation $ (3,684) (14,294)
-------- --------
-------- --------
Weighted average number of common
shares outstanding 28,233 28,008
-------- --------
-------- --------
Primary loss per share of common stock $ (.13) (.51)
-------- --------
-------- --------
FULLY DILUTED LOSS PER SHARE:
Net loss attributable to common stock, as above $ (3,684) (14,294)
Add:
Dividend requirements on:
$.75 Convertible Preferred Stock 540 540
-------- --------
Loss applicable to fully diluted calculation $ (3,144) (13,754)
-------- --------
-------- --------
Common shares applicable to fully diluted calculation:
Weighted average number of common
shares outstanding, as above 28,233 28,008
Add:
Weighted average number of shares issuable
upon assumed conversion of Convertible
Preferred Stock 10,083 10,083
-------- --------
Common shares applicable to fully diluted calculation 38,316 38,091
-------- --------
-------- --------
Fully diluted loss per share* $ (.08) (.36)
-------- --------
-------- --------
<FN>
*The fully diluted loss per share is not presented in the Company's financial
statements because the effects of assumed exercises and conversions were
anti-dilutive.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheets and condensed consolidated statements of
income on pages 1 and 2 of the Company's Form 10-Q for the quarterly period
ending March 31, 1995, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 1,676
<SECURITIES> 0
<RECEIVABLES> 15,164
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,066
<PP&E> 1,191,582
<DEPRECIATION> 920,243
<TOTAL-ASSETS> 314,093
<CURRENT-LIABILITIES> 81,642
<BONDS> 172,531
<COMMON> 2,829
0
15,845
<OTHER-SE> (16,132)
<TOTAL-LIABILITY-AND-EQUITY> 314,093
<SALES> 22,309
<TOTAL-REVENUES> 22,361
<CGS> 5,309
<TOTAL-COSTS> 7,409
<OTHER-EXPENSES> 12,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,794
<INCOME-PRETAX> (3,151)
<INCOME-TAX> (7)
<INCOME-CONTINUING> (3,144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,144)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
