<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
FOREST OIL CORPORATION
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/x/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
FOREST OIL CORPORATION
950 SEVENTEENTH STREET
1500 COLORADO NATIONAL BUILDING
DENVER, CO 80202
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JULY 26, 1995
------------------------
To the Shareholders of
FOREST OIL CORPORATION:
As a shareholder of Forest Oil Corporation, a New York corporation (the
"Company"), you are invited to be present in person or to be represented by
proxy at the Annual Meeting of Shareholders, to be held at the Petroleum Club of
Denver, 555 17th Street, Suite 3700, Denver, Colorado, on Wednesday, July 26,
1995, at 10:00 a.m., M.D.T., for the following purposes:
1. Elect two (2) Class I Directors;
2. Approve the transactions between the Company and The Anschutz
Corporation ("Anschutz") and Joint Energy Development Investments
Limited Partnership ("JEDI"), respectively, contemplated by agreements
between the Company and Anschutz and JEDI, respectively;
3. Amend the Company's Restated Certificate of Incorporation to increase
the number of authorized shares of Common Stock, Par Value $.10 Per
Share, by 88,000,000 to a total of 200,000,000;
4. Consider and vote upon the ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors for the Company for the fiscal year
ending December 31, 1995; and
5. Transact such other business as may be properly brought before the
meeting and any adjournments thereof.
Shareholders of the Company of record at the close of business on June 7,
1995 are entitled to vote at the meeting and all adjournments thereof.
A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK OF THE COMPANY MUST BE
REPRESENTED AT THE MEETING TO CONSTITUTE A QUORUM. THEREFORE, ALL SHAREHOLDERS
ARE URGED EITHER TO ATTEND THE MEETING OR TO BE REPRESENTED BY PROXY. IF A
QUORUM IS NOT PRESENT AT THE MEETING, A VOTE FOR ADJOURNMENT WILL BE TAKEN AMONG
THE SHAREHOLDERS PRESENT OR REPRESENTED BY PROXY. IF A MAJORITY OF THE
SHAREHOLDERS PRESENT OR REPRESENTED BY PROXY VOTE FOR ADJOURNMENT, IT IS THE
COMPANY'S INTENTION TO ADJOURN THE MEETING UNTIL A LATER DATE AND TO VOTE
PROXIES RECEIVED AT SUCH ADJOURNED MEETING(S).
IF YOU DO NOT EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE COMPLETE, SIGN,
DATE AND RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED BUSINESS REPLY
ENVELOPE. If you later find that you can be present or for any other reason
desire to revoke your proxy, you may do so at any time before the voting.
By order of the Board of Directors
DANIEL L. McNAMARA
SECRETARY
July 10, 1995
<PAGE>
PROXY STATEMENT
OF
FOREST OIL CORPORATION
950 SEVENTEENTH STREET
1500 COLORADO NATIONAL BUILDING
DENVER, COLORADO 80202
July 10, 1995
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors (the "Board of Directors") of Forest Oil Corporation (the
"Company") of proxies to be voted at the Annual Meeting of Shareholders (the
"Annual Meeting") to be held on Wednesday, July 26, 1995, at the Petroleum Club
of Denver, 555 17th Street, Suite 3700, Denver, Colorado, at 10:00 a.m., M.D.T.,
and at any adjournment thereof. Each holder of record at the close of business
on June 7, 1995 of shares of the Company's Common Stock, Par Value $.10 Per
Share (the "Common Stock"), will be entitled to one vote for each share so held.
As of May 31, 1995, there were 28,558,448 shares of Common Stock issued and
outstanding.
Shares represented by properly executed proxy cards received by the Company
at or prior to the Annual Meeting will be voted according to the instructions
indicated on the proxy card. Unless contrary instructions are given, the persons
named on the proxy card intend to vote the shares so represented for (i) the
election of the nominees for directors, (ii) the transactions between the
Company and The Anschutz Corporation ("Anschutz") and Joint Energy Development
Investments Limited Partnership ("JEDI"), respectively, contemplated by
agreements between the Company and Anschutz and JEDI, respectively
(collectively, the "Transactions"), (iii) the amendment of the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of Common Stock by 88,000,000 to a total of 200,000,000, and (iv) the
ratification of the appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the fiscal year ending December 31, 1995. As to any
other business which may properly come before the meeting, the persons named on
the proxy card will vote according to their judgment. The enclosed proxy may be
revoked prior to the meeting by written notice to the Secretary of the Company
at 950 Seventeenth Street, 1500 Colorado National Building, Denver, Colorado
80202, or by written or oral notice to the Secretary at the Annual Meeting at
any time prior to being voted. This Proxy Statement and the Proxy Card enclosed
herewith were first sent to Shareholders of the Company on or about July 10,
1995.
If a quorum is not present at the meeting, a vote for adjournment will be
taken among the shareholders present or represented by proxy. If a majority of
the shareholders present or represented by proxy vote for adjournment, it is the
Company's intention to adjourn the meeting until a later date and to vote
proxies received at such adjourned meeting(s).
Under the law of New York, the Company's state of incorporation, "votes
cast" at a meeting of shareholders by the holders of shares entitled to vote are
determinative of the outcome of the matter subject to vote. Abstentions and
broker non-votes will not be considered "votes cast" based on the Company's
understanding of state law requirements. A "broker non-vote" occurs if a broker
or other nominee does not have discretionary authority and has not received
instructions with respect to a particular item. Shareholders may not cumulate
their votes.
THE ANSCHUTZ AND JEDI TRANSACTIONS
At the Annual Meeting, the Company's shareholders will be asked to approve
the Anschutz and JEDI Transactions described under "The Anschutz and JEDI
Transactions". Several important factors should be considered by the
shareholders with respect to the Transactions:
SUMMARY OF TRANSACTIONS:
- Pursuant to the Transactions, the Company will issue to Anschutz an
aggregate of 18,800,000 shares of Common Stock and 620,000 shares of
Second Series Preferred Stock ("New Convertible Preferred Stock") that are
convertible into an aggregate of 6,200,000 additional shares of
1
<PAGE>
Common Stock. In addition, Anschutz will acquire an option from JEDI and
warrants from the Company to acquire an aggregate of up to 30,694,444
shares of Common Stock. See "The Anschutz and JEDI Transactions -- The
Transactions" and "-- Description of Securities to be Issued."
Therefore, based on the number of shares outstanding on May 31, 1995,
pursuant to the Transactions Anschutz will acquire approximately 40% of
the Common Stock and will have the ability, subject to a 40% ownership
limitation, to acquire up to approximately 66% of the Common Stock.
Comparatively, based on such share ownership by Anschutz, the percentage
ownership of the Company's current shareholders will be reduced to
approximately 60% initially, with the potential to be further reduced to
approximately 34%. The 40% ownership limitation terminates in five years
and is not applicable to acquisitions of shares approved by the Board of
Directors, including a majority of independent directors, acquisitions
following certain business combinations or tender offers, or acquisitions
made after a third party acquires a greater number of shares than that
held by Anschutz and its affiliates, or subject to acquisition by them.
See "The Anschutz and JEDI Transactions -- Shareholders Agreement".
- Of the 18,800,000 shares of Common Stock to be acquired pursuant to the
Transactions, Anschutz will acquire 5,500,000 shares of Common Stock
pursuant to the automatic conversion at the second closing of the Anschutz
Transaction of a $9,900,000 promissory note issued by the Company, or an
effective price of $1.80 per share. In addition, Anschutz will invest an
additional $35,100,000 in cash at the second closing and will acquire the
remaining 13,300,000 shares of Common Stock (at a price of $1.80 per
share), 620,000 shares of New Convertible Preferred Stock (at a price of
$18.00 per share), and an option from JEDI and warrants from the Company
to acquire up to 30,694,444 additional shares of Common Stock. The last
reported sales price of the Common Stock on the Nasdaq National Market was
$1 1/2 on April 17, 1995, the last trading day prior to the public
announcement of the signing by the Company of letters of intent with
respect to the Transactions, and was $2.00 on July 6, 1995. In between
such dates such price ranged from a high of $2 5/16 to a low of $1 1/2.
See "The Anschutz and JEDI Transactions -- The Transactions" and "--
Description of Securities to be Issued."
- Pursuant to the Transactions, Anschutz will acquire approximately 40% of
the then outstanding Common Stock. Subject to the 40% ownership
limitation, and in any event after five years, Anschutz could acquire an
additional 6,200,000 shares of Common Stock by converting the New
Convertible Preferred Stock. In addition, on the date of the second
closing of the Anschutz Transaction, subject to the 40% limitation,
Anschutz will have the right to acquire an additional 30,694,444 shares of
Common Stock (19,444,444 shares by the exercise of warrants at a price of
$2.10 per share and 11,250,000 shares by exercise of an option from JEDI
at an initial exercise price of $2.00 per share) for an aggregate cash
consideration of $63,333,332 to the Company. Therefore, subject to the 40%
ownership limitation, based on the number of shares outstanding on May 31,
1995, Anschutz could acquire up to an aggregate of approximately 66% of
Common Stock for an aggregate cash consideration of $108,333,332 to the
Company. See "The Anschutz and JEDI Transactions -- The Transactions" and
"-- Description of Securities to be Issued."
ADVANTAGES AND DISADVANTAGES OF THE TRANSACTIONS:
- The Anschutz and JEDI Transactions have several advantages to the Company
and its shareholders, including providing the Company with additional
equity capital, short-term liquidity, reduced leverage, lower interest
expense and a strategic alliance with Anschutz, an experienced oil and gas
investor. See "The Anschutz and JEDI Transactions -- Background."
____-_ Anschutz will be required 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
2
<PAGE>
equity securities of the Company voted with respect to the matter (other
than equity securities owned by Anschutz) are voted. Such limitations are
not applicable in all situations. For example, Anschutz is allowed to
vote its shares with respect to all matters with respect to which
Anschutz may have liability under Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Such right could
give Anschutz a veto power over certain transactions between the Company
and third parties such as a merger which requires the approval of the
holders of two-thirds of the outstanding Common Stock. See "The Anschutz
and JEDI Transactions -- Shareholders Agreement."
____-_ It is unlikely that control of the Company could be transferred to a
third party without Anschutz's consent and agreement. It is also unlikely
that a third party would offer to pay a premium to acquire the Company
without the prior agreement of Anschutz, even if the Board of Directors
should choose to attempt to sell the Company in the future. It will also
be unlikely that the Company will be able to enter into a transaction
accounted for as a pooling of interests in the next two years. Finally,
the 40% ownership limitation on Anschutz's ownership terminates after
five years and earlier under certain circumstances. Under these
circumstances, based on the number of shares outstanding on May 31, 1995,
Anschutz would have the ability on and after the second closing of the
Anschutz Transaction to acquire up to approximately 66% of the Common
Stock by converting its New Convertible Preferred Stock and exercising
during their respective terms its option and warrants for additional
proceeds to the Company of $63,333,332. Therefore, upon termination of
the 40% limitation, Anschutz may have effective control over the Company.
See "The Anschutz and JEDI Transactions -- Shareholders Agreement."
- If the Transactions are not approved by the shareholders, the Company will
be required to bear its expenses in connection with the Transactions,
including the fees payable to its financial advisor, which are estimated
to be approximately $2,750,000 in the aggregate. In addition, the Company
is obligated under certain circumstances to pay up to $500,000 to Anschutz
to reimburse it if the Anschutz Transaction is not consummated. If the
Anschutz Transaction is not consummated on or before May 17, 1996, and (a)
a third party (other than Anschutz) acquires 40% of the outstanding Common
Stock, (b) the Board of Directors withdraws its recommendation with
respect to the Anschutz Transaction or recommends an alternative
transaction, or (c) the Company enters into an agreement with respect to
an alternative transaction, the Company would be obligated to pay a
Subsequent Event Fee of a minimum of $1,000,000 up to a maximum of
$2,500,000. See "The Anschutz and JEDI Transactions -- The Transaction."
- If the Anschutz and JEDI Transactions are not consummated, the Company
will be faced with several problems for which it will need to seek
immediate solutions, including a loss of liquidity and the ability to
repay its current indebtedness, which includes a $9,900,000 promissory
note issued to Anschutz. One of the solutions considered by the Company
has been the sale of certain non-strategic assets, primarily the Company's
investment in certain Canadian assets. The Company has estimated that if
it were required to sell such assets in a short time period, such sales
could result in a discount of approximately $3 - 5 million from the book
value of such assets of approximately $13 million. Factors considered in
determining such estimate include the Company's estimate of the underlying
reserves attributable to such assets and the discounted present value of
cash flows from the Company's investment. See "The Anschutz and JEDI
Transactions -- Background."
3
<PAGE>
ELECTION OF DIRECTORS
The Company's By-laws currently provide that the Board of Directors shall be
divided into four classes as nearly equal in number as possible, with each class
having not less than three members, whose terms of office expire at different
times in annual succession. Currently the number of directors is fixed at 12. If
the transaction with Anschutz is approved by the shareholders at the Annual
Meeting, then Austin M. Beutner, John C. Dorn, Harold D. Hammar and Jeffrey W.
Miller will resign as directors and the Board of Directors will appoint Philip
F. Anschutz as a Class I director, Drake S. Tempest as a Class II director and
Craig D. Slater as a Class IV director, respectively, pursuant to the
Shareholders' Agreement with Anschutz. If the transactions with Anschutz are
approved, the size of the Board will be reduced to 10 members. The reduction
will be effected by the amendment of the Company's By-Laws by the Board of
Directors. In addition, such By-Law amendment will reduce the minimum number of
directors in each class to two. If the transactions with Anschutz are not
approved, such persons will not resign and the size of the Board will be reduced
to 11 members.
Mr. Anschutz has been a Director, Chairman of the Board and President of
Anschutz for more than the past five years, and a Director, Chairman of the
Board and President of Anschutz Company, the corporate parent of Anschutz, since
the formation of Anschutz Company in August 1991. Mr. Anschutz has been a
Director of Southern Pacific Rail Corporation ("SPRC") since June 1988 and
Chairman of SPRC since October 1988. He served as President and Chief Executive
Officer of SPRC from October 1988 until July 1993. Mr. Slater has been Director
of Finance of Anschutz since 1992 and Corporate Secretary of Anschutz since
1991. Mr. Slater held other positions with Anschutz from 1988 to 1992. Mr.
Tempest has been a partner in the law firm of O'Melveny & Myers since February
1991 and was Special Counsel to such firm from 1988 to February 1991.
The Board of Directors, effective at the 1994 Annual Meeting, reapportioned
the number of Directors to three in each class. The Board of Directors,
effective at the 1995 Annual Meeting, will provide for the number of directors
to be divided as equally as possible into four classes. At the 1994 Annual
Meeting, Jack D. Riggs, previously a Class IV Director, was reclassified as a
Class I Director with a term expiring at the 1995 Annual Meeting. Mr. Riggs, a
Class I Director, is not standing for reelection. Each class of directors is
elected for a term expiring at the annual meeting to be held four years after
the date of their election. The Class I Nominees were elected at the 1991 Annual
Meeting, the Class II Directors were elected at the 1992 Annual Meeting, the
Class III Directors were elected at the 1993 Annual Meeting and the Class IV
Directors were elected at the 1994 Annual Meeting.
A majority of the votes represented at the Annual Meeting by shares of
Common Stock entitled to vote is required to elect a director.
The persons named as proxies in the enclosed proxy, who have been so
designated by the Board of Directors, intend to vote for the election of the
Class I Nominees referred to below as directors unless otherwise instructed in
the proxy.
4
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THESE NOMINEES. Certain
information concerning such nominees, as well as the other current directors, is
set forth below:
<TABLE>
<CAPTION>
AGE AND PRINCIPAL OCCUPATION,
YEARS OF POSITIONS WITH COMPANY
SERVICE AND BUSINESS EXPERIENCE DIRECTOR
NAME WITH COMPANY DURING LAST FIVE YEARS SINCE
- - ------------------------ -------------- ------------------------------------------------------------- -----------
<S> <C> <C> <C>
CLASS I NOMINEES -- TERMS EXPIRING AT THE ANNUAL SHAREHOLDERS' MEETING IN 1999
William L. Dorn 46 - 23 Chairman of the Board and Chairman of the Executive Committee 1982
since July 1991 and Chief Executive Officer since February
1990. Member of the Executive Committee since August 1988.
President from February 1990 until November 1993. Executive
Vice President from August 1989 until February 1990. Member
of the Royalty Bonus Committee since August 1991 and Chairman
since May 1994.
James H. Lee 46 - 4 Managing Partner, Lee, Hite & Wisda Ltd. Member of the 1991
Executive Committee since February 1994.
CLASS II DIRECTORS -- TERMS EXPIRING AT THE ANNUAL SHAREHOLDERS' MEETING IN 1996
Dale F. Dorn 52 - 28 Resigned as a Vice President in September 1989; currently 1977
engaged in private investments.
Harold D. Hammar 71 - 10 Financial Consultant. Member of the Audit Committee and 1985
Compensation Committee.
Robert S. Boswe11 45 - 10 President since November 1993. Vice President from May 1991 1985
until November 1993. Chief Financial Officer since May 1991.
Financial Vice President from September 1989 until May 1991.
Member of the Executive Committee since July 1991 and the
Royalty Bonus Committee since August 1991. Director of
Franklin Supply Company Ltd.
CLASS III DIRECTORS -- TERMS EXPIRING AT THE ANNUAL SHAREHOLDERS' MEETING IN 1997
Jeffrey W. Miller 43 - 7 Independent Biologist. 1988
Michael B. Yanney 61 - 3 Chairman and Chief Executive Officer of the America First 1992
Companies, L.L.C. and a director of Burlington Northern Inc.,
Lozier Corporation, MFS Communications Company, Inc. and
America First REITs Inc. Chairman of the Compensation
Committee.
Donald H. Anderson 46 - 2 President, Chief Executive Officer and Director of Associated 1993
Natural Gas Corporation, a wholly owned subsidiary of
Panhandle Eastern Corporation, since September 1989 and
January 1989, respectively, and Chief Operating Officer and
Chairman of Associated Natural Gas, Inc., a wholly owned
subsidiary of Panhandle Eastern Corporation, since December
1994. Member of the Audit Committee.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
AGE AND PRINCIPAL OCCUPATION,
YEARS OF POSITIONS WITH COMPANY
SERVICE AND BUSINESS EXPERIENCE DIRECTOR
NAME WITH COMPANY DURING LAST FIVE YEARS SINCE
- - ------------------------ -------------- ------------------------------------------------------------- -----------
CLASS IV DIRECTORS -- TERMS EXPIRING AT THE ANNUAL SHAREHOLDERS' MEETING IN 1998
<S> <C> <C> <C>
John C. Dorn 68 - 45 Retired as Regional Vice President in December 1990. 1956
Richard J. Callahan 53 - 2 Executive Vice President of U S WEST, Inc. since January 1988 1993
and President of U S WEST International and Business
Development Group since October 1991. Member of the
Compensation Committee.
Austin M. Beutner 35 - 2 President, Chief Executive Officer and Director of the U. S. 1993
Russia Investment Fund since March 1994. Prior thereto
General Partner of The Blackstone Group since 1991. Prior
thereto a Vice President of Blackstone. Member of the
Compensation Committee.
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows, as of May 31, 1995, the number of shares of the
Company's Common Stock beneficially owned by each director and nominee, each of
the executive officers named in the Summary Compensation Table set forth under
the caption "Executive Compensation" below, and all directors and executive
officers as a group. Unless otherwise indicated, each of the persons has sole
voting power and sole investment power with respect to the shares beneficially
owned by such person.
<TABLE>
<CAPTION>
COMMON STOCK (2)
---------------------------
NAME OF INDIVIDUAL OR NUMBER OF PERCENT
NUMBER IN GROUP (1) SHARES OF CLASS
- - ---------------------------------------- ------------- ---------
<S> <C> <C>
Donald H. Anderson...................... 10,000 *
Bulent A. Berilgen...................... 122,080(3) *
Austin M. Beutner....................... -- --
Robert S. Boswell....................... 249,329(4) *
Richard J. Callahan..................... 2,000 *
Dale F. Dorn............................ 116,488(5) *
Forest D. Dorn.......................... 240,698(6) *
John C. Dorn............................ 250,485(7) *
William L. Dorn......................... 448,215(8) 1.57
Harold D. Hammar........................ 2,500 *
David H. Keyte.......................... 134,403(9) *
James H. Lee............................ 1,000 *
Jeffrey W. Miller....................... 331,220(10) 1.16
Jack D. Riggs........................... 6,635 *
Michael B. Yanney....................... 5,000 *
All directors and executive officers as
a group (19 persons, including the 15
named above)........................... 2,189,832(11) 7.66%
<FN>
- - ------------------------
* The percentage of shares beneficially owned does not exceed one percent of
the outstanding shares of the class.
(1) William L. Dorn and Forest D. Dorn are brothers, and they and Dale F. Dorn
are nephews of John C. Dorn. See "Principal Holders of Securities".
(2) Amounts reported also include shares held for the benefit of certain
directors and executive officers by the trustee of the Company's Retirement
Savings Plan Trust as of March 31, 1995.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
(3) Includes 120,000 Common shares that Bulent A. Berilgen has the vested right
to purchase pursuant to the terms of the 1992 Stock Option Plan.
(4) Includes 210,000 Common shares that Robert S. Boswell has the vested right
to purchase pursuant to the terms of the 1992 Stock Option Plan. Does not
include 225 Common shares held by Robert S. Boswell's wife or 830 shares
held by his children, of which shares Mr. Boswell disclaims beneficial
ownership.
(5) Includes 2,781 Common shares held of record by Dale F. Dorn as trustee of a
trust for the benefit of his immediate family. Dale F. Dorn, as trustee,
has disclaimed beneficial ownership of these shares. Also includes 12,250
Common shares that Dale F. Dorn, as trustee, has the right to acquire upon
the conversion of 3,500 shares of the Company's $.75 Convertible Preferred
Stock.
(6) Includes 120,000 Common shares that Forest D. Dorn has the vested right to
purchase pursuant to the terms of the 1992 Stock Option Plan. Also includes
25,800 Common shares held of record by Forest D. Dorn as co-trustee of a
trust for the benefit of his mother (see Footnote 8), of which shares Mr.
Dorn disclaims beneficial ownership. Does not include 8,628 Common shares
held by Forest D. Dorn's wife or 25,967 shares held by his children, of
which shares Mr. Dorn disclaims beneficial ownership.
(7) Includes 43,685 Common shares held of record by John C. Dorn as trustee of
trusts for the benefit of related parties. Does not include (i) 265,676
Common shares held of record by The Glendorn Foundation of which John C.
Dorn is one of the seven trustees, or (ii) 72,547 Common shares held by
John C. Dorn's wife, of which shares Mr. Dorn disclaims beneficial
ownership.
(8) Includes 210,000 Common shares that William L. Dorn has the vested right to
purchase pursuant to the terms of the 1992 Stock Option Plan. Also includes
(i) 25,800 Common shares held of record by William L. Dorn as co-trustee of
a trust for the benefit of his mother (see Footnote 6), and (ii) 74,223
Common shares held of record by William L. Dorn as trustee of trusts for
the benefit of related parties, of which shares Mr. Dorn disclaims
beneficial ownership. Does not include 14,990 Common shares held by William
L. Dorn's wife or 35,997 shares held by his children, of which shares Mr.
Dorn disclaims beneficial ownership.
(9) Includes 120,000 Common shares that David H. Keyte has the vested right to
purchase pursuant to the terms of the 1992 Stock Option Plan. Also includes
7,000 Common shares that David H. Keyte has the right to acquire upon the
conversion of 2,000 shares of the Company's $.75 Convertible Preferred
Stock.
(10) Includes 99,825 Common shares held of record by Jeffrey W. Miller as
custodian for his minor children, of which shares Mr. Miller disclaims
beneficial ownership.
(11) Includes 1,035,000 Common shares held by various executive officers who
have the vested right to purchase such shares pursuant to the terms of the
1992 Stock Option Plan and 21,350 Common shares that a director and two
executive officers have the right to acquire upon the conversion of 6,100
shares of the Company's $.75 Convertible Preferred Stock.
</TABLE>
7
<PAGE>
BOARD OF DIRECTORS AND COMMITTEES
During 1994, the Board of Directors met on six occasions. The Board of
Directors has appointed four committees, the Executive Committee, the Audit
Committee, the Compensation Committee and the Royalty Bonus Committee, which are
designed to permit action to be taken expeditiously. Only two members of each
committee are necessary to constitute a quorum. During 1994, the Executive
Committee met 15 times. William L. Dorn, Robert S. Boswell and James H. Lee are
the members of the Executive Committee. The members of the Royalty Bonus
Committee, which met once and acted by consent nine times during the year, were
William L. Dorn, Robert S. Boswell and Jack D. Riggs. Members of the Royalty
Bonus Committee are eligible to participate in royalty bonuses granted by the
Royalty Bonus Committee.
The Compensation Committee met six times during 1994. This committee makes
recommendations to the Board of Directors in the area of executive compensation,
including the selection of individual employees to be granted options from among
those eligible under the stock option plan and establishes the number of shares
issued under each option. Members of the Compensation Committee are not eligible
to participate in the Company's 1992 Stock Option Plan. The members of the
Compensation Committee are Austin M. Beutner, Richard J. Callahan, Harold D.
Hammar, Jack D. Riggs and Michael B. Yanney. A Report of the Compensation
Committee on Executive Compensation is set forth below.
The Audit Committee is appointed for the purpose of overseeing and
monitoring the Company's independent audit process and discharges its duties,
responsibilities and functions according to a plan designed to provide assurance
to the Board of Directors that the resources allocated to that process are
adequate and utilized effectively. It is also charged with the responsibility
for reviewing all related party transactions for potential conflicts of
interest. This committee met three times during the year, and its members were
Donald H. Anderson, Harold D. Hammar and Jack D. Riggs.
During 1994, each incumbent director of the Company, except Austin M.
Beutner and Richard J. Callahan, attended at least 75% of the aggregate number
of meetings of the Board of Directors and the committees of the Board of
Directors on which he served.
If the Transactions are approved by the shareholders at the Annual Meeting,
pursuant to the proposed Shareholders' Agreement with Anschutz, the membership
of the Executive, Audit and Compensation committees will be changed by the
following appointments and resignations (except as noted, existing membership of
these committees will remain unchanged): Craig D. Slater will be appointed to
the Executive Committee, Harold D. Hammar will resign from the Audit Committee,
Craig D. Slater will be appointed to the Audit Committee, Austin M. Beutner and
Harold D. Hammar will resign from the Compensation Committee and Drake S.
Tempest will be appointed to such Committee. The Board of Directors will also
appoint a Nominating Committee consisting of William L. Dorn, Philip F. Anschutz
and Michael B. Yanney. See "The Anschutz and JEDI Transactions."
The Board of Directors does not currently have a standing nominating or
similar committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs.
Beutner, Callahan, Hammar, Riggs and Yanney. Mr. Riggs retired as a Vice
President of the Company in 1987 and is not standing for reelection as a
director. The Executive Committee members are William L. Dorn, Robert S. Boswell
and James H. Lee. The members of the Royalty Bonus Committee are William L.
Dorn, Robert S. Boswell and Jack D. Riggs. William L. Dorn is Chairman of the
Board and Chief Executive Officer and Robert S. Boswell is President. During
1994 there were no compensation committee interlocks between the Company and any
other entity.
A real estate complex (the "Complex") owned by members of the Dorn and
Miller families, located near Bradford, Pennsylvania, had been historically used
by the Company for business purposes. In 1994, the Company notified the owners
of the Complex that it intended to terminate its annual usage after 1994.
8
<PAGE>
In 1994, in connection with the Company's termination of usage, the Company
paid $662,000 on account of the business use of such property, and an additional
$300,000 as a partial reimbursement of deferred maintenance costs. Members of
the Dorn and Miller families who were directors and/or executive officers of the
Company (and their immediate families) who owned a direct or indirect interest
in such Complex during 1994 were Dale F. Dorn, his brother and his two sisters;
William L. Dorn and Forest D. Dorn and their father and two sisters; John C.
Dorn and his four children; and Jeffrey W. Miller, his father and two sisters.
For further information with respect to other transactions with management
and others, see "Transactions with Management and Others".
DIRECTOR COMPENSATION
Each director who is not an employee of the Company is compensated for
services at the rate of $20,000 annually, and in addition, is paid a fee of
$2,500 for attendance in person at each meeting or series of meetings of the
Board of Directors. All directors, whether employees or not, are reimbursed for
all costs incurred by them in their capacities as directors, including the costs
of attending directors' meetings and committee meetings. The non-employee
directors and the amounts each was paid during 1994 as directors were: John C.
Dorn, Dale F. Dorn, Harold D. Hammar, Jeffrey W. Miller, Jack D. Riggs and
Michael B. Yanney -- $30,000; Donald H. Anderson -- $27,500; Austin M. Beutner
and Richard J. Callahan -- $25,000. James H. Lee received $30,000 for his
services as a director, $2,000 for attendance at meetings of the Audit and
Compensation Committees and $41,666.68 as payment for his service on the
Executive Committee, which began March 1, 1994. Messrs. Hammar and Riggs each
received an additional $8,000 for attending meetings of the Audit and
Compensation Committees. Mr. Yanney received an additional $3,000 for attending
meetings of the Compensation Committee, and Mr. Anderson was paid an additional
$4,000 for attending meetings of the Audit Committee.
No additional amounts are paid for committee participation or special
assignments, except that (i) each member of the Compensation Committee is paid
$1,000 per meeting which he attends up to a maximum of $4,000 per year for
service on that committee, (ii) each member of the Audit Committee is paid
$1,000 per meeting which he attends up to a maximum of $4,000 per year for
service on that committee and (iii) Mr. Lee will be paid $50,000 per year for
service on the Executive Committee.
9
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned during each of the Company's last three fiscal years by the Company's
Chief Executive Officer and each of the Company's four other most highly
compensated executive officers (collectively, the "Named Executive Officers"),
based on salary and bonus earned in 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS (4)
------------------------------------------------ -------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND BONUS COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) ($)(1)(2) ($)(3) OPTIONS (#) ($)(5)
- - -------------------------------------------- --------- ----------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
William L. Dorn, 1994 $ 300,012 -0- $ 2,795 -0- $ 22,942
Chairman of the Board 1993 250,008 100,159 665 175,000 32,640
and Chief Executive Officer 1992 250,008 75,618 624 175,000 10,618
Robert S. Boswell, 1994 284,004 -0- 2,515 -0- 21,559
President 1993 234,000 88,239 607 175,000 30,503
1992 234,000 94,017 567 175,000 10,445
Bulent A. Berilgen, 1994 166,512 -0- -0- -0- 11,507
Vice President of Operations 1993 137,850 53,336 -0- 100,000 16,458
1992 131,932 41,456 -0- 100,000 6,234
David H. Keyte, 1994 165,000 -0- 21,945 -0- 11,469
Vice President and 1993 139,494 36,433 18,192 100,000 16,517
Chief Accounting Officer 1992 131,618 58,419 -0- 100,000 6,234
Forest D. Dorn, 1994 163,800 -0- 18,335 -0- 12,910
Vice President and 1993 160,650 22,013 324 100,000 20,342
General Business Manager 1992 156,250 35,219 316 100,000 8,769
<FN>
- - ------------------------
(1) The following amounts indicate the awards made with respect to the years
indicated, under the Forest Oil Corporation Incentive Plan (the "Incentive
Plan"):
</TABLE>
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
William L. Dorn...................................................... $ 68,126 $ 30,500 -0-
Robert S. Boswell.................................................... 61,965 29,020 -0-
Bulent A. Berilgen................................................... 37,565 18,135 -0-
David H. Keyte....................................................... 34,542 16,185 -0-
Forest D. Dorn....................................................... 31,328 14,819 -0-
</TABLE>
Distributions of awards are made pursuant to the Incentive Plan in equal
installments over a three-year period. Pursuant to the Incentive Plan if a
participant's employment is terminated prior to the vesting of awards, the
remainder of such awards is reallocated to other participants. Amounts
reallocated in 1994 for the years 1992 and 1993 were as follows: William L.
Dorn -- $3,445; Robert S. Boswell -- $3,224; Bulent A. Berilgen -- $1,836;
David H. Keyte -- $1,838; and Forest D. Dorn -- $2,167. See "Report of the
Compensation Committee on Executive Compensation -- Incentive Plan Awards".
(2) During 1994, the Company assigned to certain of its executive officers and
other key personnel, as additional compensation, certain bonuses of
undivided interests in overriding royalty interests in the gross production
from certain exploratory oil and gas prospects in which the Company had an
interest. The cost to the Company at the time of the assignment of such
royalty interests was
10
<PAGE>
$3,599 each for William L. Dorn, Robert S. Boswell and Forest D. Dorn,
$2,061 for Bulent A. Berilgen and $2,041 for David H. Keyte. During 1994
interests in nine exploratory oil and gas prospects were so awarded by the
Royalty Bonus Committee.
(3) Does not include perquisites and other personal benefits because the value
of these items did not exceed the lesser of $50,000 or 10% of reported
salary and bonus of any of the Named Executive Officers, except for David H.
Keyte and Forest D. Dorn, each of whose 1994 total includes a cash auto
allowance of $15,000.
(4) No stock appreciation rights or restricted stock awards were granted to any
of the Named Executive Officers during any of the last three fiscal years.
(5) The 1994 totals include (i) the fair market value of the Company's matching
contribution of Common Stock to the Retirement Savings Plan in the following
amounts: William L. Dorn -- $7,500; Robert S. Boswell -- $7,500; Bulent A.
Berilgen -- $7,500; David H. Keyte -- $7,500; and Forest D. Dorn -- $7,500;
(ii) the fair market value of the Company's profit sharing bonus
contribution of Common Stock to the Retirement Savings Plan in the following
amounts: William L. Dorn -- $5,448; Robert S. Boswell -- $5,400; Bulent A.
Berilgen -- $3,181; David H. Keyte -- $3,219; and Forest D. Dorn -- $3,707;
(iii) the Company's matching contribution pursuant to deferred compensation
agreements in the following amounts: William L. Dorn -- $7,501; Robert S.
Boswell -- $6,700; Bulent A. Berilgen -- $826; David H. Keyte -- $750; and
Forest D. Dorn -- $690; and (iv) the Company's profit sharing bonus
contribution of $322 pursuant to the deferred compensation agreement of
William L. Dorn. The 1994 totals also include the following amounts
attributable to the term life portion of premiums paid by the Company
pursuant to a split dollar insurance arrangement: William L. Dorn -- $2,171;
Robert S. Boswell -- $1,959; and Forest D. Dorn -- $1,013. The remainder of
the premium is not included and does not benefit the Named Executive
Officers because the Company has the right to the cash surrender value of
the policy.
YEAR END STOCK OPTION VALUES
No stock options were granted to the Named Executive Officers in 1994.
There were no stock option exercises by any Named Executive Officers during
1994. The following table shows the number of shares covered by both exercisable
and non-exercisable stock options as of December 31, 1994 and their values at
such date:
OUTSTANDING STOCK OPTION VALUES AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL YEAR END ($)(1)
AT FISCAL YEAR END (#)
-------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---------------------------------------------------------- ----------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
William L. Dorn........................................... 175,000 175,000 $ 0 $ 0
Robert S. Boswell......................................... 175,000 175,000 0 0
Bulent A. Berilgen........................................ 100,000 100,000 0 0
David H. Keyte............................................ 100,000 100,000 0 0
Forest D. Dorn............................................ 100,000 100,000 0 0
<FN>
- - ------------------------
(1) On December 31, 1994, the last reported sales price of the Common Stock as
quoted on the Nasdaq National Market was $2.25 per share. The option price
for the options granted in 1992 is $3.00 per share and the option price for
the options granted in 1993 is $5.00 per share. Since the last reported
sales price at December 31, 1994 was lower than the option price for the
options granted in 1992 and 1993, no value is ascribed to those options in
the above table.
</TABLE>
11
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
total shareholder return on the Common Stock during the five years ended
December 31, 1994 with the cumulative return on the S & P 500 Index, the Dow
Jones Oil, Secondary Index and an index of peer companies. The graph assumes
that $100 was invested in each category on the last trading day of 1989 and that
dividends were reinvested. The companies in the peer index were selected based
on the following criteria: (i) total assets ranging from approximately $125
million to $1.1 billion, (ii) total revenue ranging from approximately $40
million to $300 million and (iii) oil and gas revenue comprising at least 54% of
total revenue. The companies included in the peer index were American
Exploration Co., DEKALB Energy Company, Devon Energy Corporation, Noble
Affiliates, Inc., Plains Petroleum Company, Pogo Producing Company, Presidio Oil
Company, Snyder Oil Corporation and The Wiser Oil Company.
The Company significantly changed the composition of its management as well
as its operating strategy during the five-year period. In December 1990 seven
executive officers and directors retired from the Company. In July 1991, William
L. Dorn was elected Chairman of the Board.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FOREST OIL PEER INDEX DJ, OIL SECONDARY S&P 500
<S> <C> <C> <C> <C>
1989 100.0 100.0 100.0 100.0
1990 39.2 79.3 83.2 96.9
1991 11.3 70.8 81.7 126.4
1992 24.1 82.0 82.3 136.1
1993 33.0 117.5 91.3 149.8
1994 17.0 111.3 86.4 151.8
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee's duties include the annual review and approval
of the compensation of the Chairman and President, review and determination of
individual elements of compensation for the Company's executive officers, review
of the administration of the Company's Incentive Plan and other long-term
incentive plans for management and determining the terms and awards under the
Company's 1992 Stock Option Plan. During 1994, the Compensation Committee, with
the assistance of its compensation consultant, developed a compensation program
for annual cash incentive bonuses and stock option grants. Although the program
was not finalized until November 1994, it established the 1994 performance goals
based on senior management's recommendations. See "Cash Bonuses" below. In 1994,
the Compensation Committee held six meetings.
12
<PAGE>
The Royalty Bonus Committee is responsible for granting bonuses of undivided
overriding royalty interests pursuant to the Company's royalty bonus program.
The Executive Committee is responsible for determining the salaries for all
officers except the Chairman and the President.
The Compensation Committee has studied the limitation on the deductibility
of compensation for federal income tax purposes pursuant to Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"). The Compensation
Committee does not currently intend to award levels of compensation that results
in such limitation. The Compensation Committee may authorize compensation in the
future that results in amounts above the limit if it determines that such
compensation is in the best interests of the Company. In addition, the
limitation may affect the future grant of stock options.
In March 1995, the Compensation Committee renewed the Executive Severance
Agreements and extended their term to December 1997. In addition, the definition
of change of control was modified. See "Transactions with Management and Others
- - -- Executive Severance Agreements."
BASE SALARIES. The Company's compensation policy for base salaries is to
set compensation within a competitive range. The competitive range for base
salaries is determined by reviewing competitive pay practices of similarly
positioned energy companies, including those companies which are considered for
comparison purposes in the Company's Five-Year Cumulative Total Returns graph.
During 1994, adjustments were made to base salaries to reflect promotions and
changes of responsibilities of certain officers. The Chief Executive Officer and
President were each given an increase of $50,000 per year based on the
Committee's assessment of their performance in reducing the Company's debt, the
restructuring of the organization, and the fact that they had not had an
increase in base salary for several years. In addition, the Compensation
Committee concluded that the increased levels of their base salaries were
comparable to those of executive officers with companies in the Company's peer
group.
CASH BONUSES. During 1994, the Committee worked with its compensation
consultant to develop a new performance based annual cash incentive bonus
program. The program provides for cash bonuses to be paid to executive officers
based on the achievement of predetermined performance criteria. Each performance
criterion is selected for its strategic importance and weighted to reflect the
relative importance to the Company's annual initiatives. For the Chief Executive
Officer the threshold is zero, the target award level is 40% of base salary and
the maximum is 100% of base salary. The Committee worked with senior management
to identify the performance criteria to be used in the program for 1994 and
1995. The criteria are: (1) Profitability (which is (i) defined generally as net
income after taxes, extraordinary items and accounting changes and (ii) weighted
40% of the formula), (2) Value Added Index (which is (i) defined generally as
changes in oil and gas reserves divided by capital expenditures multiplied by
reserve replacement ratio and (ii) weighted 30% of the formula), (3) Return on
Invested Capital (which is (i) defined generally as interest expense and pretax
income divided by total assets less non-interest liabilities and (ii) weighted
10% of the formula), (4) Operating Efficiency Against Peer Companies (which is
(i) defined as the Company's performance in terms of oil and gas exploration and
production costs with respect to both revenue and production volume as compared
to its peer group of companies and (ii) weighted 10% of the formula), and (5)
Strategic Initiatives (which (i) include achieving a targeted debt to equity
ratio for the Company, the development of a strategic investment alternative,
and organization development and (ii) is weighted 10% of the formula). No
discretionary cash bonuses were paid to the executive officers for 1994.
The Company has traditionally granted year-end Christmas bonuses to all
employees, including executive officers. The 1994 year-end bonuses were an
amount equal to 3% of the first eleven months base salary for each individual
and were approved by the Executive Committee. William L. Dorn received such a
year-end bonus of $8,250.
13
<PAGE>
STOCK OPTIONS. In 1994, the Compensation Committee granted stock options to
V. Bruce Thompson, Vice President and General Counsel, for 100,000 shares of
Common Stock and to Joan C. Sonnen, Controller for 25,000 shares of Common
Stock, both at an exercise price of $5.00 per share. For 1995, as part of the
Company's newly-developed executive compensation program, guidelines were
established for granting stock options to executive officers based on the
achievement of predetermined performance goals, mentioned above under "Cash
Bonuses."
INCENTIVE PLAN AWARDS. The Incentive Plan, which became effective January
1, 1992, permits participating employees to earn awards payable in cash, in
whole shares of the Company's Common Stock, or in any combination of cash and
whole shares of Common Stock. The Executive Committee determines whether awards
are payable in cash or stock. The Incentive Plan operates through an incentive
pool for each fiscal year that is contingent upon the Company attaining certain
targeted
levels of performance. Unless otherwise determined by the Executive Committee,
the incentive pool is funded based upon the average return on invested capital
achieved by the Company. The amount contributed to the incentive pool is a
scheduled percentage of base salary that starts at a minimum return and
increases based on average return on invested capital. The incentive pool is
divided in half. One half of the pool is awarded to all participants as a
performance distribution. A participant's percentage interest in the performance
distribution is based upon the proportion his base salary bears to the aggregate
of the base salaries of all participants. The other half of the incentive pool
is divided among participants on an individual basis at the discretion of the
Compensation Committee.
The Incentive Plan is structured to consider the Company's performance over
a three-year period. Performance is currently measured under the Incentive Plan
based on average return on invested capital. The computations for return on
invested capital in 1992 and 1993 did not take into account a three-year period.
For 1992 and 1993, certain transitional rules applied to the computation of
return on invested capital.
In 1994, the Compensation Committee approved grants under the Company's
Incentive Plan with respect to amounts earned for 1993. Total awards of $364,729
were made pursuant to the Incentive Plan to be paid out over a three-year
period, including an award in 1994 of $30,500 to William L. Dorn. Awards were
made from the discretionary pool to individual plan participants (including
William L. Dorn) based upon the following factors (in order of importance):
level of responsibility, performance of the individual during the period, base
salary, and a comparison to Peer Group compensation of executives. The
Compensation Committee received recommendations with respect to discretionary
pool awards from the Executive Committee.
PROFIT SHARING CONTRIBUTIONS. The Company's Retirement Savings Plan and
deferred compensation agreements with certain executive officers, including
William L. Dorn, give the Company discretion to make profit sharing
contributions in cash or stock for the account of the Company's officers and
employees. In 1994, the Compensation Committee approved profit sharing
contributions of Common Stock with a fair market value of $5,448 to the
Company's Retirement Savings Plan and $322 pursuant to a deferred compensation
agreement for the account of William L. Dorn. The Compensation Committee
established the amount of the contribution for each person based on the same
percentage of base salary. The percentage was determined based on a schedule set
forth in the Incentive Plan, which is a sliding scale of targets based on
average return on invested capital.
ROYALTY BONUSES. During 1994, the Company assigned to certain of its
executive officers, other key personnel and certain retirees, as additional
compensation, certain bonuses of undivided interests in overriding royalty
interests equal to approximately 6% of the Company's net interest in all oil,
gas and other minerals produced, saved and sold from certain oil and gas
prospects in which the Company had an interest. The prospects, the size of the
interest and the participants in such bonuses are determined from time to time
by the Royalty Bonus Committee of the Board of Directors and such committee's
powers with respect thereto may be terminated at any time by the Board of
Directors. The interest of each officer and key employee in such bonuses varies
according to his salary. The interest of William L. Dorn was established based
upon his responsibilities as a director and officer,
14
<PAGE>
and on his salary. By the terms of the issuing documents, such interests were to
terminate, revert to and revest in the Company on December 31, 1994 unless on
such date certain conditions with respect to production or drilling operations
on the properties subject to the royalties were fulfilled. Certain royalty
interests awarded in 1993 (6 in number) terminated, reverted to and revested in
the Company during 1994.
The Compensation Committee believes that the graph depicting Five Year
Cumulative Total Return, included under the caption "Stock Performance Graph",
should be considered with the following graph. The following graph has been
prepared on the same basis as the preceding graph, except that it shows stock
performance over the period from July 31, 1991 to December 31, 1994. In 1991,
William L. Dorn was elected Chairman of the Board. The Company believes that the
Dow Jones Oil, Secondary Index is meaningful because it is an independent,
objective view of the performance of other similarly sized energy companies.
COMPARISON OF SEMI-ANNUAL CUMULATIVE TOTAL RETURN
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FOREST OIL PEER INDEX DJ, OIL SECONDARY S&P 500
<S> <C> <C> <C> <C>
07/31/91 100 100 100 100
12/31/91 95 91 90 109
06/30/92 79 92 86 108
12/31/92 201 106 91 117
06/30/93 363 157 107 123
12/31/93 276 151 101 129
06/30/94 268 171 105 125
12/31/94 142 143 96 131
</TABLE>
Date: July 10, 1995
COMPENSATION COMMITTEE
Michael B. Yanney, Chairman
Austin M. Beutner
Richard J. Callahan
Harold D. Hammar
Jack D. Riggs
EXECUTIVE COMMITTEE
William L. Dorn, Chairman
Robert S. Boswell
James H. Lee
ROYALTY BONUS COMMITTEE
William L. Dorn, Chairman
Robert S. Boswell
Jack D. Riggs
15
<PAGE>
PENSION PLAN
The Company's Pension Plan is a qualified, non-contributory defined benefit
plan. On May 8, 1991, the Board of Directors suspended benefit accruals under
the Pension Plan effective as of May 31, 1991.
The following table shows the estimated maximum annual benefits payable upon
retirement at age 65 as a straight life annuity to participants in the Pension
Plan for the indicated levels of average annual compensation and various periods
of service, assuming no future changes in such plan:
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM ANNUAL
PENSION BENEFITS (2)
-------------------------------
YEARS OF SERVICE
-------------------------------
REMUNERATION (1) 10 20 30
- - ---------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
$100,000.............................................................. 36,846 48,060 53,400
200,000.............................................................. 73,692 96,120 106,800
300,000.............................................................. 79,282 103,412 114,902
400,000.............................................................. 79,282 103,412 114,902
<FN>
- - ------------------------
(1) For each Named Executive Officer, the level of compensation used to
determine benefits payable under the Pension Plan is such officer's base
salary for 1991.
(2) Normal retirement benefits attributable to the Company's contributions are
limited under certain provisions of the Code to $120,000 in 1995, as
increased annually thereafter for cost of living adjustments.
</TABLE>
The amount of the Company's contribution, payment or accrual in respect to
any specified person in the Pension Plan is not and cannot readily be separately
or individually calculated by the Pension Plan actuaries. Annual benefits at
normal retirement are approximately 24% of average annual earnings (excluding
bonuses) for any consecutive 60-month period, which produces the highest amount,
in the last 15 years prior to retirement, up to May 31, 1991, when benefit
accruals ceased plus 21% of such earnings prorated over 20 years of credited
service, and 1/2 of 1% of such earnings for each year of credited service in
excess of 20, subject to certain adjustments for lack of plan participation.
There is no Social Security offset. Such benefits are payable for life with a 10
year certain period, or the actuarial equivalent of such benefit.
As a result of the suspension of benefit accruals under the Pension Plan and
the substitution of profit sharing contributions to the Retirement Savings Plan,
the following amounts are the estimated increases (decreases) in the annual
combined benefit payments to the Named Executive Officers under the Pension Plan
and the Retirement Savings Plan (whether combined benefits increased or
decreased is a function of the combination of length of service and salary
levels) as compared to what the payments would have been without the profit
sharing contributions:
<TABLE>
<CAPTION>
ESTIMATED
INCREASE
(DECREASE)
IN ANNUAL
PAYMENTS
------------------
<S> <C>
William L. Dorn..................................................................... $ (33,928)
Robert S. Boswell................................................................... (127,141)
Bulent A. Berilgen.................................................................. (35,472)
Forest D. Dorn...................................................................... 21,104
David H. Keyte...................................................................... (34,661)
</TABLE>
Because benefit accruals under the Pension Plan were suspended effective May
31, 1991, the years of credited service for the Named Executive Officers are as
follows: William L. Dorn -- 20; Robert S. Boswell -- 2; Bulent A. Berilgen -- 9;
Forest D. Dorn -- 14 and David H. Keyte -- 4. The
16
<PAGE>
estimated annual accrued benefit payable, based on a life annuity benefit, upon
normal retirement for each of such persons is: William L. Dorn -- $45,994;
Robert S. Boswell -- $4,436; Bulent A. Berilgen -- $11,832; David H. Keyte --
$5,401; and Forest D. Dorn -- $18,886.
Certain participants in the Pension Plan have been prevented by the limits
of the Code from receiving the full amount of pension benefits to which they
would otherwise have been entitled. Such persons have had benefits credited to
them under a Supplemental Retirement Plan, which together with the benefits
payable under the Pension Plan, equaled the benefit to which they would have
been entitled under the Pension Plan but for such Code limits. The Supplemental
Retirement Plans for each participant were unfunded, non-qualified,
non-contributory benefit plans. Benefits payable vest to the same extent as the
Pension Plan benefits and are unsecured general obligations of the Company.
Benefit accruals under these plans were suspended effective May 31, 1991 in
conjunction with the suspension of benefit accruals under the Pension Plan.
PRINCIPAL HOLDERS OF SECURITIES
The Company currently has one class of voting securities outstanding. On May
31, 1995, there were 28,558,448 shares of Common Stock outstanding, with each
such share being entitled to one vote. On May 31, 1995 members of the Dorn and
Miller families, descendants of the founders of the Company, owned 3,500,436
shares of Common Stock, constituting approximately 12.26% of the voting power of
the Company.
As of May 31, 1995, to the knowledge of the Board of Directors the only
shareholders who owned beneficially more than 5% of the outstanding shares of
Common Stock were:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- - ------------------------ --------------------------- -------------------- --------
<S> <C> <C> <C>
Common Stock (1) The Anschutz Corporation 5,500,000(2) 16.15%
2400 Anaconda Tower
555 17th Street
Denver, Colorado 80202
R.B. Haave Associates, Inc. 3,701,650(3) 12.46%
270 Madison Avenue
New York, NY 10016
Smith Barney Inc. 2,270,277(4)(5) 7.95%
1345 Avenue of the Americas
New York, NY 10115
Metropolitan Life 1,855,000(6) 6.49%
Insurance Company
One Madison Avenue
New York, NY 10010
<FN>
- - ------------------------
(1) Based on Schedules 13D and 13G and amendments thereto filed with the SEC
and the Company by the reporting person through June 1, 1995 and the amount
of Common Stock outstanding on May 31, 1995.
(2) On May 19, 1995, Anschutz loaned the Company $9,900,000 for a term of nine
months. The loan may be converted into 5,500,000 shares of Common Stock at
Anschutz's election, but the loan must be so converted at the second
closing of the Anschutz Transaction described under "The Anschutz and JEDI
Transactions." If the Company's shareholders approve the Transactions
described under "The Anschutz and JEDI Transactions", based on the number
of outstanding shares of Common Stock as of May 31, 1995, Anschutz would
own approximately 39.7% of the voting power of the Company, subject to the
19.9% voting restriction contemplated by the proposed Shareholders
Agreement between Anschutz and the Company. In addition, subject to the 40%
ownership restriction contemplated by the proposed Shareholders Agreement
with
</TABLE>
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<TABLE>
<S> <C>
Anschutz, Anschutz would have the right to acquire an additional 36,894,444
shares of Common Stock through the exercise of warrants and an option and
the conversion of preferred stock it would acquire in such transactions.
See "The Anschutz and JEDI Transactions".
(3) Includes 1,150,450 shares of Common Stock that the reporting person has the
right to acquire upon the conversion of 328,700 shares of the Company's
$.75 Convertible Preferred Stock.
(4) Smith Barney Holdings Inc. is the sole common stockholder of Smith Barney
Inc., and The Travelers Inc. is the sole stockholder of Smith Barney
Holdings Inc. Smith Barney Holdings Inc. and The Travelers Inc. disclaim
beneficial ownership of these securities.
(5) Includes 1,750 and 45 shares of Common Stock that the reporting person has
the right to acquire upon the conversion of 500 shares of the Company's
$.75 Convertible Preferred Stock and the exercise of Warrants to purchase
shares of Common Stock, respectively.
(6) These shares are beneficially owned by State Street Research and Management
Company, a subsidiary of Metropolitan Life Insurance Company, which
disclaims beneficial ownership of these securities.
</TABLE>
TRANSACTIONS WITH MANAGEMENT AND OTHERS
RETIREMENT BENEFITS FOR EXECUTIVES AND DIRECTORS. In December 1990, in
consideration of their many years of service the Company entered into retirement
agreements with seven executives and directors ("Retirees") pursuant to which
the Retirees will receive supplemental retirement payments in addition to the
amounts to which they are entitled under the Company's retirement plan. In
addition, the Retirees and their spouses are entitled to lifetime coverage under
the Company's group medical and dental plans, tax and other financial services
and payments by the Company in connection with certain club membership dues. The
Retirees will also continue to participate in the Company's royalty bonus
program until December 31, 1995. The Company has also agreed to maintain certain
life insurance policies in effect at December 1990, for the benefit of each of
the Retirees.
Six of the Retirees have subsequently resigned as directors. One of the
Retirees continues to serve as a director and will be paid the customary
non-employee director's fee. Pursuant to the terms of the retirement agreements,
the former directors and any other Retiree who ceases to be a director (or his
spouse) will be paid $2,500 a month until December 2000.
The Company's obligation to one Retiree under a revised retirement agreement
is payable in Common Stock or cash, at the Company's option, in May of 1996 at
approximately $190,000 per year with the balance ($149,000) payable in May 1997.
The retirement agreements for the other six Retirees, one of whom received in
1991 the payments scheduled to be made in 1999 and 2000, provide for
supplemental retirement payments totaling approximately $938,400 per year
through 1998 and approximately $740,400 per year in 1999 and 2000.
EXECUTIVE SEVERANCE AGREEMENTS. The Company has entered into executive
severance agreements (the "Executive Severance Agreements") with certain
executive officers, including the Named Executive Officers. The Executive
Severance Agreements provide for severance benefits for termination without
cause and for termination following a "change of control" of the Company. The
Executive Severance Agreements provide that if an executive's employment is
terminated either (a) by the Company for reasons other than cause or other than
as a consequence of death, disability, or retirement, or (b) by the executive
for reasons of diminution of responsibilities, compensation, or benefits or, in
the case of change of control, a significant change in the executive's principal
place of employment, the executive will receive certain payments and benefits.
In March 1995, the Compensation Committee renewed the Executive Severance
Agreements and extended their term to December 1997. In addition, the definition
of "change of control" was modified.
In the case of termination of an executive's employment which does not occur
within two years of a change of control, these severance benefits include (a)
payment of the executive's base salary for a
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term of months equal to the whole number of times that the executive's base
salary can be divided by $10,000, limited to 30 months (such amounts payable
will be reduced by 50% if the executive obtains new employment during the term
of payment) and (b) continued coverage of the executive and any of his or her
dependents under the Company's medical and dental benefit plans throughout the
payment term without any cost to the executive.
If an executive's employment by the Company is terminated under the
circumstances described above within two years after the date upon which a
change of control occurs, the Company would be obligated to take the following
actions after the last day of the executive's employment:
(a) the Company will pay to the executive an amount equal to 2.5 times the
executive's base salary;
(b) the Company will permit the executive and those of his dependents who
are covered under the Company's medical and dental benefit plans to be
covered by such plans without any cost to the executive for a two-year
period of time;
(c) the Company will cause any and all outstanding options to purchase stock
of the Company held by the executive to become immediately exercisable in
full and cause the executive's accrued benefits under any non-qualified
deferred compensation plans to become immediately non-forfeitable; and
(d) if any payment or distribution to the executive, whether or not pursuant
to such agreement, is subject to the federal excise tax on "excess
parachute payments", the Company will be obligated to pay to the
executive such additional amount as may be necessary so that the
executive realizes, after the payment of any income or excise tax on such
additional amount, an amount sufficient to pay all such excise taxes.
The Executive Severance Agreements also provide that the Company will pay
legal fees and expenses incurred by an executive to enforce rights or benefits
under such agreements. Under the Executive Severance Agreements, a "change of
control" of the Company would be deemed to occur if, as modified in March, 1995,
(i) the Company is not the surviving entity in any merger, consolidation or
other reorganization (or survives only as a subsidiary of an entity other than a
previously wholly-owned subsidiary of the Company); (ii) the Company sells,
leases or exchanges all or substantially all of its assets to any other person
or entity (other than a wholly-owned subsidiary of the Company); (iii) the
Company is dissolved and liquidated; (iv) any person or entity, including a
"group" as contemplated by Section 13(d)(3) of the Exchange Act acquires or
gains ownership or control (including, without limitation, power to vote) of
more than 40% of the outstanding shares of the Company's voting stock (based
upon voting power); or (v) as a result of or in connection with a contested
election of directors, the persons who were directors of the Company before such
election cease to constitute a majority of the Board of Directors.
The executive officers who have entered into Executive Severance Agreements
will be required, as a condition to the closings of the transactions
contemplated by the Purchase Agreement, to waive the obligations of the Company
pursuant to such agreements with respect to a "change of control." See "The
Anschutz and JEDI Transactions."
OTHER TRANSACTIONS. For a description of other transactions with management
and others see "Compensation Committee Interlocks and Insider Participation."
TRANSACTIONS WITH THE BLACKSTONE GROUP. In 1994, the Company engaged The
Blackstone Group to perform certain investment banking services. The Blackstone
Group advised the Company in 1994 with respect to certain potential business
transactions, none of which was consummated. It is anticipated that The
Blackstone Group also will be used by the Company in 1995 to analyze certain
potential business transactions. Austin M. Beutner, a director of the Company,
was, until March 1994, a General Partner of The Blackstone Group, which is also
providing investment banking services in 1995.
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<PAGE>
TRANSACTIONS WITH FORMER EXECUTIVE OFFICERS. John F. Dorn resigned as an
executive officer and director of the Company in 1993. John F. Dorn is the
brother of Dale F. Dorn, a director of the Company. Kenneth W. Smith resigned as
an executive officer in March 1994. The Company had previously entered into
severance agreements with the former executive officers and the Company's other
executive officers as described above under "Executive Severance Agreements." In
lieu of the severance payments due under their severance agreements, the Company
agreed to pay John F. Dorn and Kenneth W. Smith for 30 months and 24 months,
respectively, their salaries at the time of the termination of their employment.
In addition, the Company has agreed with the former executive officers with
respect to the following matters: (a) their stock options are fully vested and
are not subject to early termination; (b) they received payments from the
Company equivalent to amounts they would have received as deferred payments
under the Incentive Plan with respect to 1992 and 1993; (c) John F. Dorn
received full vesting with respect to split dollar life insurance at the
Company's expense; (d) they continued to participate in the Company's Executive
Overriding Royalty Bonus Plan until April 1, 1994; (e) they were given their
Company automobiles and office furnishings and the Company paid for the cost of
relocating their offices; (f) the Company will provide John F. Dorn with certain
accounting, financial and estate planning services for a limited period of time;
and (g) until March 31, 1996, if John F. Dorn decides to relocate from Colorado,
the Company will pay his moving expenses and purchase his home, in accordance
with the Company's employee relocation policy.
In March 1994, the Company sold certain non-strategic oil and gas properties
for $4,400,000 to an entity controlled by John F. Dorn and Kenneth W. Smith. The
properties included in this transaction contained interests in approximately 70
wells. All of the properties were non-operated working interests or overriding
royalty interests. The Company established the sales price based upon an opinion
from an independent third party. The purchaser financed 100% of the purchase
price with a loan. The loan bears interest at the rate of prime plus 1% and is
secured by a mortgage on the properties and John F. Dorn's and Kenneth W.
Smith's personal guarantees. The Company participated as a lender in the loan in
the amount of approximately $800,000. In addition, the Company agreed to
subordinate to the other lender its right of payment of principal on default.
John F. Dorn and Kenneth W. Smith have separately agreed with the Company that
their stock options will be canceled to the extent that the Company's
participation in the loan is not repaid in full. The number of stock options
canceled will be based upon a Black-Scholes valuation. Collectively, they have
options to purchase 275,000 shares of the Company's Common Stock at $3.00 per
share and 275,000 shares at $5.00 per share. In 1994, the Company paid
approximately $234,500 to the entity that purchased the properties to settle
title disputes.
SECTION 16 REPORTING
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the SEC and the National Association of Security Dealers, Inc.
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of copies of such forms received by it and
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during the period from
January 1, 1994 to March 31, 1995, its officers, directors, and greater than 10%
beneficial owners complied with all applicable filing requirements, except that
Dale F. Dorn, John C. Dorn and Michael B. Yanney each failed to file a monthly
report of one transaction, but such transactions were reported in their year-end
reports on Form 5, which were timely filed.
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<PAGE>
THE ANSCHUTZ AND JEDI TRANSACTIONS
At the Annual Meeting, the Company's shareholders will be asked to approve
the Anschutz and JEDI Transactions. Several important factors should be
considered by the shareholders with respect to the Transactions:
SUMMARY OF TRANSACTIONS:
- Pursuant to the Transactions, the Company will issue to Anschutz an
aggregate of 18,800,000 shares of Common Stock and 620,000 shares of New
Convertible Preferred Stock that are convertible into an aggregate of
6,200,000 additional shares of Common Stock. In addition, Anschutz will
acquire an option from JEDI and warrants from the Company to acquire an
aggregate of up to 30,694,444 shares of Common Stock. See "The
Transactions" and "Description of Securities to be Issued" below.
Therefore, based on the number of shares outstanding on May 31, 1995,
pursuant to the Transactions Anschutz will acquire approximately 40% of
the Common Stock and will have the ability, subject to a 40% ownership
limitation, to acquire up to approximately 66% of the Common Stock.
Comparatively, based on such share ownership by Anschutz, the percentage
ownership of the Company's current shareholders will be reduced to
approximately 60% initially, with the potential to be further reduced to
approximately 34%. The 40% ownership limitation terminates in five years
and is not applicable to acquisitions of shares approved by the Board of
Directors, including a majority of independent directors, acquisitions
following certain business combinations or tender offers, or acquisitions
made after a third party acquires a greater number of shares than that
held by Anschutz and its affiliates, or subject to acquisition by them.
See "Shareholders Agreement" below.
- Of the 18,800,000 shares of Common Stock to be acquired pursuant to the
Transactions, Anschutz will acquire 5,500,000 shares of Common Stock
pursuant to the automatic conversion at the second closing of the Anschutz
Transaction of a $9,900,000 promissory note issued by the Company, or an
effective price of $1.80 per share. In addition, Anschutz will invest an
additional $35,100,000 in cash at the second closing and will acquire the
remaining 13,300,000 shares of Common Stock (at a price of $1.80 per
share), 620,000 shares of New Convertible Preferred Stock (at a price of
$18.00 per share), and an option from JEDI and warrants from the Company
to acquire up to 30,694,444 additional shares of Common Stock. The last
reported sales price of the Common Stock on the Nasdaq National Market was
$1 1/2 on April 17, 1995, the last trading day prior to the public
announcement of the signing by the Company of letters of intent with
respect to the Transactions, and was $2.00 on July 6, 1995. In between
such dates such price ranged from a high of $2 5/16 to a low of $1 1/2.
See "The Transactions" and "Description of Securities to be Issued" below.
- Pursuant to the Transactions, Anschutz will acquire approximately 40% of
the then outstanding Common Stock. Subject to the 40% ownership
limitation, and in any event after five years, Anschutz could acquire an
additional 6,200,000 shares of Common Stock by converting the New
Convertible Preferred Stock. In addition, on the date of the second
closing of the Anschutz Transaction, subject to the 40% limitation,
Anschutz will have the right to acquire an additional 30,694,444 shares of
Common Stock (19,444,444 shares by the exercise of warrants at a price of
$2.10 per share and 11,250,000 shares by exercise of an option from JEDI
at an initial exercise price of $2.00 per share) for an aggregate cash
consideration of $63,333,332 to the Company. Therefore, subject to the 40%
ownership limitation, based on the number of shares outstanding on May 31,
1995, Anschutz could acquire up to an aggregate of approximately 66% of
Common Stock for an aggregate cash consideration of $108,333,332 to the
Company. See "The Transactions" and "Description of Securities to be
Issued" below.
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<PAGE>
ADVANTAGES AND DISADVANTAGES OF THE TRANSACTIONS:
- The Anschutz and JEDI Transactions have several advantages to the Company
and its shareholders, including providing the Company with additional
equity capital, short-term liquidity, reduced leverage, lower interest
expense and a strategic alliance with Anschutz, an experienced oil and gas
investor. See "Background" below.
- Anschutz will be required 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. Such limitations are not
applicable in all situations. For example, Anschutz is allowed to vote its
shares with respect to all matters with respect to which Anschutz may have
liability under Section 16(b) of the Exchange Act. Such right could give
Anschutz a veto power over certain transactions between the Company and
third parties such as a merger which requires the approval of the holders
of two-thirds of the outstanding Common Stock. See "Shareholders
Agreement" below.
- It is unlikely that control of the Company could be transferred to a third
party without Anschutz's consent and agreement. It is also unlikely that a
third party would offer to pay a premium to acquire the Company without
the prior agreement of Anschutz, even if the Board of Directors should
choose to attempt to sell the Company in the future. It will also be
unlikely that the Company will be able to enter into a transaction
accounted for as a pooling of interests in the next two years. Finally,
the 40% ownership limitation on Anschutz's ownership terminates after five
years and earlier under certain circumstances. Under these circumstances,
based on the number of shares outstanding on May 31, 1995, Anschutz would
have the ability on and after the second closing of the Anschutz
Transaction to acquire up to approximately 66% of the Common Stock by
converting its New Convertible Preferred Stock and exercising during their
respective terms its option and warrants for additional proceeds to the
Company of $63,333,332. Therefore, upon termination of the 40% limitation,
Anschutz may have effective control over the Company. See "Shareholders
Agreement" below.
- If the Transactions are not approved by the shareholders, the Company will
be required to bear its expenses in connection with the Transactions,
including the fees payable to its financial advisor, which are estimated
to be approximately $2,750,000 in the aggregate. In addition, the Company
is obligated under certain circumstances to pay up to $500,000 to Anschutz
to reimburse it if the Anschutz Transaction is not consummated. If the
Anschutz Transaction is not consummated on or before May 17, 1996, and (a)
a third party (other than Anschutz) acquires 40% of the outstanding Common
Stock, (b) the Board of Directors withdraws its recommendation with
respect to the Anschutz Transaction or recommends an alternative
transaction, or (c) the Company enters into an agreement with respect to
an alternative transaction, the Company would be obligated to pay a
Subsequent Event Fee of a minimum of $1,000,000 up to a maximum of
$2,500,000. See "The Transaction" below.
- If the Anschutz and JEDI Transactions are not consummated, the Company
will be faced with several problems for which it will need to seek
immediate solutions, including a loss of liquidity and the ability to
repay its current indebtedness, which includes a $9,900,000 promissory
note issued to Anschutz. One of the solutions considered by the Company
has been the sale of certain non-strategic assets, primarily the Company's
investment in certain Canadian assets. The Company has estimated that if
it were required to sell such assets in a short time period, such sales
could result in a discount of approximately $3-5 million from the book
value of such assets of approximately $13 million. Factors considered in
determining such estimate include the Company's estimate of the underlying
reserves attributable to such assets and the discounted present value of
cash flows from the Company's investment. See "Background."
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<PAGE>
BACKGROUND
Management of the Company began investigating various alternatives beginning
in the fall of 1994 when it became apparent that the market price of natural gas
was declining significantly which would have the effect of impeding activities
relating to execution of its business plan and potentially cause liquidity
constraints if prices remained low for prolonged periods of time. Forest's oil
and gas reserves are 85 percent natural gas and located principally in the Gulf
of Mexico. The Company's reserves are characteristically high volume and
consequently relatively short-lived making the Company somewhat more vulnerable
to volatility in natural gas prices than many of its competitors.
Management initially began discussions with potential joint venture or
"strategic alliance" corporate partners that might have been interested in
exchanging either oil reserves or long-lived natural gas reserves for
participation in the Company's Gulf of Mexico exploitation and exploration
activities. Discussions were held with several companies and negotiations
pursued with two particular companies into early 1995. These discussions did not
lead to any specific transaction proposal.
Management also pursued certain potential merger transactions beginning in
the fall of 1994. The characteristics sought were opportunities with companies
whose market trading values were not significantly higher than the Company's,
whose assets were complementary to Forest's and whose balance sheets were less
leveraged than the Company's balance sheet. Several target companies were
identified. In November, 1994 the Company engaged Batchelder & Partners, Inc.
("Batchelder"), an investment banking firm, to help it examine various potential
merger opportunities. Although discussions have been held with several
companies, no proposal has gone beyond the discussion stage.
During the course of pursuing these alternatives, management also had
discussion with several companies about a potential sale of the Company. None of
these opportunities were attractive to the Company. In each situation the
potential acquirers had high market valuations for the common stock of their
companies and were looking to use their highly valued common stocks to acquire
"under-valued" stocks without paying a control premium.
While examining these various alternatives, management held discussions with
representatives of JEDI about the potential to convert some of the indebtedness
it holds with the Company into equity in the context of a larger transaction.
Various opportunities were examined and negotiations held in the context of
specific transactions. In the course of these discussions, Batchelder introduced
Anschutz as a potential equity investor in the Company in the context of a debt
restructuring with JEDI. Negotiations were conducted with both Anschutz and JEDI
to determine whether a satisfactory transaction could be accomplished. The
Company was first approached concerning a possible investment by Anschutz in
February 1995 by Batchelder, which has on different occasions represented both
the Company and Anschutz in certain matters. At the time the Company was
approached by Anschutz it was faced with short term liquidity needs. 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. These factors made it unlikely that the Company would be able to
raise equity capital in the public markets. The Company had nearly exhausted its
bank line of credit and had also considered the liquidation of certain
non-strategic assets to meet its liquidity needs.
In response to this set of circumstances, the Company's Board of Directors
formed a subcommittee consisting of Messrs. Anderson, Callahan, Beutner, Yanney,
Lee, William L. Dorn and Boswell to consider the alternatives available to the
Company. In addition, the Board of Directors requested that the Company engage a
financial advisor to assist the Board of Directors in evaluating, from a
financial point of view, certain alternatives being considered by the Company.
Dillon, Read & Co. Inc. ("Dillon Read") was engaged to serve as a financial
advisor to the Company and its Board of Directors and to render general
financial advisory services to the Company. Dillon Read was asked by the Board
of Directors to generally comment on the Company's financial condition,
prospects and strategic alternatives available to the Company.
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The Board of Directors considered the alternatives that management had
pursued to address the Company's needs and assessed them from a number of
perspectives, including likelihood of completion. The Board of Directors
determined that the Anschutz investment represented a more practical and
expeditious solution to the Company's liquidity needs than attempting to raise
equity capital through private sources, in the public equity markets or by other
alternatives considered. Dillon Read also confirmed, in its opinion, that the
public equity markets were not a viable alternative for the Company as a means
of raising capital. In addition, the Board of Directors believed that pursuing
an Anschutz investment would give the Company an opportunity to pursue its
long-term growth strategy. The Board of Directors instructed management and
Dillon Read to focus its attention on the Anschutz investment in order to
determine whether a satisfactory transaction could be achieved from the
Company's perspective.
The Board of Directors requested that Dillon Read advise the Board of
Directors on the reasonableness, from a financial point of view, of certain
aspects of the proposed Anschutz and JEDI transactions. One of the legal issues
facing the Company was whether the ownership position to be obtained by
Anschutz, in light of the constraints imposed by the Shareholders Agreement,
could be deemed to constitute a "change of control". With the legal uncertainty
surrounding the question of whether a "change of control" had occurred, Dillon
Read informed the Company that it would not be in a position to render its own
conclusion as to whether the Transactions were fair to the Company and its
shareholders from a financial point of view. Dillon Read informed the Company
that (i) because the Company had not reached a determination as to whether a
"change of control" would occur from a legal point of view, and (ii) due to the
fact that the Board had asked Dillon Read to focus on the Anschutz investment as
opposed to seeking alternatives to the Transactions, Dillon Read could not reach
a conclusion as to whether a sufficient premium had been paid if it were
eventually determined that a "change of control" had occurred. Therefore, Dillon
Read advised the Board that the only opinion it could provide would be that,
under the circumstances as summarized in the opinion, it was reasonable for the
Board to conclude that the consideration to be received by the Company in the
Transactions is fair from a financial point of view. The Company believes that
if the Transactions would be deemed to be a "change of control", except as
otherwise disclosed in this Proxy Statement, there would be no material adverse
effects to the shareholders resulting from the Transactions.
The Company, Anschutz and representatives of JEDI conducted extensive
negotiations prior to reaching agreement with respect to the terms of the
Transactions. The Company believed that additional equity capital should be
obtained at or above the then current market price of the Company's Common
Stock. Anschutz agreed to invest equity capital if the JEDI loan was
restructured, with the Company substantially reducing its interest cost and
converting a substantial portion of the loan to equity on which Anschutz would
have an option. The Company and JEDI discussed several alternatives for
restructuring the JEDI loan in combination with the Anschutz investment,
including exchanging equity for part of the loan. In order to agree to the
interest rate reduction and the grant of an option on equity received in the
loan restructuring, JEDI required, among other things, that any equity proceeds
received by the Company pursuant to the Transactions, other than the amounts
paid upon the initial investment, be used to reduce the principal amount of the
JEDI loan.
The Board of Directors relied in part on Dillon Read as to the
reasonableness, from a financial point of view, of certain aspects of the
Transactions to the Company, such as the price to be paid by Anschutz and the
terms of the Warrants. The Board of Directors also relied on the recommendations
of management with respect to the terms of Transactions. The Company's primary
consideration in structuring the ownership and voting restrictions to be
included in the Shareholders Agreement was to limit Anschutz's ownership
position and control of the Company. The terms of the Anschutz and JEDI
Transactions were considered and approved by the Board of Directors at four
meetings, one prior to the execution of the letters of intent and three prior to
execution of the definitive agreements. The Company signed letters of intent
with both Anschutz and JEDI on April 17, 1995. The JEDI letter
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of intent was amended on April 27, 1995. Batchelder acted as an intermediary
between the parties and the Company agreed to compensate Batchelder in the
amount of approximately $1 million if the Transactions are consummated and pay
all of its expenses.
THE TRANSACTIONS
On May 17, 1995, the Company entered into definitive agreements with
Anschutz and with JEDI, a Delaware limited partnership, whose general partner is
Enron Capital Corp., an affiliate of Enron Corp., with respect to the
transactions summarized below. The Purchase Agreement between the Company and
Anschutz dated May 17, 1995 (the "Anschutz Agreement") and the Restructure
Agreement between the Company and JEDI dated May 17, 1995 (the "JEDI Agreement")
are included as exhibits to the Company's Form 8-K which was filed with the
Commission on May 26, 1995. The Company has agreed to provide copies of the Form
8-K without charge upon request. See "General and Other Matters -- Available
Information".
Pursuant to the Anschutz Agreement, for a total consideration of $45,000,000
Anschutz will purchase an aggregate of 18,800,000 shares of Common Stock and
620,000 shares of Second Series Preferred Stock ("New Convertible Preferred
Stock") that are convertible into an aggregate of 6,200,000 additional shares of
Common Stock. The New Convertible Preferred Stock will have a liquidation
preference and will receive dividends ratably with the Common Stock. The
Anschutz investment will be made in two closings. In the first closing, which
occurred on May 19, 1995, Anschutz loaned the Company $9,900,000 for a term of
nine months. The loan bears interest at 8% per annum for 16 weeks and at 12.5%
per annum thereafter. The loan is nonrecourse to the Company and secured by oil
and gas properties owned by the Company, the preferred stock of Archean Energy
Ltd. (a private Canadian exploration and production company) owned by the
Company, and $2,000,000 of cash. The loan may be accelerated by Anschutz in
certain events, including default on other indebtedness in the aggregate amount
of $500,000, judgments against the Company (not adequately covered by insurance)
in excess of $1,000,000, and a "change of control" within the meaning of the
Company's Indenture (the "Note Indenture") with respect to its 11 1/4% Senior
Subordinated Notes due 2003 (the "11 1/4% Notes"). The loan may be converted
into 5,500,000 shares of Common Stock at Anschutz's election, but the loan must
be so converted, if not previously repaid, at the second closing. At the second
closing, expected to occur following receipt of approval by the Company's
shareholders of the transactions contemplated by the Anschutz Agreement and the
JEDI Agreement, Anschutz will separately purchase from the Company, for an
additional payment of $35,100,000, 13,300,000 shares of Common Stock and the New
Convertible Preferred Stock and Anschutz will acquire warrants to purchase
19,444,444 shares of Common Stock with an exercise price of $2.10 per share (the
"$2.10 Warrants") and will acquire from JEDI an option to acquire up to an
additional 11,250,000 shares of Common Stock, subject to certain restrictions.
The $2.10 Warrants are exercisable during the first 18 months after the second
closing, subject to extension in certain circumstances to 36 months after the
second closing. See "Descriptions of Securities to be Issued" below.
At the second closing Anschutz will agree pursuant to a Shareholders
Agreement with the Company (the "Shareholders Agreement") to certain voting,
acquisition, transfer and certain other limitations relating to all its 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 to three the number
of persons associated with Anschutz that may at any time be elected as directors
of the Company and limit the total number of directors to 10 and (c) a limit on
the acquisition of additional shares of Common Stock by Anschutz (whether
pursuant to the conversion of the New Convertible Preferred Stock, the exercise
of the warrants or the option received from JEDI, each as described below, or
otherwise), subject to certain exceptions, that would prohibit any acquisition
by Anschutz that would result in
25
<PAGE>
Anschutz beneficially owning 40% or more of the shares of Common Stock then
issued and outstanding. While the foregoing limitations are in effect, Anschutz
will have a minority representation on the Board of Directors. See "Shareholders
Agreement" below.
At the first closing the Company and Anschutz also entered into a
Registration Rights Agreement (the "Anschutz Registration Rights Agreement")
pursuant to which the Company has agreed to register pursuant to the Securities
Act of 1933, as amended (the "Securities Act"), any Common Stock acquired by
Anschutz in connection with the Anschutz Agreement. Anschutz has the right to
demand such registration on four separate occasions and will have certain
"piggy-back" registration rights with respect to Company registrations. The
Company will bear the cost of any registration pursuant to the Anschutz
Registration Rights Agreement. At the second closing the Company will also enter
into a registration rights agreement with JEDI on terms substantially similar to
the Anschutz Registration Rights Agreement, including two demand registration
rights.
The JEDI Agreement contemplates that, at the second closing referred to
above, Forest and JEDI will restructure JEDI's existing loan which had a
principal balance of approximately $62,100,000 at May 15, 1995. As a part of the
restructuring, the existing JEDI loan balance will be divided into two tranches.
Tranche A will be in the original principal amount of $40,000,000, will bear
interest at the rate of 12.5% per annum and will be due and payable in full on
December 31, 2000. Tranche B will be in the original principal amount of
approximately $22,100,000, will not bear interest and will be due and payable in
full on December 31, 2002. In addition to the interest rate reduction on the
Tranche B loan amount, JEDI will relinquish the net profits interest that it
holds in certain Forest properties and will receive $2.00 Warrants described
below. The amendment to the Loan Agreement relating to the JEDI Loan (the "JEDI
Loan Agreement") also revises and updates the schedule of operations to be
conducted on the properties securing the loan, subjects the Company to certain
approval and information delivery covenants with respect to proposed capital
operations on the JEDI properties and amends the loan amortization and property
cash flow covenants contained in the JEDI Loan Agreement to provide for target
cash flow and loan balance amounts that the Company believes are achievable. As
noted above, the restructuring of the JEDI loan is a condition to the Anschutz
Transaction. In addition, the restructuring of the JEDI loan is conditioned upon
the consummation of the Anschutz Transaction. 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 interest expense of approximately
$2,000,000 per annum. See "Pro Forma Capitalization" below. Subject to certain
conditions, the Company may satisfy the 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. The conditions include the
expiration or full exercise of the $2.10 Warrants, the absence of a default
under the JEDI loan agreement, the accuracy of certain representations and
warranties under the JEDI loan agreement and the absence of material liens or
litigation affecting the JEDI properties. 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. The Company believes that
the option to convey the properties to JEDI affords the Company greater
flexibility in managing its capital structure. Although the Company has no
current plans regarding the possible exercise of such option, the Company would
likely do so if at the time the option became exercisable the outstanding
balance of the JEDI loan was significantly greater than the value of the
properties securing the JEDI loan. 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 Agreement also contemplates that, at the second closing, JEDI will
receive warrants to purchase 11,250,000 shares of the Common Stock with an
exercise price of $2.00 per share (the "$2.00 Warrants"). For up to the first 36
months after the second closing, the $2.00 Warrants may be exercised only on the
dates and in the respective numbers of shares required to be delivered by JEDI
to Anschutz pursuant to the exercise of the option granted by JEDI to Anschutz,
as described below. The
26
<PAGE>
Anschutz Agreement also provides that, at the second closing, JEDI will grant to
Anschutz an option on the 11,250,000 shares of Common Stock issuable upon the
exercise of the $2.00 Warrants during the first 36 months after the second
closing. 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 Anschutz Agreement and the JEDI Agreement require the Company to pay
Anschutz and JEDI certain fees and expenses in connection with the transactions
contemplated thereby in certain circumstances. The Anschutz Agreement also
requires the Company to pay to Anschutz a fee of a minimum of $1,000,000 up to a
maximum of $2,500,000 upon the occurrence of certain events prior to the second
closing (or, if the second closing does not occur, by May 17, 1996), such as a
merger, consolidation or other business combination between the Company and a
person other than Anschutz. The Company is also obligated in certain
circumstances to pay up to $500,000 of expenses incurred by Anschutz if the
second closing does not occur. In the Anschutz Agreement, the Company has agreed
not to solicit proposals for transactions that would require the Company to pay
such 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 Anschutz Agreement contains representations and warranties regarding
corporate existence and power, authorization, approvals and consents, binding
effect, financial information, financial condition, absence of defaults under
outstanding debt instruments, absence of certain changes or events, taxes,
litigation, compliance with laws, licenses, employee matters, labor disputes,
subsidiaries, property, oil and gas interests, equipment, leases, proprietary
rights, insurance, debt, capitalization, environmental matters, books and
records, material contracts, documents filed with the Securities and Exchange
Commission, required votes of shareholders, Section 912 of the New York Business
Corporation Law, absence of merger agreements, and fees for brokers and finders.
The Anschutz Agreement also contains covenants by the Company, including, a
covenant not to solicit transaction proposals from other parties, additional
affirmative covenants requiring the maintenance of records, maintenance of
properties, conduct of business, maintenance of insurance, compliance with laws,
payment of taxes, reporting of specified information to Anschutz, reservation of
shares of Common Stock to be issued pursuant to the Anschutz Agreement,
qualification of such shares for inclusion in the Nasdaq National Market,
maintenance of existence, compliance with laws, coordination of publicity
regarding the transactions, maintenance of confidentiality of information and
further assurances, and negative covenants with respect to amendment of charter
documents, issuance of securities, creation of liens and encumbrances,
incurrence of debt, restricted payments, investments, merger agreements or
agreements with respect to other business combinations, leases, dispositions of
assets, transactions with affiliates, accounting changes, dispositions of
capital stock of a subsidiary, compensation of executive officers, modifying or
withdrawing the Board of Directors recommendations that holders of shares of
Common Stock approve the transactions, union contracts, settling or compromising
tax liabilities, settling litigation, delisting securities of the Company from
the Nasdaq National Market, amending any of the transaction documents without
the prior approval of Anschutz and imposing limitations on the rights of
Anschutz as a shareholder.
The Anschutz Agreement also contains a covenant by the Company that it will
amend the Rights Agreement dated as of October 14, 1993 between the Company and
Mellon Securities Trust Company, as Rights Agent, (the "Rights Agreement") with
respect to the transactions contemplated by the Anschutz Agreement and the JEDI
Agreement. The amendment of the Rights Agreement will exempt from the provisions
of the Rights Agreement shares of Common Stock acquired by Anschutz and JEDI
pursuant to the Anschutz Agreement (including shares later acquired pursuant to
the conversion of the New Convertible Preferred Stock or the exercise of the
$2.10 Warrants or the option received from JEDI) and JEDI Agreement,
respectively. The amendment to Rights Agreement will not exempt other shares of
Common Stock acquired by Anschutz or JEDI from the provisions of the Rights
Agreement. In the Anschutz Agreement, the Company has agreed to waive the
provisions of the Rights Agreement with respect to Anschutz if, and to the same
extent, it waives such provisions with respect to any other person.
27
<PAGE>
The consent of a majority of the holders of the 11 1/4% Notes has been
obtained to the waiver of the "change of control" covenant in the Note Indenture
with respect to the transactions contemplated by the Anschutz Agreement and the
JEDI Agreement and any future acquisition of equity securities of the Company by
Anschutz (whether pursuant to the Anschutz Agreement or otherwise). The purchase
by Anschutz of Common Stock at the second closing and the other transactions
contemplated by the Anschutz Agreement are also subject to, among other things,
the prior approval of the Company's shareholders and waiver of the provisions of
the Company's Rights Agreement and the closing of the transactions contemplated
by the JEDI Agreement.
The Company has received the opinion, from a financial point of view, of
Dillon Read with respect to the Transactions. A copy of the Dillon Read opinion
is included in this Proxy Statement as Annex A. See "Financial Advisor" below.
The Board of Directors believes that the transactions contemplated by the
Anschutz Agreement and the JEDI Agreement will improve the Company's liquidity
and will position the Company to execute on its business plan. Management and
the Board of Directors believe that the Transactions are in the best interests
of the Company and its shareholders.
A majority of the votes represented at the Annual Meeting by shares of
Common Stock entitled to vote is required for approval of the transactions
contemplated by the Anschutz and JEDI Agreements as described in this Proxy
Statement.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
TRANSACTIONS CONTEMPLATED BY THE ANSCHUTZ AND JEDI AGREEMENTS AS DESCRIBED IN
THIS PROXY STATEMENT.
The persons named in the enclosed proxy, who have been so designated by the
Board of Directors, intend to vote for the proposal described above unless
otherwise instructed in the proxy. The Company believes that the members of the
Board of Directors and the senior management of the Company intend to vote or
direct the vote of all shares of Common Stock of which they have beneficial
ownership in favor of this proposal.
DESCRIPTION OF SECURITIES TO BE ISSUED
Subject to the approval of the shareholders of the Company, at the second
closing Anschutz will acquire 5,500,000 shares of Common Stock pursuant to the
conversion of the Company's $9,900,000 loan from Anschutz (unless previously
repaid), 13,300,000 shares of Common Stock, 620,000 shares of New Convertible
Preferred Stock, the $2.10 Warrants to purchase 19,444,444 shares of Common
Stock and an option from JEDI to acquire 11,250,000 shares of Common Stock
acquired by JEDI pursuant to the exercise of the $2.00 Warrants to be granted to
JEDI pursuant to the JEDI Agreement.
The New Convertible Preferred Stock will be issued in a series designated as
"Second Series Convertible Preferred Stock". Each share of New Convertible
Preferred Stock (1) will have the right to receive dividends on the dates and in
the form that dividends shall be payable on the Common Stock, in each case in an
amount equal to the amount of such dividend payable on the number of shares of
Common Stock into which such share of New Convertible Preferred Stock shall be
convertible immediately preceding the record date for the determination of the
shareholders entitled to receive such dividend, (2) will have no right to vote,
(3) will have the right, upon any liquidation, dissolution or winding up of the
Company, before any distribution is made on any shares of Common Stock, to be
paid the amount of $18.00 and, after there shall have been paid to each share of
Common Stock the amount of $1.80, will have the right to receive distributions
on the dates and in the form that distributions shall be payable on the Common
Stock, in each case in an amount equal to the amount of such distributions
payable on the number of shares of Common Stock into which such share of New
Convertible Preferred Stock is convertible (assuming for such purpose that such
conversion were possible) immediately preceding the record date for the
determination of the shareholders entitled to receive such distribution and (4)
will be convertible into 10 shares of Common Stock, which conversion may be made
from time to time on or before the date that is the fifth anniversary of the
second closing, but which in any event shall be made on such fifth anniversary.
The rights of the holders of the
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<PAGE>
New Convertible Preferred Stock to receive dividends are junior and subordinate
to the rights of the holders of the Company's $.75 Convertible Preferred Stock
to the same extent that the rights of the holders of the Common Stock are
subordinate in right to receive dividends to the rights of the holders of $.75
Convertible Preferred Stock to receive dividends, and the rights of the holders
of the New Convertible Preferred Stock will rank pari passu with the Company's
$.75 Convertible Preferred Stock as to liquidation preference.
The $2.10 Warrants will be issued to Anschutz. The $2.10 Warrants will
expire 18 months after the second closing (or, if the Shareholders Agreement
would limit such exercise or the Company shall have previously sold in excess of
$60,000,000 of equity securities in a transaction in which Anschutz has agreed
not to sell shares for a period of nine months, 36 months after the second
closing).
The $2.00 Warrants will be issued to JEDI and 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 the 90 days and 15 days
preceding the termination is in excess of $2.50 per share.
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<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1995 and the pro forma capitalization adjusted to give effect, at
the First Closing, to a $9,900,000 nonrecourse loan to the Company by Anschutz
and to give effect, at the Second Closing, to (i) conversion of the Anschutz
loan of $9,900,000 into 5,500,000 shares of Common Stock, (ii) the issuance of
13,300,000 shares of Common Stock, 620,000 shares of New Convertible Preferred
Stock and the $2.10 Warrants to purchase 19,444,444 shares of Common Stock to
Anschutz for a total consideration of $35,100,000, (iii) the restructuring of
JEDI's loan and the issuance of the $2.00 Warrants to purchase 11,250,000 shares
of Common Stock in connection therewith and (iv) related costs associated with
the foregoing transactions.
<TABLE>
<CAPTION>
MARCH 31, PRO FORMA PRO FORMA
1995 FIRST CLOSING SECOND CLOSING
------------ ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt, including current portion:
Short-term convertible note payable to Anschutz................... $ -- 9,900(1) -- (2)
Bank debt......................................................... 45,000 37,100(1) -- (3)
Nonrecourse secured loan.......................................... 57,641 57,641 45,226(4)
Production payment obligation..................................... 17,904 17,904 17,904
11 1/4% subordinated notes........................................ 99,328 99,328 99,328
------------ ------------- --------------
Total debt, including current portion........................... 219,873 221,873 162,458
Retirement benefits payable to executives and directors, including
current portion.................................................... 4,034 4,034 4,034
Other liabilities................................................... 16,008 16,008 16,008
Deferred revenue.................................................... 29,289 29,289 29,289
Shareholders' equity:
New Convertible Preferred Stock, 620,000 shares outstanding on a
pro forma basis after the Second Closing......................... -- -- 8,518(3)
$.75 Convertible Preferred Stock, 2,880,973 shares issued and
outstanding...................................................... 15,845 15,845 15,845
Common Stock, par value $.10 per share, 28,295,311 shares issued
and outstanding at March 31, 1995 and after the First Closing and
47,095,311 shares outstanding on a pro forma basis after the
Second Closing (6)............................................... 2,829 2,829 4,709(2)(3)
Capital surplus................................................... 188,593 188,593 232,060(2)(3)(5)
Accumulated deficit............................................... (202,643) (202,643) (202,975)(2)(3)(4)(5)
Foreign currency translation...................................... (1,312) (1,312) (1,312)
Treasury stock, at cost, 44,664 shares............................ (770) (770) (770)
------------ ------------- --------------
Total shareholders' equity...................................... 2,542 2,542 56,075
------------ ------------- --------------
Total capitalization.......................................... $ 271,746 273,746 267,864
------------ ------------- --------------
------------ ------------- --------------
<FN>
(1) The First Closing occurred on May 19, 1995. The pro forma effects shown
above include receipt by the Company of a $9,900,000 convertible
nonrecourse loan from Anschutz, use of $7,900,000 proceeds therefrom to
reduce the Company's outstanding bank debt, and deposit of the remaining
$2,000,000 of proceeds in an escrow account.
(2) At Second Closing, the $9,900,000 loan from Anschutz will be converted into
5,500,000 shares of Common Stock, resulting in additional par value of
$550,000 and capital surplus of $9,350,000. Interest expense of
approximately $132,000 will be incurred between the first and second
closings.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(3) At Second Closing, the Company will receive from Anschutz $35,100,000 in
cash which, in conjunction with the $2,000,000 escrow account referred to
in (1) above, will be used to repay bank debt. In return for such
consideration, Anschutz will receive 13,300,000 shares of Common Stock,
620,000 shares of New Convertible Preferred Stock and warrants to purchase
19,444,444 shares of Common Stock at a purchase price of $2.10 per share.
Based on the relative fair market values of the Common Stock, New
Convertible Preferred Stock and the $2.10 Warrants, the Company estimates
that it will record a value of approximately $18,271,700 for the Common
Stock (of which $1,330,000 represents par value and the remainder is
Capital Surplus); a value of approximately $8,517,600 for the New
Convertible Preferred Stock; and Capital Surplus of approximately
$8,310,700 representing the fair value of the $2.10 Warrants.
(4) At Second Closing, the principal balance of the nonrecourse secured loan,
which was approximately $62,101,000 at March 31, 1995, will be reduced by
the $16,875,000 fair market value of the $2.00 Warrants which will be
issued to JEDI, resulting in a new principal balance of $45,226,000. The
$12,415,000 difference between the $57,641,000 carrying value of the loan
at March 31, 1995 and the new principal balance will be credited to Capital
Surplus.
(5) A portion of the costs related to the JEDI restructuring, expected to be
approximately $200,000, will be charged to expense. The costs related to
the Anschutz transaction and the equity component of the JEDI transaction,
expected to total approximately $3,550,000, will be charged to Capital
Surplus.
(6) The number of shares of Common Stock outstanding does not include, as of
March 31, 1995, 3,270,000 shares issuable upon exercise of outstanding
share options, 1,244,715 shares issuable upon exercise of the Company's
existing warrants, or 10,083,406 shares issuable upon conversion of the
Company's $.75 Convertible Preferred Stock.
</TABLE>
SHAREHOLDERS AGREEMENT
In connection with the proposed issuance to Anschutz, Anschutz will enter
into the Shareholders Agreement with the Company providing for certain voting
and other limitations regarding its shares of Common Stock for the lesser of (i)
five years after the second closing and (ii) the first day on which the sum of
the number of shares of Common Stock owned by Anschutz and its affiliates and
any shares of Common Stock subject to acquisition by Anschutz and its affiliates
(regardless of any conditions or restrictions on such rights) is less than 20%
of the total of all shares of Common Stock issued and outstanding and subject to
issuance (regardless of any conditions or restrictions on such rights). The
Shareholders Agreement requires the Company to, among other things, except as
otherwise approved by the Board of Directors, including a majority of the
Independent Directors (as defined below), or by vote of the holders of
two-thirds of the shares of Common Stock then issued and outstanding (in which
Anschutz Excess Securities (as defined below) are voted in accordance with the
restrictions contained in the Shareholders Agreement) (a) fix the number of
directors of the Company at ten, who are to be three persons selected by
Anschutz (the "Anschutz Designees"), two persons who are officers of the Company
and five persons unaffiliated with Anschutz who are not and have not been at any
time during the preceding two years an officer or employee of the Company or a
director, officer or employee of a beneficial owner of 5% or more of the shares
of Common Stock then issued and outstanding or an affiliate of such beneficial
owner ("Independent Directors"), (b) appoint an Anschutz Designee chosen by
Anschutz to each of the Executive Committee, the Compensation Committee and the
Audit Committee (or committees having similar functions) of the Board of
Directors, (c) appoint a Nominating Committee composed of three directors, one
of whom shall be an Anschutz Designee, one of whom shall be an officer of the
Company and one of whom shall be an Independent Director, (d) require that
nominees to the Board of Directors other than the Anschutz Designees shall be
selected by a vote of at least two members of the Nominating Committee, of whom
one shall be an Independent Director, (e) if any Anschutz Designee shall cease
to be a director for any reason, fill the vacancy resulting thereby with an
Anschutz Designee and (f) call meetings of the Board of Directors and committees
thereof upon the written request of any Anschutz Designee who is a director.
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<PAGE>
The Shareholders Agreement also contains a limit on voting that would
require Anschutz to vote all equity securities of the Company 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 (the "Anschutz Excess
Securities") in the same proportion as all other equity securities of the
Company voted with respect to the matter (other than equity securities held by
Anschutz) are voted, except that Anschutz may vote the Anschutz Excess
Securities without restriction (a) for the election of the permitted number of
Anschutz Designees, (b) with respect to all matters with respect to which
Anschutz may have liability under Section 16(b) of the Exchange Act (unless the
Company has obtained a final judgment to the effect that Anschutz will have no
such liability) and (c) with respect to other matters as approved by the Board
of Directors, including a majority of Independent Directors.
The exception with respect to Section 16(b) of the Exchange Act could have
the effect of permitting Anschutz to vote the Anschutz Excess Securities without
restriction in connection with a proposed merger of the Company with a third
party, which merger had been approved by the Board of Directors (regardless of
how the directors appointed by Anschutz might vote on such merger). Depending
upon its percentage ownership, if permitted to vote the Anschutz Excess
Securities, Anschutz could have a veto power over certain transactions between
the Company and third parties such as a merger which requires the approval of
the holders of two-thirds of the outstanding Common Stock.
The Shareholders Agreement also contains an agreement on the part of
Anschutz not to transfer the beneficial ownership of any of its shares of Common
Stock and Preferred Stock (including shares later acquired pursuant to the
conversion of the New Convertible Preferred Stock or the exercise of the $2.10
Warrants or the option received from JEDI), except (a) in a public offering of
Common Stock pursuant to a registration statement effective under the Securities
Act, (b) to a person or Group (as defined in Section 13(d)(3) of the Exchange
Act) who represents that it will then beneficially own 9.9% or less of the total
number of shares of Common Stock then issued and outstanding and those subject
to issuance (even if then subject to conditions or restrictions), (c) to a
person or Group who will then beneficially own more than 9.9% but less than 20%
of the total number of shares of Common Stock issued and outstanding and those
subject to issuance (even if then subject to conditions or restrictions) if such
person or Group assumes by written instrument satisfactory to both Anschutz and
the Company the transfer restrictions previously applicable to Anschutz, (d) any
transfer approved by the Board of Directors, including a majority of the
Independent Directors, which approval shall not be unreasonably withheld with
respect to a transfer to any person or Group who represents that it will then
beneficially own more than 9.9% and less than 20% of the total number of shares
of Common Stock issued and outstanding and those subject to issuance (even if
then subject to conditions or restrictions), (e) a transfer in connection with
certain business combination transactions or tender or exchange offers, upon the
liquidation or dissolution of the Company or as effected by operation of law and
(f) the pledge or grant of a security interest in certain cases.
The Shareholders Agreement also provides that Anschutz will neither alone,
nor through or with its affiliates, acquire shares of Common Stock which, when
combined with shares of Common Stock then owned by Anschutz and its affiliates,
would result in Anschutz beneficially owning 40% or more of the shares of Common
Stock then issued and outstanding (provided that shares of Common Stock which
may be acquired pursuant to the conversion of the New Convertible Preferred
Stock or the exercise of the $2.10 Warrants or the option received from JEDI
that have not been issued shall not be included in such determination), except
that such restriction shall not apply to (i) acquisitions following a business
combination transaction that (A) has been approved by the Board of Directors
(including a majority of the Independent Directors) or by the holders of
two-thirds of the shares of Common Stock voted with respect to such transaction
in which Anschutz Excess Securities are voted in accordance with the
Shareholders Agreement) and (B) results in the beneficial ownership by any
person or Group of 20% or more of the shares of Common Stock then issued and
outstanding (or if all or any part of the shares of Common Stock are changed
into or exchanged for shares of capital stock of any other person, 20% of such
issued and outstanding shares), (ii) acquisitions following the commencement of
a tender or exchange offer made by any person or Group (other than and not
including
32
<PAGE>
Anschutz or an affiliate of, or any person acting in concert with, Anschutz) to
acquire beneficial ownership of 40% or more of the shares of Common Stock then
issued and outstanding, (iii) acquisitions after any person or Group (other than
and not including an affiliate of Anschutz) shall own beneficially shares of
Common Stock which exceed the sum of the number of shares of Common Stock then
owned by Anschutz and its affiliates plus the number then subject to acquisition
upon the conversion, exercise or exchange by Anschutz and its affiliates of
equity securities of the Company or other rights then owned (whether or not
subject to restrictions or conditions) and (iv) acquisitions approved by the
Board of Directors, including a majority of Independent Directors. If Anschutz's
percentage ownership were diluted by future increases in the outstanding Common
Stock, the 40% restriction on Anschutz's ownership would not preclude Anschutz
from acquiring shares of Common Stock in the open market up to the 40% level,
regardless of Anschutz's ability to exercise warrants or options or to convert
the New Convertible Preferred Stock.
The Shareholders Agreement also provides that the Company will not take or
recommend to its shareholders any action which would impose on Anschutz or its
affiliates any limitations on their legal rights, other than those imposed by
the express terms of the Shareholders Agreement, and that the Company will not
take any action that will or may, directly or indirectly, result in Anschutz or
any affiliate having liability under Section 16(b) of the Exchange Act with
respect to securities acquired pursuant to the Anschutz Agreement (including
shares acquired upon the conversion of the New Convertible Preferred Stock or
the exercise of the $2.10 Warrants or the option received from JEDI). The
Company has the right to seek a declaratory judgment as to whether any action
described in the preceding sentence or the provisions with respect to the
limitations on the voting of the Anschutz Excess Securities on a matter shall be
effective and in doing so whether Anschutz will have Section 16(b) liability
with respect to such matters. The Shareholders Agreement also provides that the
voting restrictions on the Anschutz Excess Securities, and the transfer
restrictions and the cap on purchases of Common Stock by Anschutz in excess of
40%, shall no longer apply if any of the Anschutz Designees are not elected to
the Board of Directors (and Anschutz and its affiliates voted all the shares of
Common Stock owned by them in favor of such election) or one or more directors
who are Anschutz Designees are not appointed to the Committees as provided in
the Shareholders Agreement (and the directors who are Anschutz Designees voted
in favor of such appointment).
FINANCIAL ADVISOR
The Company retained Dillon Read to act as its financial advisor. On May 15,
1995, Dillon Read delivered an opinion to the Board of Directors indicating that
the transactions, taken as a whole, including the consideration to be received
by the Company, represent a reasonable means under the circumstances of raising
capital for the Company and that it was reasonable to conclude that the
consideration to be received by the Company in the transactions is fair to the
Company and to the Common Stockholders of the Company from a financial point of
view. In reaching this opinion, Dillon Read relied upon the accuracy and
completeness of all financial and other information provided to it by the
Company, as well as all publicly available information, and did not
independently verify such information. Dillon Read restated its opinion as of
May 17, 1995, the date on which the Company entered into the Anschutz and JEDI
Agreements. A copy of Dillon Read's written opinion is attached as Annex A
hereto.
In arriving at its opinion, Dillon Read reviewed the Anschutz Agreement and
the JEDI Agreement, and certain business and financial information relating to
the Company, including certain financial information, third party oil and gas
reserve estimates and other analyses and estimates provided to Dillon Read by
the Company, and reviewed and discussed the business and prospects of the
Company with representatives of the Company's management. Dillon Read also
considered certain financial data of the Company and compared that information
to similar data for publicly held companies in businesses Dillon Read believed
to be generally comparable to that of the Company. Dillon Read also considered
the financial terms of certain other transactions, including minority
investments, which have recently been effected and considered such other
information, financial
33
<PAGE>
studies and analyses, and financial, economic and market criteria as Dillon Read
deemed relevant. Dillon Read also reviewed market prices for the Company's
Common Stock for dates prior to the date of the announcement of the transactions
on April 18, 1995.
Dillon Read did not make an independent evaluation or appraisal of any of
the assets or liabilities (contingent or otherwise) of the Company, nor was
Dillon Read furnished with any such evaluations or appraisal. With respect to
the financial projections, estimates and analyses which the Company furnished to
Dillon Read, Dillon Read utilized such information and, with the Board's
consent, relied thereon. Further, Dillon Read assumed that such information was
prepared in good faith by the Company's management and was reasonably based upon
the Company's historical financial performance and certain estimates and
assumptions which were reasonable at the time made. Dillon Read's opinion was
based on economic, monetary and market conditions existing on April 17, 1995.
In rendering its opinion, Dillon Read took into consideration that without
effecting the transactions, the Company believed that it was facing near-term
liquidity issues necessitating the sale of certain assets to raise cash at a
discount of approximately $3 - $5 million to the value that the Company believed
could be realized without timing constraints, as well as a highly leveraged
balance sheet which limited the Company's ability to maintain, much less
increase, its asset base. Dillon Read also considered the recent depressed state
of the natural gas market and the resulting impact on the valuations of
publicly-traded domestic natural gas producers. Additionally, Dillon Read
considered a number of benefits to the Company which result from the
transactions including a significant improvement in the liquidity of the
Company, the availability of cash to make budgeted capital expenditures and a
material reduction in financial leverage, as well as over $2 million in annual
interest expense savings.
Dillon Read is an internationally recognized investment banking firm which,
as a part of its investment banking business, is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Dillon Read was selected by
the Company and its Board of Directors as financial advisor based on such
qualifications.
In connection with Dillon Read's engagement by the Company, the Company paid
Dillon Read $100,000 upon its being retained to act as the Company's financial
advisor on March 7, 1995 and has agreed to pay Dillon Read $100,000 for each
90-day period of Dillon Read's engagement, payable on June 30, 1995 and
September 30, 1995. The Company also agreed to pay Dillon Read certain fees for
acting as financial advisor to the Company depending upon the type and size of
the transactions entered into by the Company. If all of the transactions
summarized in this Proxy Statement are consummated, Dillon Read shall be
entitled to receive an aggregate additional fee of $991,250 pursuant to such fee
arrangements. The Company also agreed to indemnify Dillon Read pursuant to
customary indemnification provisions and to reimburse certain of Dillon Read's
expenses. In the ordinary course of its business, Dillon Read may trade the
securities of the Company and may at any time hold a long or short position in
such securities for its own account or for the accounts of its customers.
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Board of Directors recommends that the shareholders adopt an amendment
to the Company's Restated Certificate of Incorporation, which would increase the
authorized number of shares of Common Stock by 88,000,000 to a total of
200,000,000. As of May 31, 1995, there were 28,558,448 shares of the Company's
Common Stock outstanding. On such date, 10,083,406 shares of Common Stock were
reserved for issuance upon conversion of the Companys $.75 Convertible Preferred
Stock. Also, 1,244,715 shares of Common Stock were reserved for issuance upon
the exercise of the Company's Warrants, and 3,270,000 shares of Common Stock
were reserved for issuance upon the exercise
34
<PAGE>
of stock options granted pursuant to the terms of the Company's Stock Option
Plan. The Company also may issue up to 55,694,444 additional shares pursuant to
the Anschutz and JEDI Transactions. See "The Anschutz and JEDI Transactions."
If the amendment to increase the number of authorized shares of Common Stock
is approved, the increased number of authorized shares of Common Stock will be
available for issuance, from time to time, for such purposes and consideration,
and on such terms, as the Board of Directors may approve and no further vote of
the shareholders of the Company will be sought, except as required by applicable
law or by the rules of the Nasdaq National Market. The Company believes that,
upon the consummation of Anschutz and JEDI Transactions, the limited number of
currently authorized but unissued shares of Common Stock would unduly restrict
its ability to respond to business needs and opportunities. The availability of
additional shares of Common Stock for issuance will afford the Company
flexibility in the future by assuring that there will be sufficient authorized
but unissued shares of Common Stock for possible stock dividends, stock splits,
acquisitions, financing requirements and other corporate purposes. The Company
has no definite plans for the use of the Common Stock for which authorization is
sought other than pursuant to the Anschutz and JEDI Transactions as described
above. Unreserved shares of Common Stock may be issued, under certain
circumstances, to pay dividends on the Company's $.75 Convertible Preferred
Stock. Additionally, the Board of Directors has, from time to time, distributed
shares of Common Stock as dividends on the Company's Common Stock and has
contributed shares of Common Stock to the Company's Retirement Savings Plan and
Annual Incentive Plan. The Company may issue Common Stock under similar
circumstances in the future.
Pursuant to the requirements of the Nasdaq National Market on which the
Company's Common Stock, $.75 Convertible Preferred Stock and Warrants are
listed, shareholder approval is required (in addition to the initial
authorization of the shares) for the issuance of Common Stock (or securities
convertible into Common Stock) under certain circumstances. These circumstances
primarily include (i) adoption of certain types of stock option or purchase
plans or other arrangements in which stock may be acquired by officers or
directors of the Company, (ii) issuances which would result in a change of
control of the Company and (iii) issuances in connection with certain
transactions involving the acquisition of stock or assets of another company.
The existence of additional authorized shares of Common Stock could have the
effect of rendering more difficult or discouraging hostile takeover attempts.
Other than the Anschutz and JEDI Transactions, the Company is not aware of any
existing or planned effort on the part of any party to accumulate material
amounts of voting stock, or to acquire the Company by means of a merger, tender
offer, solicitation of proxies in opposition to management or otherwise, or to
change the Company's management, nor is the Company aware of any person having
made any offer to acquire the voting stock or assets of the Company.
The Company's Restated Certificate of Incorporation and By-laws currently
contain the following provisions which also may make more difficult or
discourage takeover attempts. The By-laws provide for staggered elections for
the Board of Directors. See "Election of Directors" above. This system makes it
more difficult for shareholders electing directors to change the majority of the
Company's directors; absent an amendment to the By-laws or a series of director
resignations it could take three annual meetings to change the majority of the
Company's directors. In addition to the Rights Agreement, the Company has
entered into Executive Severance Agreements with certain executive officers. See
"Election of Directors -- Transactions with Management and Others -- Executive
Severance Agreements" above.
The terms of the additional shares for which authorization is sought will be
identical to the terms of the shares of Common Stock now authorized, issued and
outstanding, and the amendment will not affect the terms, or the rights of the
holders of, those shares. The Company's Common Stock has no cumulative voting,
conversion, preemptive or subscription rights, and is not redeemable.
35
<PAGE>
A certificate authorizing the increased number of shares of Common Stock
will be filed with the Department of State of New York if shareholder approval
is obtained.
It is therefore proposed that the first paragraph of Paragraph 3 of the
Company's Restated Certificate of Incorporation relating to the number of shares
of capital stock authorized for issuance be amended so as to read in its
entirety as follows:
"3. The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is Two Hundred and Ten Million
(210,000,000), consisting of Two Hundred Million (200,000,000) shares of
Common Stock, Par Value $.10 Per Share, and Ten Million (10,000,000) shares
of Preferred Stock, Par Value $.01 Per Share, which shares of Preferred
Stock shall be classified into two classes, Senior Preferred Stock and
Junior Preferred Stock as described in Paragraph 3.II, each class of which
shall be issuable in one or more series."
Adoption of this amendment requires the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THIS
PROPOSAL.
The persons named in the enclosed proxy, who have been so designated by the
Board of Directors, intend to vote for the proposal described above unless
otherwise instructed in the proxy. The Company believes that the members of the
Board of Directors and the senior management of the Company intend to vote or
direct the vote of all shares of Common Stock of which they have beneficial
ownership in favor of this proposal.
APPOINTMENT OF INDEPENDENT AUDITORS
Subject to ratification by the shareholders of the Company, the Board has
designated the firm of KPMG Peat Marwick LLP, Suite 2300, 707 Seventeenth
Street, Denver, Colorado 80202 as independent auditors to examine and audit the
Company's financial statements for the year 1995. This firm has audited the
Company's financial statements for approximately 45 years and is considered to
be well qualified. The designation of such firm as auditors is being submitted
for ratification or rejection at the Annual Meeting. Action by shareholders is
not required under the law for the appointment of independent auditors, but the
ratification of their appointment is submitted by the Board in order to give the
shareholders of the Company the final choice in the designation of auditors. The
Board will be governed by the decision of a majority of the votes entitled to be
cast. A majority of the vote represented at the Annual Meeting by shares of
Common Stock entitled to vote is required to ratify the appointment of KPMG Peat
Marwick LLP.
A representative of KPMG Peat Marwick LLP will be present at the Annual
Meeting with the opportunity to make a statement if he desires to do so and will
also be available to respond to appropriate questions. A representative of the
firm was present at the last Annual Meeting for the same purpose.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
SHAREHOLDER PROPOSALS
Any shareholder proposals to be included in the Board of Directors'
solicitation of proxies for the 1996 Annual Meeting of Shareholders must be
received by Daniel L. McNamara, Secretary, at 1500 Colorado National Building,
950 -- 17th Street, Denver, CO 80202, no later than December 2, 1995.
GENERAL AND OTHER MATTERS
The Board of Directors knows of no matter, other than those referred to in
this Proxy Statement, which will be presented at the Annual Meeting. However, if
any other matters are properly brought before the meeting or any of its
adjournments, the person or persons voting the proxies will vote them in
accordance with their judgment on such matters. Should any nominee for director
be unwilling or
36
<PAGE>
unable to serve at the time of the Annual Meeting, or any adjournment thereof,
the persons named in the proxy will vote it for the election of such other
person for such directorship as the Board of Directors may recommend unless,
prior to the Annual Meeting, the Board of Directors has eliminated that
directorship by reducing the size of the Board of Directors. The Board of
Directors is not aware that any nominee named herein will be unwilling or unable
to serve as a director.
On May 24, 1994, the Company renewed Directors and Officers Liability
Coverages designed to indemnify the directors and officers of the Company and
its subsidiaries against certain liabilities incurred by them in the performance
of their duties and also providing for reimbursement in certain cases to the
Company and its subsidiaries for sums paid by them to directors and officers as
indemnification for similar liability. This type of coverage was originally
purchased by the Company on May 24, 1978. The 1994 renewal was for a one-year
period. The term of the insurance has been extended through July 24, 1995, and
the Company intends to renew the coverage on an annual basis. Primary insurance
of $10,000,000 was renewed with National Union Fire Insurance Company and the
excess insurance coverage of $10,000,000 was renewed with Reliance Insurance
Company and National Union Fire Insurance Company for a total coverage of
$20,000,000. Aggregate premiums for the 12-month period ending May 24, 1995 were
$510,122. No claims have been filed and no payments have been made to the
Company or its subsidiaries or to any of their directors or officers under this
coverage.
The Restated Certificate of Incorporation of the Company limits the personal
liability of the Company's directors to the fullest extent permitted by the New
York Business Corporation Law ("BCL"), as currently formulated or as it might be
revised in the future. The Restated Certificate of Incorporation provides that a
director will not be liable for damages for any breach of duty unless it is
finally established that (a) the director's acts or omissions were in bad faith
or involved intentional misconduct or a knowing violation of law; or (b) the
director personally gained a financial profit or other advantages to which he
was not legally entitled; or (c) the director's acts violated Section 719 of the
BCL which provides that directors who vote for, or concur in, certain types of
corporate action proscribed by the BCL will be jointly and severally liable for
any injury resulting from such action.
The cost of preparing, assembling, and mailing this Proxy Statement, the
enclosed proxy card and the Notice of Annual Meeting will be paid by the
Company. Additional solicitation by mail, telephone, telegraph or personal
solicitation may be done by directors, officers, and regular employees of the
Company. Such persons will receive no additional compensation for such services.
Brokerage houses, banks and other nominees, fiduciaries and custodians nominally
holding shares of Common Stock of record will be requested to forward proxy
soliciting material to the beneficial owners of such shares, and will be
reimbursed by the Company for their reasonable expenses. The Company has
retained Morrow & Co., Inc. to assist in such solicitation and has agreed to pay
reasonable and customary fees for its services and to reimburse it for
reasonable out-of-pocket expenses in connection therewith.
INCORPORATION BY REFERENCE. The Company hereby incorporates by reference
into this Proxy Statement the following information from its Annual Report on
Form 10-K which has previously been furnished to shareholders: Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and Supplementary Data.
AVAILABLE INFORMATION.__UPON REQUEST OF ANY SHAREHOLDER, THE COMPANY'S
ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1994 FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC") ON FORM 10-K, INCLUDING FINANCIAL STATEMENTS,
THE SCHEDULES AND ANY AMENDMENTS THERETO AND ANY DOCUMENTS INCORPORATED BY
REFERENCE THEREIN AND THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED MAY 17,
1995 WILL BE SENT TO THE SHAREHOLDER WITHOUT CHARGE BY FIRST CLASS MAIL WITHIN
ONE BUSINESS DAY OF RECEIPT OF SUCH REQUEST. ALL REQUESTS SHOULD BE ADDRESSED TO
THE SECRETARY OF THE COMPANY AT 950 SEVENTEENTH STREET, 1500 COLORADO NATIONAL
BUILDING, DENVER, COLORADO 80202 OR BY TELEPHONE TO (303) 592-2400. THE DILLON
READ OPINION IS INCLUDED IN THIS PROXY STATEMENT AS ANNEX A AND THE COMPANY'S
QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31, 1995 FILED WITH THE SEC ON FORM
10-Q IS INCLUDED HEREIN AS ANNEX B.
37
<PAGE>
You are urged to complete, sign, date and return your proxy promptly. You
may revoke your proxy at any time before it is voted. If you attend the Annual
Meeting, as we hope you will, you may vote your shares in person.
By order of the Board of Directors
DANIEL L. McNAMARA
SECRETARY
July 10, 1995
38
<PAGE>
ANNEX A
[DILLON, READ LETTERHEAD]
As of May 17, 1995
Board of Directors
Forest Oil Corporation
1500 Colorado National Building
950 Seventeenth Street
Denver, Colorado 80202
Dear Directors:
You have requested our opinion, from a financial point of view, with respect
to the transactions (the "Transactions") as expressed in the Purchase Agreement
dated as of May 17, 1995, between Forest Oil Corporation ("Forest" or the
"Company") and The Anschutz Corporation ("Anschutz") and the Restructure
Agreement as of the same date between the Company and Joint Energy Development
Investments Limited Partnership ("JEDI"), an affiliate of Enron Corporation (the
"Purchasers") (together, the "Agreements").
We understand the business terms of the Transactions to be as follows:
Forest will sell to Anschutz 18,800,000 shares of common stock and 620,000
shares of preferred stock of Forest that are convertible into 6,200,000
additional shares of common stock for a total consideration of $45 million or
$1.80 per share of common stock. The preferred stock will have a liquidation
preference and will receive dividends ratably with the common stock. In
addition, Anschutz will receive warrants and an option to purchase common stock
as described below. The investment will be made in two closings. In the first
closing, which occurred on May 19, 1995, Anschutz loaned the Company $9.9
million for a term of nine months. The loan bears interest at 8% per annum for
16 weeks and at 12.5% per annum thereafter. The loan is secured by various
assets of Forest. The loan may be converted into 5,500,000 shares of Forest's
common stock at the election of Anschutz, 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, Anschutz will
purchase the remaining 13,300,000 shares of common stock and the convertible
preferred stock.
In connection with this purchase, at the second closing Anschutz will agree
to certain voting, acquisition, and transfer limitations regarding shares of
common stock for five years after the second closing, including (i) a limitation
on voting, subject to certain exceptions, that require Anschutz to vote all
shares of common stock owned by Anschutz in excess of an amount equal to 19.99%
of the shares of common stock then outstanding in the same proportion as all
other shares of common stock are voted, (ii) a limit on the number of Anschutz
designated directors to three in addition to five independent directors and two
officer directors and (iii) a limit on the acquisition of additional shares of
common stock by Anschutz (whether pursuant to the exercise of the $2.10 warrants
or the option
1
<PAGE>
received from JEDI, as described below, or otherwise), subject to certain
exceptions, that prohibit any acquisition by Anschutz that would result in
Anschutz owning 40% or more of the shares of common stock then issued and
outstanding.
At the second closing, Forest and JEDI will restructure JEDI's existing loan
currently having a principal balance of approximately $62.1 million. In exchange
for certain warrants referred to below, JEDI will relinquish the net profits
interest that it holds in certain Forest properties and will reduce the interest
rate relating to the loan from 12 1/2% per annum to an initial blended rate of
8% per annum. As a result of the loan restructuring and the issuance of the
warrants, the Company anticipates a reduction of the recorded amount of the
related liability to approximately $45 million and a reduction of interest
expense on the JEDI loan of approximately $2 million per annum. In addition, on
a one-time basis 18 months after the second closing, the Company may put its
interest in the underlying properties back to JEDI in full satisfaction of the
loan.
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 and Anschutz will
receive warrants to purchase 19,444,444 shares of common stock at $2.10 per
share. The $2.00 warrants expire on the scheduled maturity of the JEDI loan,
except that the Company may terminate the warrants at any time beginning 36
months after the second closing, if the average closing price of the common
stock for the 90 days and 15 days preceding the date on which notice of
termination is given is in excess of $2.50 per share. For the first 36 months
after the second closing, the $2.00 warrants may be exercised only on the dates
and in the respective numbers of shares required to be delivered by JEDI to
Anschutz pursuant to the exercise of the option granted by JEDI to Anschutz, as
described below. The $2.10 warrants are exercisable during the first 18 months
after the second closing, subject to extension in certain circumstances to 36
months after the second closing. If the $2.10 warrants are extended, the
Company's right to put its interest in the underlying properties back to JEDI
will also be extended to a date 36 months after the second closing. At the
second closing, JEDI will grant to Anschutz an option to purchase up to
11,250,000 shares of common stock during the first 36 months after the second
closing at a share price which results in an 18% per annum return to JEDI, with
the exception of a $3.10 per share maximum price. It is a condition to the
restructuring of the JEDI loan that the Company covenant to use the proceeds
from the exercise of the warrants to repay the JEDI loan.
The Company is required to pay to Anschutz a fee of up to $2.5 million upon
the occurrence, on or before the second closing (or if the second closing does
not occur, May 17, 1996), of certain events, such as a merger, consolidation or
other business combination between the Company and a person other than Anschutz
if the second closing does not occur. The Company has agreed not to solicit
proposals for transactions that would require the Company to pay such a fee,
subject to the duty of the Board of Directors to act in a manner which is
consistent with its fiduciary obligations.
The Transactions have been approved by Forest's board of directors and
certain of its creditors. The purchase by Anschutz of common stock at the second
closing and the transactions between Anschutz and JEDI described above are also
subject to, among other things, the prior approval of Forest's shareholders.
Dillon, Read & Co. Inc. ("Dillon Read") has acted as financial advisor to
the Company in connection with the Transactions. In the course of our
engagement, we have participated in negotiations with respect to the
Transactions and are familiar with the financial terms of the Transactions.
In arriving at our opinion we have reviewed the Agreements with Anschutz and
JEDI, respectively, and certain business and financial information relating to
Forest, including certain financial information, third party oil and gas reserve
estimates and other analyses and estimates provided to us by the Company, and
have reviewed and discussed the business and prospects of Forest with
representatives of the Company's management. We have considered certain
financial data of Forest and have compared that information to similar data for
publicly held companies in businesses we believe to be generally comparable to
that of Forest. We have also considered the financial terms of certain other
transactions, including minority investments, which have recently been effected
and have
2
<PAGE>
considered such other information, financial studies and analyses, and
financial, economic and market criteria as we deemed relevant. We have also
reviewed market prices for the Company's common stock for dates prior to the
date of the announcement of the Transactions on April 18, 1995.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have, with your
consent, relied on its being complete and accurate in all material respects. We
have not made an independent evaluation or appraisal of any of the assets or
liabilities (contingent or otherwise) of Forest, nor have we been furnished with
any such evaluation or appraisals. Furthermore, in rendering our opinion we, at
your direction, did not seek alternatives to the Transactions. With respect to
the financial projections, estimates and analyses which you have furnished to
us, we have utilized such information and have, with your consent, relied
thereon. Further, we have assumed that such information was prepared in good
faith by the Company's management and was reasonably based upon the Company's
historical financial performance and certain estimates and assumptions which
were reasonable at the time made. Our opinion is based on economic, monetary and
market conditions existing on the date thereof.
In the ordinary course of business, we may trade the debt and equity
securities of the Company for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
In rendering our opinion we took into consideration, at your direction, that
without effecting the Transactions, the Company believed that it was facing
near-term liquidity issues necessitating the sale of certain assets to raise
cash at a discount of approximately $3 million to $5 million to the value that
the Company believed could be realized without timing constraints, as well as a
highly leveraged balance sheet which limits the Company's ability to maintain,
much less increase, its asset base. We also considered the recent depressed
state of the natural gas market and the resulting impact on the valuations of
publicly traded domestic natural gas producers. Additionally, we considered a
number of benefits to the Company which result from the Transactions including a
significant improvement in the liquidity of the Company, the availability of
cash to make budgeted capital expenditures and a material reduction in financial
leverage as well as over $2 million in annual interest expense savings on the
JEDI loan.
Based upon and subject to the foregoing and after reviewing other factors
including current market, economic and business considerations; such other
factors we deem relevant; and, in particular, the factors enumerated in the
preceding paragraph including the recent depressed state of the natural gas
market, it is our opinion that the Transactions, taken as a whole, including the
consideration to be received by the Company, represent a reasonable means under
the circumstances of raising capital for the Company and that it is reasonable
to conclude that the consideration to be received by the Company in the
Transactions is fair to the Company and to the common stockholders of the
Company from a financial point of view.
Very truly yours,
Dillon, Read & Co. Inc.
3
<PAGE>
ANNEX B
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
<TABLE>
<S> <C>
[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
</TABLE>
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)
<TABLE>
<S> <C>
NEW YORK 25-0484900
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or organization)
1500 COLORADO NATIONAL
BUILDING
950 - 17TH STREET
DENVER, COLORADO
(Address of principal 80202
executive offices) (Zip Code)
</TABLE>
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 _
<TABLE>
<CAPTION>
NUMBER OF SHARES
OUTSTANDING
TITLE OF CLASS OF COMMON STOCK APRIL 28, 1995
- - ----------------------------------------------------------------------------- -----------------
<S> <C>
Common Stock, Par Value $.10 Per Share 28,267,702
</TABLE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<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
----------- ------------
<S> <C> <C>
(IN THOUSANDS)
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) 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
4
<PAGE>
FOREST OIL CORPORATION
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 1995 and 1994
(Unaudited) (Continued)
(4) CHANGES IN ACCOUNTING FOR OIL AND GAS SALES (CONTINUED)
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
5
<PAGE>
FOREST OIL CORPORATION
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 1995 and 1994
(Unaudited) (Continued)
(5) SUBSEQUENT EVENTS (CONTINUED)
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.
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
6
<PAGE>
FOREST OIL CORPORATION
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 1995 and 1994
(Unaudited) (Continued)
(5) SUBSEQUENT EVENTS (CONTINUED)
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.
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. 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.
9
<PAGE>
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 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.
10
<PAGE>
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.
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
11
<PAGE>
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' 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
12
<PAGE>
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.
13
<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)
</TABLE>
(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.
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.
14
<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 TO BE ATTRIBUTABLE TO PRODUCTION
DELIVERED TO ENRON PAYMENT DELIVERIES (1)
-------------------------- --------------------------
NATURAL NATURAL
OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF)
ANNUAL ------------- ----------- ------------- -----------
AMORTIZATION
OF DEFERRED
REVENUE
-----------------
(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
-------- --- ----------- --- -----------
-------- --- ----------- --- -----------
</TABLE>
(1) Represents volumes required to be delivered to Enron net of estimated
royalty volumes.
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 defined, except that the amount
required to be paid in any given month shall not exceed 100% of the
15
<PAGE>
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.
16
<PAGE>
Currently, it is the Company's intention to commit no more than 75% of its
anticipated total production and no more than 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
17
<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.
18
<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.
19
<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)
________/s/_DANIEL L. MCNAMARA________
Date: May 22, 1995
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)
20
<PAGE>
FOREST OIL CORPORATION
PROXY SOLICITED BY BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS
The undersigned shareholder of Forest Oil Corporation, a New York
corporation (the Company), hereby appoints William L. Dorn, Daniel L. McNamara
and Linda M. Trulick, or any one of them, attorneys, agents and proxies of the
undersigned, with full power of substitution to each of them, to vote all the
shares of Common Stock, Par Value $.10 per share, of the Company which are
entitled to one vote per share and which the undersigned may be entitled to vote
at the Annual Meeting of Shareholders of the Company to be held at the Petroleum
Club of Denver, 555 17th Street, Suite 3700, Denver, Colorado, on Wednesday,
July 26, 1995, at 10:00 A.M., M.D.T., and at any adjournment of such meeting,
with all powers which the undersigned would possess if personally present:
1. Elect two (2) Class I Directors;
2. Approve the transactions with The Anschutz Corporation and Joint Energy
Development Investments Limited Partnership;
3. Amend the Company's Restated Certificate of Incorporation to increase the
number of authorized shares of Common Stock, Par Value $.10 Per Share, by
88,000,000 to a total of 200,000,000;
4. Consider and vote upon the ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors for the Company for the fiscal year
ended December 31, 1995; and
5. Vote upon such other matters as may be properly brought before the meeting
or any adjournment thereof hereby revoking all previous proxies and
ratifying all that any of said proxies, their substitutes, or any of them,
may lawfully do by virtue hereof.
If no directions are given, the individuals designated above will vote for
the above proposals and, at their discretion, on any other matter that may come
before the meeting.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and Proxy Statement of the Company.
(CONTINUED AND TO BE VOTED, DATED AND SIGNED ON REVERSE SIDE)
<PAGE>
FOREST OIL CORPORATION
COMMON STOCK PROXY ONE (1) VOTE PER SHARE
PLEASE MARK VOTES / / OR /X/
SPECIAL NOTES
I PLAN TO ATTEND THE MEETING / /
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSALS:
<TABLE>
<S> <C> <C> <C>
No. 1. Election of Directors. No. 2. Approve the transactions with The
Nominees are William L. Dorn and Anschutz Corporation and Joint
James H. Lee. Energy Development Investments
(To withhold authority to vote for Limited Partnership.
all nominees check the block marked
"Withheld". To withhold authority
to vote for any individual
nominee write that nominee's
name on the space provided
below.)
-------------------------------
FOR / / WITHHELD / / FOR / / AGAINST / / ABSTAIN / /
No. 3. Amendment of Restated Certificate No. 4. Ratification of the Appointment of
of Incorporation to increase Independent Auditors.
authorized shares.
FOR / / AGAINST / / ABSTAIN / / FOR / / AGAINST / / ABSTAIN / /
</TABLE>
(Signature(s) should agree with names on
Stock Certificates as shown herein.
Attorneys, executors, administrators,
trustees, guardians or custodians should
give full title as such.) Please
complete, date and sign this proxy and
return it promptly in the enclosed
envelope whether or not you plan to
attend the meeting. No postage is
required.
Date: _____________________________, 1995
_________________________________________
_________________________________________
Signature of Shareholder(s)
THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS
- - ------------------------------------------------------------
IF YOU PLAN TO ATTEND THE ANNUAL MEETING OF THE SHAREHOLDERS, PLEASE MARK THE
APPROPRIATE BOX IN THE SPECIAL NOTES SECTION OF THE PROXY CARD ABOVE.
