<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1997
REGISTRATION NO. 333-39255
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CANADIAN FOREST FOREST OIL
OIL LTD. CORPORATION
(Exact name of Registrant (Exact name of Registrant
as specified in its charter) as specified in its charter)
ALBERTA, CANADA NEW YORK
(State of other jurisdiction (State of other jurisdiction
of incorporation or organization) of incorporation or organization)
N/A 25-0484900
(I.R.S. Employer (I.R.S. Employer
Identification No.) Identification No.)
1311 1311
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
DANIEL L. MCNAMARA
CORPORATE COUNSEL AND SECRETARY
800 6TH AVENUE S.W., SUITE 600 FOREST OIL CORPORATION
CALGARY T2P3G3 1600 BROADWAY, SUITE 2200
CANADA DENVER, COLORADO 80202
(Address, including zip code, and (303) 812-1400
telephone number, (Name, Address, including zip code,
including area code, of Canadian and telephone number,
Forest Oil Ltd.'s principal executive including area code, of Forest Oil
offices) Corporation's principal
executive offices and agent for
service for each registrant)
--------------------------
COPY TO:
ALAN P. BADEN
VINSON & ELKINS L.L.P.
2300 FIRST CITY TOWER
HOUSTON, TEXAS 77002-6760
(713) 758-2430
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
--------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
PROSPECTUS
CANADIAN FOREST OIL LTD.
OFFER TO EXCHANGE
8 3/4% SENIOR SUBORDINATED NOTES DUE 2007
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ALL OUTSTANDING 8 3/4% SENIOR SUBORDINATED NOTES DUE 2007
PAYMENT UNCONDITIONALLY GUARANTEED ON A SENIOR SUBORDINATED BASIS BY
FOREST OIL CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON DECEMBER 12, 1997, UNLESS EXTENDED
Canadian Forest Oil Ltd., an Alberta, Canada corporation ("Canadian Forest" or
the "Issuer"), and Forest Oil Corporation, a New York corporation and the parent
of the Issuer ("Forest" or the "Company"), hereby offer, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
letter of transmittal (the "Letter of Transmittal," and together with this
Prospectus, the "Exchange Offer"), to exchange $1,000 principal amount of the
8 3/4% Senior Subordinated Notes due 2007 of the Issuer and which are
unconditionally guaranteed on a senior subordinated basis by Forest (the
"Exchange Notes"), which have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to a Registration Statement (as
defined herein) of which this Prospectus constitutes a part, for each $1,000
principal amount of the outstanding 8 3/4% Senior Subordinated Notes due 2007 of
the Issuer and which are unconditionally guaranteed on a senior subordinated
basis by Forest (the "Old Notes"), of which $125,000,000 principal amount is
outstanding. The form and terms of the Exchange Notes are identical in all
material respects to the form and terms of the Old Notes except for certain
transfer restrictions and registration rights relating to the Old Notes. The
Exchange Notes will evidence the same debt as the Old Notes and will be issued
under and be entitled to the benefits of the Indenture (as defined herein). The
Exchange Notes and the Old Notes are collectively referred to herein as the
"Notes."
The Notes are unsecured senior subordinated obligations of the Issuer. The
payment of the principal of, premium, if any, on and interest on the Notes is
subordinated in right of payment to the payment when due in cash of all Senior
Indebtedness (as defined herein) of the Issuer. The Notes rank subordinate in
right of payment to all existing and future Senior Indebtedness of the Issuer,
PARI PASSU with any future PARI PASSU Indebtedness (as defined herein) of the
Issuer and senior to any future Subordinated Indebtedness (as defined herein) of
the Issuer. The Notes are unconditionally guaranteed on a senior subordinated
basis (the "Company Guarantee") by the Company. The Company Guarantee ranks
subordinate in right of payment to all existing and future Senior Indebtedness
of the Company, PARI PASSU with any existing and future Pari Passu Indebtedness
of the Company and senior to any future Subordinated Indebtedness of the
Company.
(COVER CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" BEGINNING ON PAGE 20 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE
NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
<PAGE>
The Issuer and the Company will accept for exchange any and all Old Notes
that are validly tendered on or prior to 5:00 p.m., New York City time, on the
date the Exchange Offer expires, which will be December 12, 1997, unless the
Exchange Offer is extended. See "The Exchange Offer -- Expiration Date;
Extensions; Amendments." Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the business day prior to the Expiration
Date (as defined herein), unless previously accepted for exchange. The Exchange
Offer is not conditioned upon any minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
conditions which may be waived by the Issuer and the Company and to the terms
and provisions of the Registration Agreement (as defined herein). Old Notes may
be tendered only in denominations of $1,000 principal amount and integral
multiples thereof. The Issuer and the Company have agreed to pay the expenses of
the Exchange Offer. See "The Exchange Offer."
The Exchange Notes will bear interest at the rate of 8 3/4% per annum,
payable semi-annually on March 15 and September 15 of each year, commencing
March 15, 1998, to holders of record on the March 1 and September 1 immediately
preceding such interest payment date. Holders of Exchange Notes of record on
March 1, 1998 will receive interest on March 15, 1998 from the date of issuance
of the Exchange Notes, plus an amount equal to the accrued interest on the Old
Notes from the date of issuance of the Old Notes, September 29, 1997, to the
date of exchange thereof. Interest on the Old Notes accepted for exchange will
cease to accrue upon issuance of the Exchange Notes.
The Old Notes were sold by the Issuer and the Company on September 29, 1997
to the Initial Purchasers (as defined herein) in a transaction not registered
under the Securities Act in reliance upon Section 4(2) of the Securities Act.
The Old Notes were thereupon offered and sold by the Initial Purchasers only to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) and pursuant to offers and sales that occurred outside the United States
within the meaning of Regulation S under the Securities Act, each of whom agreed
to comply with certain transfer restrictions and other conditions. Accordingly,
the Old Notes may not be offered, resold or otherwise transferred unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy the obligations of the Company
and the Issuer under the Registration Agreement entered into with the Initial
Purchasers in connection with the offering of the Old Notes. See "Exchange
Offer; Registration Rights."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission" or "SEC") to third parties, including
EXXON CAPITAL HOLDINGS CORPORATION, SEC No-Action Letter (available April 13,
1989), MORGAN STANLEY & CO. INC., SEC No-Action Letter (available June 5, 1991)
(the "Morgan Stanley Letter") and MARY KAY COSMETICS, INC., SEC No-Action Letter
(available June 5, 1991), the Issuer and the Company believe that the Exchange
Notes issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by the respective holders thereof (other than a
"Restricted Holder," being (i) a broker-dealer who purchased Old Notes exchanged
for such Exchange Notes directly from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a person
that is an affiliate of the Issuer or the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder is not participating in, and has no arrangement with any person to
participate in, the distribution (within the meaning of the Securities Act) of
such Exchange Notes. Eligible holders wishing to accept the Exchange Offer must
represent to the Issuer and the Company that such conditions have been met.
Holders who tender Old Notes in the Exchange Offer with the intention to
participate in a distribution of the Exchange Notes may not rely upon the Morgan
Stanley Letter or similar no-action letters. See "The Exchange Offer --
General." Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Old Notes
2
<PAGE>
where such Exchange Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company and the Issuer
have agreed that, starting on the Expiration Date and ending on the close of
business 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
Neither the Issuer nor the Company will receive any proceeds from the
Exchange Offer.
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to the liquidity of
any markets that may develop for the Exchange Notes or as to the ability of the
holders of Exchange Notes to sell their Exchange Notes or the price at which
such holders would be able to sell their Exchange Notes. Future trading prices
of the Exchange Notes will depend on many factors, including, among others,
prevailing interest rates, the operating results of the Issuer and the Company
and the market for similar securities. The Issuer and the Company do not intend
to apply for listing of the Exchange Notes on any securities exchange. Salomon
Brothers Inc, Lehman Brothers, Chase Securities Inc. and Morgan Stanley Dean
Witter (the "Initial Purchasers") have informed the Issuer and the Company that
they currently intend to make a market for the Exchange Notes. However, they are
not so obligated, and any such market making may be discontinued at any time
without notice. Accordingly, no assurance can be given that an active public or
other market will develop for the Exchange Notes or as to the liquidity of or
the trading market for the Exchange Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY OR THE ISSUER
ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
Available Information.............................................................. 4
Incorporation of Certain Documents by Reference.................................... 5
Prospectus Summary................................................................. 6
Forward-Looking Statements......................................................... 20
Risk Factors....................................................................... 20
Private Placement.................................................................. 29
Use of Proceeds.................................................................... 29
Capitalization..................................................................... 30
Selected Financial and Operating Data.............................................. 31
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 35
Business and Properties............................................................ 47
Management......................................................................... 68
Beneficial Owners of Securities.................................................... 70
The Anschutz and JEDI Transactions................................................. 71
Description of Bank Credit Facilities.............................................. 72
The Exchange Offer................................................................. 74
Description of the Notes........................................................... 81
Certain United States and Canadian Federal Income Tax Considerations............... 119
Exchange Offer; Registration Rights................................................ 122
Plan of Distribution............................................................... 124
Transfer Restrictions on Old Notes................................................. 125
Legal Matters...................................................................... 128
Experts............................................................................ 128
Certain Definitions................................................................ 128
Index to Financial Statements...................................................... F-1
</TABLE>
AVAILABLE INFORMATION
The Company, but not the Issuer, is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files periodic reports, proxy and information
statements and other information with the Commission. Such reports and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the following regional offices
of the Commission: Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained by mail from the
Public Reference Section of the Commission, at Judiciary Plaza, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, at prescribed rates. In
addition, the Commission maintains a site on the World Wide Web that contains
reports, proxy and information statements and other information filed
electronically by the Company with the Commission which can be accessed over the
Internet at http://www.sec.gov. While any Old Notes remain outstanding, the
Company and the Issuer will make available, upon request, to any holder and any
prospective purchaser of Old Notes, the information required pursuant to Rule
144A(d)(4) under the Securities Act during any period in which the Company is
not subject to Section 13 or 15(d) of the Exchange Act. Any such request should
be directed to Daniel L. McNamara, Corporate Counsel and Secretary, Forest Oil
Corporation at 1600 Broadway, Suite 2200, Denver Colorado 80202.
This Prospectus constitutes part of a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Issuer and the Company with the
Commission under the Securities Act. This Prospectus omits certain of the
information set forth in the Registration Statement. Reference is hereby made to
the Registration Statement and
4
<PAGE>
to the exhibits relating thereto for further information with respect to the
Issuer and the Company and the securities offered hereby. Statements contained
herein concerning the provisions of contracts or other documents are not
necessarily complete, and each such statement is qualified in its entirety by
reference to the copy of the applicable contract or other document filed with
the Commission. Copies of the Registration Statement and the exhibits thereto
are on file at the offices of the Commission and may be obtained upon payment of
the fee prescribed by the Commission, or may be examined without charge at the
public reference facilities of the Commission described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
pursuant to the Exchange Act (File No. 0-4597) and are incorporated herein by
reference:
(1) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(2) the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997;
(3) the Company's Current Reports on Form 8-K dated February 7, March 7,
and May 9, 1997, and on Form 8-K/A filed January 28, 1997; and
(4) the Company's Proxy Statement for the Annual Meeting of Stockholders
held on May 14, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made by this Prospectus shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
thereof. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Issuer and the Company hereby undertake to provide without charge to
each person, including any beneficial owner to whom a copy of this Prospectus
has been delivered, upon the written or oral request of such person, a copy of
any or all of the information that has been incorporated by reference in this
Prospectus (not including exhibits to the information that is incorporated by
reference herein unless such exhibits are specifically incorporated by reference
in such information). Requests for such copies should be directed to Daniel L.
McNamara, Corporate Counsel and Secretary, Forest Oil Corporation at 1600
Broadway, Suite 2200, Denver, Colorado 80202.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE
ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE ISSUER,
THE COMPANY OR THE EXCHANGE AGENT. NEITHER THE DELIVERY OF THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUER OR THE COMPANY SINCE THE DATE
HEREOF. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR
BOTH TOGETHER, CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
5
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) INCLUDED
ELSEWHERE IN THIS PROSPECTUS AND IN THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE. CERTAIN TERMS USED HEREIN ARE DEFINED UNDER "CERTAIN DEFINITIONS."
UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES IN THIS PROSPECTUS TO
(I)"CANADIAN FOREST" OR THE "ISSUER" ARE TO CANADIAN FOREST OIL LTD. (THE ISSUER
OF THE NOTES) AND ITS SUBSIDIARIES, AND (II) "FOREST" OR THE "COMPANY" ARE TO
FOREST OIL CORPORATION (THE CORPORATE PARENT OF THE ISSUER AND THE GUARANTOR OF
THE NOTES) AND ITS CONSOLIDATED SUBSIDIARIES.
THE COMPANY
Forest Oil Corporation is an independent oil and natural gas company engaged
in the exploration, exploitation, development and acquisition of oil and gas
properties and the production and marketing of oil and natural gas in North
America. The Company's reserves and producing properties are located primarily
in three core areas: (i) the Gulf of Mexico and Gulf Coast (the "Gulf Region");
(ii) West Texas, Oklahoma and the Rocky Mountain region of the United States
(the "Western Region"); and (iii) Canada (the "Canadian Region"). In 1996,
production from the United States and Canada accounted for approximately 60% and
40%, respectively, of the Company's production on an MCFE basis. The Company
currently operates 40 offshore platforms in the Gulf of Mexico, and 1996
production from the Gulf of Mexico accounted for approximately 42% of the
Company's production on an MCFE basis.
The Company's average daily production in the first six months of 1997 and
estimated proved reserves at December 31, 1996 are summarized below:
<TABLE>
<CAPTION>
ESTIMATED PROVED RESERVES AT DECEMBER
AVERAGE DAILY PRODUCTION
FIRST SIX MONTHS 1997 31, 1996
------------------------------------------------ -------------------------------------
TOTAL TOTAL
OIL (BBLS) GAS (MCF) (MCFE) % OF TOTAL OIL (MBBLS) GAS (MMCF) (MMCFE)
----------- --------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gulf Region..................... 2,713 81,199 97,477 55 4,313 157,448 183,326
Western Region.................. 320 7,370 9,290 5 1,485 76,877 85,787
Canadian Region................. 5,204 38,685 69,909 40 18,216 102,925 212,221
----- --------- ----------- --- ----------- ----------- -----------
Total....................... 8,237 127,254 176,676 100% 24,014 337,250 481,334
<CAPTION>
% OF TOTAL
-----------
<S> <C>
Gulf Region..................... 38
Western Region.................. 18
Canadian Region................. 44
---
Total....................... 100%
</TABLE>
At December 31, 1996, approximately 73% of the Company's estimated proved
reserves was classified as proved developed and approximately 70% was natural
gas. At such date, the Company owned interests in 1,403 gross (572 net)
producing wells in the United States and Canada. The Company currently operates
approximately 77% of its production in the United States and 48% of its
production in Canada.
Forest has been operating offshore in the Gulf Region since 1954 and
currently has interests in 75 lease blocks (approximately 330,000 gross acres)
in the Gulf of Mexico, of which 49 are held by production. The Company has
developed a significant gathering and processing infrastructure in the Gulf of
Mexico that facilitates production from its lease blocks. The Company has
interests in approximately 72,000 gross acres onshore in the Gulf Region, of
which 8% is undeveloped. The Company currently has an inventory of approximately
35 drilling projects in the Gulf Region.
The Company re-established its exploration efforts in the Western Region in
1996, focusing on the Rocky Mountain states. The Company's Western Region staff
is also responsible for development of the Company's producing properties in
Wyoming, Oklahoma and West Texas. The Company has interests in approximately
240,000 gross acres in the Western Region, of which 38% is undeveloped. The
Company currently has an inventory of approximately 18 drilling projects in the
Western Region.
The Company established a new core area in Canada in December 1995 with the
acquisition of a 56% economic interest (subsequently increased to 66%) in Saxon
Petroleum Inc. ("Saxon") and the January 1996 acquisition of Canadian Forest
(formerly ATCOR Resources Ltd.). The Company believes
6
<PAGE>
that the generally longer reserve life and lower aggregate cost nature of its
Canadian properties complements its Gulf of Mexico properties, which tend to
have shorter reserve lives and higher aggregate finding, development and
operating costs. The Company has interests in approximately 1,021,000 gross
acres in Canada, of which 70% is undeveloped. The Company currently has an
inventory of approximately 33 drilling projects in Canada.
The Company's 1997 planned capital expenditures of approximately $130
million are currently allocated as follows: $69 million to the Gulf Region, $12
million to the Western Region and $49 million to Canada. Approximately 68% of
the 1997 planned expenditures is allocated to drilling costs and 32% to lease
acquisition, seismic and other costs.
Since the first quarter of 1996, the Company has devoted most of its capital
spending program to exploratory, exploitation and development drilling, as well
as lease acquisition and seismic costs. This expanded drilling budget has
resulted in significant discoveries on Company-generated prospects including:
(i) a High Island Block 116 well in March 1996, which had initial daily gross
production of approximately 55 MMCFE (24 MMCFE net); (ii) a Eugene Island Block
53 well in the first quarter of 1997, which had initial daily gross production
of approximately 31 MMCFE (21 MMCFE net) and (iii) 27 BCFE of net estimated
proved reserves in the Bigoray Field in western central Alberta, Canada during
1996. The Company attributes this success to its high quality property base, as
well as to the integration of 3-D seismic with geological interpretations,
advanced drilling and production techniques and other technologies applied by
its experienced regional technical staff.
The Company's acquisition activity and drilling successes have resulted in
production growth and increased revenues and cash provided by operating
activities. The Company's average daily production increased from approximately
111 MMCFE per day in 1995, to approximately 162 MMCFE per day in 1996 and to
approximately 177 MMCFE per day during the first six months of 1997. For the
year ended December 31, 1996, the Company generated revenues of $317.5 million,
cash provided by operating activities of $67.8 million and EBITDA (as defined)
of $92.9 million. For the six months ended June 30, 1997, the Company generated
revenues of $172.4 million, cash provided by operating activities of $24.3
million and EBITDA of $51.2 million.
BUSINESS STRENGTHS
The Company believes it has certain strengths that provide it with
significant competitive advantages, including the following:
WELL POSITIONED IN PROSPECTIVE NORTH AMERICAN BASINS
Management believes that its core regions contain substantial reserve
potential and are among the most prospective areas in North America. Forest
holds interests in approximately 1.5 million total gross acres in its three core
regions and an interest in 22 Canadian frontier licenses in the Beaufort/North
McKenzie region of the Northwest Territories and Sable Island, Nova Scotia.
DIVERSIFIED NATURAL GAS MARKETS
The Company believes that through its acquisitions in Canada and its
operations in the Western Region, it has positioned itself to achieve greater
stability in its overall operating margin in the event of any narrowing of
natural gas pricing differentials between the United States and Canada.
Management believes that improvements in the infrastructure of the North
American gas transportation system have the potential to create a more efficient
transportation grid that may result in price differentials that are more closely
related to proximity to market rather than the availability of transportation.
EXPERTISE AND INFRASTRUCTURE IN THE GULF OF MEXICO
In over 40 years of operating in the Gulf Region, Forest has developed an
extensive proprietary database, including seismic, well logs, velocity surveys
and paleo and regional studies. The Company's
7
<PAGE>
exploration team integrates this data in evaluating drilling prospects. The
Company's senior operating personnel, as well as its geoscientists and
engineers, have substantial experience in the technical challenges arising from
exploitation and exploration of this region. During the period from 1992 through
1996, the Company drilled 39 offshore wells in this region, of which 77% were
completed as commercially productive. The Company has interests in 75 lease
blocks in the Gulf of Mexico of which 49 are held by production rather than
being subject to expiration by the passage of time. In addition, the Company has
developed an extensive production and transportation infrastructure to better
control costs and minimize the time interval between discoveries and production.
Forest owns interests in 50 platforms, 55 processing facilities, and an
estimated 325 miles of gathering systems in the Gulf Region.
APPLICATION OF TECHNOLOGY
The Company uses advanced technology in its exploration and development
activities to reduce drilling risks and finding costs and to more effectively
prioritize drilling prospects. As of June 30, 1997, the Company had acquired 3-D
seismic surveys on 85 offshore lease blocks and had 425,000 acres of 3-D seismic
data and 300,000 miles of 2-D seismic data. The ability to obtain 3-D seismic
data at reasonable costs and integrate such data into the Company's extensive
proprietary database has enabled the Company to identify multiple development
and exploratory prospects in mature producing fields which had not been
identified through earlier technologies.
In addition, the Company uses new drilling and completion technology to
stimulate production. For example, Saxon has utilized new production and
completion techniques to enhance production in the Pekisko formation in the
Bigoray field. These techniques included horizontal drilling into the formation
with a newly developed mud system, and subsequent artificial lifting of oil and
water with long-stroke pumps. Saxon's share of this field's current production
is 2,720 equivalent barrels of oil per day. The Company believes this drilling
and completion methodology can be used in other non-commercial properties in
Canada.
STRATEGY
The Company's strategy is to focus on exploration, exploitation, development
and acquisition of oil and gas producing properties located in selected areas in
North America where the Company has expertise and experience. The Company will
pursue this strategy through the following initiatives:
EXPAND EXPLORATION. The Company is expanding exploration as a source of
future growth, particularly opportunities that benefit from the selective use of
advanced technologies such as new 3-D seismic processing techniques and
production and completion methods. The Company is also seeking to apply proven
technologies to deeper water prospects in the Gulf of Mexico and to prospects in
the Northwest Territories in Canada. Since improving its capitalization, the
Company has accelerated the exploration and development of its inventory of
prospects and generally retained a larger working interest in such prospects. In
addition, the Company has continued to acquire additional prospects identified
by the Company's exploration teams. The Company seeks to maintain a balanced
exploration portfolio that includes higher risk exploration prospects that have
the potential for larger reserves, as well as lower risk projects.
INCREASE EXPLOITATION AND DEVELOPMENT OF EXISTING PROPERTIES. The Company
continually evalutates new imaging, drilling and completion technologies and
their potential application to the Company's existing properties in order to
identify additional exploitation and development opportunities. The Company
intends to increase exploitation and development expenditures and activities on
its existing properties in 1997 as compared to prior years. For example, the
Company is reprocessing and reshooting seismic data at Eugene Island Block 292
in order to identify additional drilling prospects at deeper horizons. Wells in
the Eugene Island Block 292 field in which the Company has an interest have
produced cumulative volumes of over 2,900 BCFE, primarily from shallow producing
formations. The Company also pursues workovers, recompletions, secondary
recovery operations and other production enhancement techniques on its
properties to increase production.
8
<PAGE>
CONTINUE TO PURSUE ACQUISITIONS. The Company continues to pursue
acquisitions of producing properties that meet selection criteria that include
(i) strategic location in a core area of operations or establishment of a new
core area through the acquisition of a significant property base, (ii) potential
for increasing reserves and production through lower risk exploitation and
development, (iii) attractive potential return on investment, and (iv)
opportunities for improved operating efficiencies. In Canada, Forest has an
additional criterion that natural gas properties include sufficient plant
processing capacity and adequate access to markets.
MAINTAIN FINANCIAL FLEXIBILITY. The Company is committed to maintaining
financial flexibility, which management believes is important for the successful
execution of its strategy. The Company has substantially reduced its debt as a
percentage of book capitalization from 98% as of December 31, 1994 to 47% as of
June 30, 1997. From 1995 through August 1997, the Company added a total of
approximately $300 million of common equity. Management seeks to continue to
reduce the Company's level of debt as a percentage of book capitalization.
Giving effect to (i) the issuance of the Old Notes, (ii) the exercise of the
warrant described below and (iii) additional borrowings under the Company's U.S.
Credit Facility (as defined), and the use of the aggregate proceeds from such
sources to repay the Canadian Credit Facility and to purchase all of the 11 1/4%
Notes in the Tender Offer, the Company would have had debt as a percentage of
pro forma as adjusted book capitalization of 45% as of June 30, 1997.
RECENT DEVELOPMENTS
ANSCHUTZ WARRANT EXERCISE. On August 28, 1997, The Anschutz Corporation
("Anschutz") purchased 3,500,000 shares of Common Stock, par value $0.10 per
share, of the Company (the "Common Stock") at an exercise price of $8.60 per
share by exercising a warrant (the "Anschutz Warrant"), resulting in cash
proceeds to Forest of $30.1 million. As a result of the exercise of the Anschutz
Warrant, outstanding shares of Common Stock increased from 32.6 million shares
to 36.1 million shares. See "Use of Proceeds," "Capitalization" and "The
Anschutz and JEDI Transactions."
TENDER OFFER FOR 11 1/4% SENIOR SUBORDINATED NOTES. On September 29, 1997,
the Company completed a tender offer and solicitation of consents to certain
amendments to the related indenture (the "Tender Offer") for approximately $90.2
million of its $100 million aggregate principal amount of 11 1/4% Senior
Subordinated Notes due 2003 (the "11 1/4% Notes"), in advance of the first call
date of September 1, 1998. The consideration for the 11 1/4% Notes was $1,096.96
for each $1,000 principal amount tendered (including the related consent fee),
based upon a fixed spread over the yield on the 6.125% U.S. Treasury Notes due
August 31, 1998, plus accrued and unpaid interest.
The Tender Offer was funded by (i) $72.0 million of the net proceeds from
the sale of the Old Notes, and (ii) a portion of the $30.1 million of proceeds
of the exercise of the Anschutz Warrant. The Company recorded an extraordinary
loss on early extinguishment of debt of approximately $12.4 million related to
the purchase of the 11 1/4% Notes and payment of the related consent fees.
SAXON. The board of directors of Saxon has created a special committee of
directors, which has engaged a third party to assess the asset base of Saxon and
to determine strategic alternatives to maximize shareholder value. The Company
anticipates that this assessment may result in a transaction in which Forest
would sell its entire interest in Saxon. No assurance can be given as to whether
any such transaction will occur or as to the terms thereof.
The Company acquired a 56% economic interest in Saxon on December 20, 1995
in exchange for cash, property and shares of Common Stock and, through a series
of additional transactions, increased its equity ownership to 66%. Saxon has
operated as a separate entity under its own management during this period.
Forest owns 89,840,316 common shares of Saxon and has the right to purchase
an additional 6,531,500 common shares of Saxon at an average cost CDN$0.54 per
share. On October 30, 1997, the closing price of the common shares of Saxon on
the Toronto Stock Exchange was CDN$0.82 per share.
9
<PAGE>
THE PRIVATE PLACEMENT AND USE OF PROCEEDS
The Old Notes were sold by the Issuer on September 29, 1997 to the Initial
Purchasers and were thereupon offered and sold by the Initial Purchasers only to
qualified institutional buyers and to purchasers outside the United States. The
net proceeds of $121.6 million received by the Issuer in connection with the
sale of the Old Notes were used as follows: $72.0 million was transferred to the
Company to be used to purchase a portion of the Company's 11 1/4% Notes and
$34.5 million was used to repay the outstanding balance under the Canadian
Credit Facility. It is anticipated that the remainder of the net proceeds will
be used for general corporate purposes. See "Private Placement" and
"Capitalization."
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $125,000,000 principal
amount of Exchange Notes for up to $125,000,000 principal amount of Old Notes.
The form and terms of the Exchange Notes are identical in all material respects
to the form and terms of the Old Notes except that the Exchange Notes have been
registered under the Securities Act and will not contain certain transfer
restrictions and hence are not entitled to the benefits of the Registration
Agreement relating to the contingent increases in the interest rate provided for
pursuant thereto. See "Exchange Offer; Registration Rights." The Exchange Notes
will evidence the same debt as the Old Notes and will be issued under and be
entitled to the benefits of the Indenture governing the Old Notes. See
"Description of the Notes."
<TABLE>
<S> <C>
THE EXCHANGE OFFER................ Each $1,000 principal amount of Exchange Notes will be
issued in exchange for each $1,000 principal amount of
outstanding Old Notes. As of the date hereof,
$125,000,000 principal amount of Old Notes are issued
and outstanding. The Company will issue the Exchange
Notes to tendering holders of Old Notes on or promptly
after the Expiration Date.
RESALE............................ The Company believes that the Exchange Notes issued
pursuant to the Exchange Offer generally will be freely
transferable by the holders thereof without registration
or any prospectus delivery requirement under the
Securities Act, except for certain Restricted Holders
who may be required to deliver copies of this Prospectus
in connection with any resale of the Exchange Notes
issued in exchange for such Old Notes. See "The Exchange
Offer -- General" and "Plan of Distribution."
EXPIRATION DATE................... 5:00 p.m., New York City time, on December 12, 1997,
unless the Exchange Offer is extended, in which case the
term "Expiration Date" means the latest date to which
the Exchange Offer is extended. See "The Exchange Offer
-- Expiration Date; Extensions; Amendments."
INTEREST ON THE NOTES............. The Exchange Notes will bear interest payable
semi-annually on March 15 and September 15 of each year,
commencing March 15, 1998. Holders of Exchange Notes of
record on March 1, 1998 will receive interest on March
15, 1998 from the date of issuance of the Exchange
Notes, plus an amount equal to the accrued interest on
the Old Notes from the date of issuance of the Old
Notes, September 29, 1997, to the date of exchange
thereof. Consequently, assuming the Exchange Offer is
consummated prior to the record date in respect of the
March 15, 1998 interest payment for the Old Notes,
holders
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
who exchange their Old Notes for Exchange Notes will
receive the same interest payment on March 15, 1998 that
they would have received had they not accepted the
Exchange Offer. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the
Exchange Notes. See "The Exchange Offer -- Interest on
the Exchange Notes."
PROCEDURES FOR TENDERING OLD
NOTES........................... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, or an Agent's Message (as defined herein)
together with the Old Notes to be exchanged and any
other required documentation to the Exchange Agent at
the address set forth herein and therein or effect a
tender of Old Notes pursuant to the procedures for
book-entry transfer as provided for herein. See "The
Exchange Offer -- Procedures for Tendering."
SPECIAL PROCEDURES FOR BENEFICIAL
HOLDERS......................... Any beneficial holder whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender in the
Exchange Offer should contact such registered holder
promptly and instruct such registered holder to tender
on the beneficial holder's behalf. If such beneficial
holder wishes to tender directly, such beneficial holder
must, prior to completing and executing the Letter of
Transmittal and delivering the Old Notes, either make
appropriate arrangements to register ownership of the
Old Notes in such holder's name or obtain a properly
completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
See "The Exchange Offer -- Procedures for Tendering."
GUARANTEED DELIVERY PROCEDURES.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes and a properly completed
Letter of Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis and
deliver an Agent's Message, may tender their Old Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
WITHDRAWAL RIGHTS................. Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the business day
prior to the Expiration Date, unless previously accepted
for exchange. See "The Exchange Offer -- Withdrawal of
Tenders."
TERMINATION OF THE EXCHANGE
OFFER........................... The Issuer and the Company may terminate the Exchange
Offer if they determine that the Exchange Offer violates
any
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
applicable law or interpretation of the staff of the
SEC. Holders of Old Notes will have certain rights
against the Issuer and the Company under the
Registration Agreement should the Issuer and the Company
fail to consummate the Exchange Offer. See "Exchange
Offer; Registration Rights."
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF EXCHANGE NOTES...... Subject to certain conditions (as summarized above in
"Termination of the Exchange Offer" and described more
fully in "The Exchange Offer -- Termination"), the
Issuer and the Company will accept for exchange any and
all Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time,
on the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- General."
EXCHANGE AGENT.................... Marine Midland Bank is serving as exchange agent (the
"Exchange Agent") in connection with the Exchange Offer.
The mailing address of the Exchange Agent is and hand
deliveries and deliveries by overnight courier should be
sent to: Marine Midland Bank, 140 Broadway -- Level A,
New York, New York 10005-1180, Attention: Corporate
Trust Services. For information with respect to the
Exchange Offer, the telephone number for the Exchange
Agent is (212) 658-5931 and the facsimile number for the
Exchange Agent is (212) 658-2292. See "The Exchange
Offer -- Exchange Agent."
USE OF PROCEEDS................... There will be no cash proceeds payable to the Issuer or
the Company from the issuance of the Exchange Notes
pursuant to the Exchange Offer. See "Use of Proceeds."
For a discussion of the use of the net proceeds received
by the Issuer and the Company from the sale of the Old
Notes, see "Private Placement."
TERMS OF THE NOTES
SECURITIES OFFERED................ $125,000,000 aggregate principal amount of 8 3/4% Senior
Subordinated Notes due 2007.
ISSUER............................ Canadian Forest Oil Ltd.
MATURITY DATE..................... September 15, 2007.
INTEREST PAYMENT DATES............ March 15 and September 15 of each year, and in the case
of the Old Notes and the Exchange Notes will commence on
March 15, 1998.
COMPANY GUARANTEE................. The Notes will be unconditionally guaranteed on a senior
subordinated basis by Forest Oil Corporation (the
"Company Guarantee").
SUBSIDIARY GUARANTEES............. Under certain circumstances, the Notes will in the
future be unconditionally guaranteed (the "Subsidiary
Guarantees") on a senior subordinated basis by
Restricted Subsidiaries of the Company (the "Subsidiary
Guarantors"). The terms of such
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
subordination will be the same as those for the Notes
and the Company Guarantee. See "Description of the Notes
-- Subsidiary Guarantees."
OPTIONAL REDEMPTION............... Except as otherwise described below, the Notes will not
be redeemable at the Issuer's option prior to September
15, 2002. Thereafter, the Notes will be subject to
redemption at the option of the Issuer, in whole or in
part, at the redemption prices set forth herein, plus
accrued and unpaid interest thereon to the applicable
redemption date. In addition, prior to September 15,
2000, the Issuer may, at its option, on any one or more
occasions, redeem up to 33 1/3% of the original
aggregate principal amount of the Notes at a redemption
price equal to 108.75% of the principal amount thereof,
plus accrued and unpaid interest, if any, thereon to the
redemption date with all or a portion of the net
proceeds of public sales of Common Stock of Forest;
provided that at least 66 2/3% of the original aggregate
principal amount of the Notes remains outstanding
immediately after the occurrence of such redemption. See
"Description of the Notes -- Optional Redemption."
ADDITIONAL AMOUNTS................ All payments made by the Issuer under or with respect to
the Notes, by the Company under or with respect to the
Company Guarantee and by any Subsidiary Guarantor under
or with respect to its Subsidiary Guarantee will be made
free and clear of, and without withholding or deduction
for Canadian taxes unless required by law or by the
interpretation or administration thereof by the relevant
government authority or agency, in which case the
Issuer, the Company and the Subsidiary Guarantors will
pay such additional amounts as may be necessary so that
the net amount received by holders of the Notes (other
than certain excluded holders of the Notes) after such
withholding or deduction will not be less than the
amount that would have been received in the absence of
such withholding or deduction. See "Description of the
Notes -- Additional Amounts."
OPTIONAL TAX REDEMPTION........... In the event of certain changes affecting Canadian
withholding taxes, the Notes will be subject to
redemption as a whole, but not in part, at the option of
the Issuer at any time, at 100% of the principal amount
thereof, plus accrued and unpaid interest thereon (if
any) to but excluding the redemption date. See
"Description of the Notes -- Redemption for Changes in
Canadian Withholding Taxes."
SUBORDINATION..................... The Notes are unsecured senior subordinated obligations
of the Issuer. The payment of the principal of, premium,
if any, on and interest on the Notes is subordinated in
right of payment to the payment when due in cash of all
Senior Indebtedness (as defined) of the Issuer. The
Notes rank subordinate in right of payment to all
existing and future Senior Indebtedness of the Issuer,
PARI PASSU with any future Pari Passu Indebtedness (as
defined) of the Issuer and senior to any future
Subordinated Indebtedness (as defined) of the Issuer.
The Company
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Guarantee and the Subsidiary Guarantee of any Subsidiary
Guarantor will rank subordinate in right of payment to
all existing and future Senior Indebtedness, PARI PASSU
with any future Pari Passu Indebtedness and senior to
any future Subordinated Indebtedness of the Company of
such Subsidiary Guarantor, as applicable. At September
30, 1997, the Issuer had no outstanding Senior
Indebtedness and the Company had $78.0 million of
outstanding Senior Indebtedness (not including
approximately $48.0 million of aggregate borrowing
capacity available under the Bank Credit Facilities (as
defined) which, if borrowed, would be Senior
Indebtedness of the Issuer or the Company) and the
Issuer and the Company had no outstanding Pari Passu
Indebtedness or Subordinated Indebtedness other than the
Old Notes. Outstanding 11 1/4% Notes constitute Pari
Passu Indebtedness of the Company. See "Description of
the Notes -- Certain Covenants" and " -- Limitation on
Indebtedness", "Risk Factors -- Subordination" and "--
Possible Limitations on Enforceability of Subsidiary
Guarantees" and "Description of the Notes --
Subordination." The Indenture under which the Old Notes
were, and the Exchange Notes will be, issued permits the
Issuer, the Company and the Restricted Subsidiaries (as
defined) to incur additional indebtedness, including
Senior Indebtedness and Pari Passu Indebtedness.
CHANGE OF CONTROL................. Upon the occurrence of a Change of Control (as defined),
the Issuer will be required to offer to repurchase all
or a portion of each Holder's Notes, at an offer price
in cash equal to 101% of the aggregate principal amount
of such Notes plus accrued and unpaid interest, if any,
thereon to the date of repurchase, and to repurchase all
Notes tendered pursuant to such offer. The Bank Credit
Facilities prohibit the Issuer and the Company from
repurchasing any Notes pursuant to a Change of Control
offer prior to the repayment in full of the Senior
Indebtedness of the Issuer and the Company under the
Bank Credit Facilities. In the event of a Change of
Control, there can be no assurance that the Company and
the Issuer will have sufficient funds to repurchase any
of the Notes or be permitted under the terms of any
other indebtedness to repurchase or redeem the Notes.
See "Risk Factors -- Payment Upon a Change of Control,"
"Description of Other Debt" and "Description of the
Notes -- Repurchase at the Option of Holders Upon a
Change of Control."
CERTAIN COVENANTS................. The Old Notes were and the Exchange Notes will be issued
pursuant to an indenture (the "Indenture") that contains
certain covenants that, among other things, limit the
ability of the Company and its Restricted Subsidiaries,
including the Issuer, to incur additional indebtedness,
pay dividends, make distributions, make investments,
make certain other Restricted Payments (as defined),
enter into certain transactions with affiliates, dispose
of certain assets, incur liens securing
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
Indebtedness (as defined) of any kind other than
Permitted Liens (as defined) and engage in mergers and
consolidations. See "Description of the Notes -- Certain
Covenants."
EXCHANGE OFFER; REGISTRATION
RIGHTS.......................... The Company agreed to use its reasonable best efforts to
file and cause to become effective the Exchange Offer
Registration Statement (as defined) relating to the
Exchange Offer for the Old Notes or, in lieu thereof, to
file and cause to become effective the Shelf
Registration Statement (as defined) for the resale of
the Old Notes. If (i) neither the Exchange Registration
Statement nor the Shelf Registration Statement has been
filed with the Commission on or prior to the 60th day
following the original issuance of the Old Notes, (ii)
neither the Exchange Offer Registration Statement nor
the Shelf Registration Statement has been declared
effective by the Commission on or prior to the 120th day
following the original issuance of the Old Notes, (iii)
neither the Exchange Offer has been consummated nor the
Shelf Registration Statement has been declared effective
on or prior to the 150th day following the original
issuance of the Old Notes or (iv) after either the
Exchange Offer Registration Statement or the Shelf
Registration Statement has been declared effective, such
registration statement thereafter ceases to be effective
or usable (subject to certain exceptions) in connection
with resales of Old Notes or Exchange Notes in
accordance with and during the periods specified in the
Registration Agreement (as defined), then Special
Interest (in addition to the stated interest on the Old
Notes and the Exchange Notes) will accrue on the Old
Notes and the Exchange Notes. Upon the consummation of
the Registered Exchange Offer or the declaration of
effectiveness of such Shelf Registration Statement with
respect to the Old Notes, the Special Interest will
cease accruing. See "Exchange Offer; Registration
Rights."
ABSENCE OF A PUBLIC MARKET FOR THE
NOTES........................... The Exchange Notes will be a new issue of securities for
which there is currently no market. The Issuer and the
Company do not intend to apply for listing of the Notes
on any securities exchange or stock market. Although the
Initial Purchasers have informed the Issuers and the
Company that they each currently intend to make a market
in the Notes and, if issued, the Exchange Notes, they
are not obligated to do so, and any such market making
may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes.
The Old Notes currently trade in The Portal Market.
</TABLE>
RISK FACTORS
Prior to making an investment decision, prospective investors in the Notes
should consider all the information set forth in the Prospectus and should
carefully evaluate the considerations set forth in "Risk Factors."
15
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth summary historical financial data for the
Company for the six months ended June 30, 1997 and 1996, and for each of the
years in the three-year period ended December 31, 1996. The data presented below
under the captions "Consolidated Statement of Operations Data" and "Consolidated
Balance Sheet Data" for, and as of the end of, each of the years in the
three-year period ended December 31, 1996 are derived from the Consolidated
Financial Statements of the Company which have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. The Consolidated Financial
Statements as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996, and the Independent Auditors' Report
thereon, are included elsewhere in this Prospectus. The summary data for the six
months ended June 30, 1997 and 1996 have been derived from the unaudited
Condensed Consolidated Financial Statements included elsewhere in this
Prospectus. The summary financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Condensed Consolidated Financial Statements and
the Consolidated Financial Statements of the Company (including the Notes
thereto).
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------
1997 1996 1996(1) 1995 1994(1)
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue(2):
Marketing and processing............................ $ 98,209 83,589 187,374 -- --
Oil and gas sales................................... 72,509 56,522 128,713 82,275 114,541
Miscellaneous, net.................................. 1,650 303 1,387 181 1,406
---------- ---------- ---------- ---------- ----------
Total revenue..................................... 172,368 140,414 317,474 82,456 115,947
Expenses:
Marketing and processing............................ 93,906 79,165 178,706 -- --
Oil and gas production.............................. 18,671 15,856 32,199 22,463 22,384
General and administrative.......................... 8,547 6,337 13,623 9,081 11,166
Interest (2)........................................ 10,033 12,220 23,307 25,323 26,773
Depreciation and depletion.......................... 36,756 26,989 63,068 43,592 65,468
Minority interest in earnings (loss) of
subsidiary........................................ 161 (171) (19) -- --
Provision for impairment of oil and gas
properties........................................ -- -- -- -- 58,000
---------- ---------- ---------- ---------- ----------
Total expenses.................................... 168,074 140,396 310,884 100,459 183,791
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes, cumulative effect
of change in accounting principle and extraordinary
item................................................ $ 4,294 18 6,590 (18,003) (67,844)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings (loss) before cumulative effect of change in
accounting principle and extraordinary item......... $ 1,326 (3,287) 1,139 (17,996) (67,853)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net earnings (loss)................................... $ 1,326 (3,287) 3,305 (17,996) (81,843)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):
Net property and equipment............................ $ 497,030 418,278 458,242 277,599 276,609
Total assets.......................................... $ 592,012 520,834 563,458 321,043 324,832
Long-term debt (2).................................... $ 223,884 201,886 168,859 193,879 207,054
Shareholders' equity.................................. $ 241,646 178,537 242,443 44,297 6,086
(SEE FOOTNOTES ON FOLLOWING PAGE)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------
1997 1996 1996(1) 1995 1994(1)
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED FINANCIAL DATA:
EBITDA (2)(3)......................................... $ 51,244 39,056 92,946 50,912 82,397
Cash provided (used) by operating activities (2)...... $ 24,290 21,953 67,815 (3,062) 42,441
Cash used by investing activities..................... $ 73,832 161,227 226,867 17,219 32,307
Cash provided (used) by financing activities.......... $ 46,583 140,200 164,500 20,698 (14,126)
Total capital expenditures............................ $ 82,647 163,815 244,118 52,744 42,544
Historical credit ratios:
Ratio of earnings to fixed charges (4).............. 1.4 -- 1.3 -- --
Ratio of EBITDA to interest expense................. 5.1 3.2 4.0 2.0 3.1
Ratio of debt to EBITDA (5)......................... 2.2 2.7 1.9 4.1 3.0
Pro forma credit ratios:
Pro forma ratio of earnings to fixed charges (6).... 1.3 1.2
Pro forma as adjusted ratio of earnings to fixed
charges (7)....................................... 1.6 1.4
Pro forma as adjusted ratio of EBITDA to interest
expense (7)....................................... 5.7 4.4
Pro forma as adjusted ratio of debt to
EBITDA (5)(7)..................................... 2.2 1.8
</TABLE>
- ------------------------
(1) In 1996, the Company realized a gain on extinguishment of debt of $2,166,000
as a result of the extinguishment of nonrecourse secured debt. The Company
changed its method of accounting for oil and gas sales from the sales method
to the entitlements method effective January 1, 1994.
(2) The following table sets forth certain financial data for Saxon, a
consolidated subsidiary in which the Company holds a 66% economic interest.
Saxon will not initially be a Restricted Subsidiary under the Indenture. See
"-- Recent Developments" and Note 2 of Notes to the Consolidated Financial
Statements:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ ---------------------
<S> <C> <C>
(IN THOUSANDS)
Revenue.............................................. $ 7,336 9,722
Interest expense..................................... $ 256 741
Long-term debt....................................... $ 22,104 --
EBITDA............................................... $ 3,544 5,155
Cash provided (used) by operating activities......... $ (1,583) 9,541
</TABLE>
(3) EBITDA represents earnings before income taxes, cumulative effect of changes
in accounting principles, extraordinary items, interest, depreciation and
depletion, and impairment of proved oil and gas properties. EBITDA is
included as supplemental disclosure because it is commonly accepted as
providing useful information regarding a company's ability to incur and
service debt and to fund capital expenditures and because certain covenants
contained in the Indenture are based in part on EBITDA. In evaluating
EBITDA, the Company believes that investors should consider, among other
things, the amount by which EBITDA exceeds interest costs for the period,
how EBITDA compares to principal repayments on debt for the period and how
EBITDA compares to capital expenditures for the period. To evaluate EBITDA,
the components of EBITDA, such as revenue and operating expenses, and the
variability of such components over time, should be also be considered.
Investors should be cautioned, however, that EBITDA should not be construed
as an alternative to operating income (as determined in accordance with
GAAP) as an indicator of the Company's operating performance, or to cash
provided by operating activities (as determined in
17
<PAGE>
accordance with GAAP) as a measure of liquidity. The Company's method of
calculating EBITDA may differ from the methods used by other companies, and
as a result the EBITDA measures disclosed herein may not be comparable to
other similarly titled measures disclosed by other companies.
(4) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of net earnings before income taxes and fixed charges. Fixed charges
consist of interest expense (which includes amortization of debt discount)
and that portion of rental cost equivalent to interest (estimated to be
one-third of rental cost).
The historical earnings for the six months ended June 30, 1996 and the years
ended December 31, 1995 and 1994 were inadequate to cover fixed charges. The
coverage deficiencies were $324,000, $18,327,000 and $68,127,000,
respectively.
(5) The historical ratio of debt to EBITDA and the pro forma as adjusted ratio
of debt to EBITDA represent the ratio of debt (consisting of long-term debt,
other long-term liabilities that are interest-bearing and deferred revenue)
at the end of the period to the amount of EBITDA for the period (annualized
in the case of EBITDA for the six months ended June 30, 1997).
(6) The pro forma ratio of earnings to fixed charges gives effect to the
application of $72.0 million of the proceeds from the sale of the Old Notes
to purchase $64.8 million of the $100 million principal amount outstanding
on the 11 1/4% Notes in the Tender Offer, the application of $32.9 million
of the proceeds of the Old Notes to repay outstanding borrowings under the
Canadian Credit Facility, and the retention of $16.5 million by the Issuer
for working capital and to fund capital expenditures.
(7) The pro forma as adjusted ratios of earnings to fixed charges, EBITDA to
interest expense and debt to EBITDA give effect to (i) the issuance of the
Old Notes for net proceeds of $121.6 million, and (ii) the exercise of the
Anschutz Warrant for proceeds of $30.1 million, and the use of the aggregate
proceeds from such sources to repay the outstanding balance of $32.9 million
under the Canadian Credit Facility, to purchase approximately $90.2 million
principal amount of the 11 1/4% Notes in the Tender Offer for approximately
$99.0 million plus approximately $375,000 of related expenses and to retain
the balance of the proceeds for working capital and to fund capital
expenditures.
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<PAGE>
SUMMARY RESERVE AND OPERATING DATA
The following table sets forth summary information with respect to the
Company's estimates of its proved oil and gas reserves and the discounted future
net cash flows from these reserves as of December 31, 1996 and certain
production information for the six months ended June 30, 1997. The Company's
U.S. reserves have been reviewed by Ryder Scott Company ("Ryder Scott"). A
report on Canadian Forest's reserves has been prepared by McDaniel & Associates
Consultants Ltd. ("McDaniel"). A report on Saxon's reserves has been prepared by
Fekete Associates Inc. ("Fekete"). The Ryder Scott review and the McDaniel and
Fekete reports are collectively referred to as the "Reserve Engineer Reports."
For additional information relating to reserves, see "Risk Factors -- Ceiling
Limitation Writedowns" and "-- Uncertainty of Estimates of Oil and Gas
Reserves," "Business and Properties -- Oil and Gas Reserves" and Note 18 of
Notes to Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
UNITED CANADIAN TOTAL
STATES FOREST SAXON (1) CONSOLIDATED
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Proved Developed
Natural Gas (MMCF).......................................... 165,629 58,162 12,694 236,485
Liquids (MBBLS) (2)......................................... 5,311 9,223 4,037 18,571
Total (MMCFE)............................................. 197,495 113,500 36,916 347,911
Proved Undeveloped
Natural Gas (MMCF).......................................... 65,626 21,507 10,562 97,695
Liquids (MBBLS) (2)......................................... 487 202 4,754 5,443
Total (MMCFE)............................................. 68,548 22,719 39,086 130,353
---------- ----------- ----------- -------------
Total Proved (MMCFE).......................................... 266,043 136,219 76,002 478,264
Proved reserves attributable to volumetric production
payments, all of which are proved developed:
Natural gas (MMCF)........................................ 3,070 -- -- 3,070
Liquids (MBBLS) (2)....................................... -- -- -- --
Total proved reserves attributable to volumetric production
payments (MMCFE)............................................ 3,070 -- -- 3,070
---------- ----------- ----------- -------------
Total proved reserves including amounts attributable to
volumetric payments (MMCFE)................................. 269,113 136,219 76,002 481,334
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
Standardized measure of discounted future net cash flows
relating to proved oil and gas reserves (in thousands)...... $ 384,211 106,183 69,475 559,869
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
Total discounted future net cash flows relating to proved oil
and gas reserves, including amounts attributable to
volumetric production payments (in thousands)............... $ 387,337 106,183 69,475 562,995
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
Weighted average price used to calculate discounted future net
cash flows relating to proved oil and gas reserves at
December 31, 1996:
Natural gas (per Mcf)..................................... $ 3.52 1.73 1.55 2.88
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
Liquids (per Bbl) (2)..................................... $ 23.82 18.03 22.02 20.63
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
Average daily production for the six months ended June 30,
1997:
Natural gas (MCF)........................................... 88,569 33,276 5,409 127,254
Liquids (BBLS) (2).......................................... 3,033 3,552 1,652 8,237
Total (MCFE)................................................ 106,767 54,588 15,321 176,676
---------- ----------- ----------- -------------
---------- ----------- ----------- -------------
</TABLE>
- --------------------------
(1) Includes 100% of the reserves owned by Saxon, a consolidated subsidiary in
which the Company holds a 66% economic interest. Saxon will not initially be
a Restricted Subsidiary under the Indenture. See "-- Recent Developments"
and Note 2 to the Consolidated Financial Statements.
(2) Includes oil, condensate and natural gas liquids.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included in this Prospectus and in the documents
incorporated herein by reference, including without limitation statements under
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" regarding planned capital
expenditures, the availability of capital resources to fund capital
expenditures, estimates of proved reserves, the number of anticipated wells to
be drilled in 1997 and thereafter, the Company's financial position, business
strategy and other plans and objectives for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. There are
numerous uncertainties inherent in estimating quantities of proved oil and
natural gas reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
Company. Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact way,
and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates made by different engineers often vary from one another. In
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revisions of such estimate and such revisions, if
significant, would change the schedule of any further production and development
drilling. Accordingly, reserve estimates are generally different from the
quantities of oil and natural gas that are ultimately recovered. Additional
important factors that could cause actual results to differ materially from the
Company's expectations are disclosed under "Risk Factors" and elsewhere in this
Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS,
THE FOLLOWING FACTORS RELATING TO THE COMPANY AND THE EXCHANGE OFFER SHOULD BE
CAREFULLY CONSIDERED WHEN EVALUATING AN INVESTMENT IN THE NOTES.
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenue, profitability and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. Prices for oil and natural gas are subject to wide fluctuation in
response to relatively minor changes in the supply of and demand for oil and
natural gas, market uncertainty and a variety of additional factors that are
beyond the control of the Company. These factors include the level of consumer
product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of oil and natural gas, the
price of oil and gas imports and overall economic conditions. From time to time,
oil and gas prices have been depressed by excess domestic and imported supplies.
There can be no assurance that current price levels will be sustained. It is
impossible to predict future oil and natural gas price movements with any
certainty. Declines in oil and natural gas prices will adversely affect the
Company's financial condition, liquidity and results of operations and may
reduce the amount of the Company's oil and natural gas that can be produced
economically.
The Company is impacted more by natural gas prices than by oil prices,
because the majority of its production and reserves are natural gas. At December
31, 1996, 70% of the Company's estimated proved reserves consisted of natural
gas on an MCFE basis. During 1996, 72% of the Company's total production
consisted of natural gas. The average Gulf Coast spot price received by the
Company for natural gas decreased from $3.89 per MCF at December 31, 1996 to
approximately $3.24 per MCF at
20
<PAGE>
October 1, 1997. During the same period, the West Texas Intermediate price for
crude oil decreased from $23.75 per barrel to $18.75 per barrel.
In order to attempt to minimize the product price volatility to which the
Company is subject, the Company, from time to time, enters into energy swap
agreements and other financial arrangements with third parties to attempt to
reduce the Company's short-term exposure to fluctuations in future oil and
natural gas prices. There can be no assurance, however, that such hedging
transactions will reduce risk or mitigate the effect of any substantial or
extended decline in oil or natural gas prices. Any substantial or extended
decline in the prices of oil or natural gas would have a material adverse effect
on the Company's financial condition, liquidity and results of operation. For
further information concerning market conditions, long-term contracts,
production payments and energy swap agreements, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
This Prospectus contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom that rely upon various
assumptions, including assumptions required by the Commission as to oil and gas
prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. The process of estimating oil and gas reserves is
complex, requiring significant decisions and assumptions in the evaluation of
available geological, geophysical, engineering and economic data for each
reservoir. As a result, such estimates are inherently imprecise. Actual future
production, oil and gas prices, revenues, taxes, development expenditures,
operating expenses and quantities of recoverable oil and gas reserves may vary
substantially from those estimated in the Reserve Engineer Reports. Any
significant variance in these assumptions could materially affect the estimated
quantities and present value of reserves set forth in this Prospectus. In
addition, the Company's proved reserves may be subject to downward or upward
revision based upon production history, results of future exploration and
development, prevailing oil and gas prices and other factors, many of which are
beyond the Company's control. Actual production, revenues, taxes, development
expenditures and operating expenses with respect to the Company's reserves will
likely vary from the estimates used, and such variances may be material.
Approximately 27% of the Company's total estimated proved reserves at
December 31, 1996 were undeveloped, which are by their nature less certain.
Recovery of such reserves will require significant capital expenditures and
successful drilling operations. The reserve data set forth in the Reserve
Engineer Reports assumes that substantial capital expenditures by the Company
will be required to develop such reserves. Although cost and reserve estimates
attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated. See "Business and Properties -- Oil and Gas Reserves."
The present value of future net revenues referred to in this Prospectus
should not be construed as the current market value of the estimated oil and gas
reserves attributable to the Company's properties. In accordance with applicable
requirements of the Commission, the estimated discounted future net cash flows
from proved reserves are generally based on prices and costs as of the date of
the estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net cash flows will also be affected by increases or
decreases in consumption by gas purchasers and changes in governmental
regulations or taxation. The timing of actual future net cash flows from proved
reserves, and thus their actual present value, will be affected by the timing of
both the production and the incurrence of expenses in connection with
development and production of oil and gas properties. In addition, the 10%
discount factor, which is required by the Commission to be used in calculating
discounted future net cash flows for reporting purposes, is not necessarily the
most appropriate discount factor based on interest rates in effect from time to
time and risks associated with the Company or the oil and gas industry in
general.
21
<PAGE>
EFFECTS OF LEVERAGE
As of June 30, 1997, on a pro forma as adjusted basis, the Company's
long-term debt would have been $224.0 million and the Company estimates that it
would have had approximately $70.0 million of aggregate borrowing capacity under
the Bank Credit Facilities, subject to the borrowing base formula at the time.
In addition, the Indenture will allow the Company to incur additional
Indebtedness on a secured basis. See "Use of Proceeds" and "Capitalization."
The Company's level of indebtedness will have several important effects on
its operations, including (i) a substantial portion of the Company's cash flow
from operations will be dedicated to the payment of interest on its indebtedness
and will not be available for other purposes, (ii) the covenants contained in
the Bank Credit Facilities and Indenture limit its ability to borrow additional
funds or to dispose of assets and may affect the Company's flexibility in
planning for, and reacting to, changes in business conditions, (iii) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired, and (iv) the terms of certain of the Company's
indebtedness permit its creditors to accelerate payments upon certain events of
default or a change of control of the Company. Moreover, future acquisition or
development activities may require the Company to alter its capitalization
significantly. These changes in capitalization may significantly alter the
leverage of the Company. The Company's ability to meet its debt service
obligations and to reduce its total indebtedness will be dependent upon the
Company's future performance, which will be subject to general economic
conditions and to financial, business and other factors affecting the operations
of the Company, many of which are beyond its control. There can be no assurance
that the Company's future performance will not be adversely affected by such
economic conditions and financial, business and other factors or that the
Company will be able to meet its debt service obligations, including its
obligations under the Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Furthermore, to the extent that the Company is unable to repay its
indebtedness at maturity out of cash on hand, it could attempt to refinance such
indebtedness, or repay such indebtedness with the proceeds of an equity
offering, at or prior to their maturity. There can be no assurance that the
Company will be able to generate sufficient cash flow to service its interest
payment obligations under its indebtedness or that future borrowings or equity
financing will be available for the payment or refinancing of the Company's
indebtedness. To the extent that the Company is not successful in negotiating
renewals of its borrowings or in arranging new financing, it may have to sell
significant assets which would have a material adverse effect on the Company's
business and results of operations. Among the factors that will affect the
Company's ability to effect an offering of its capital stock or refinance the
Notes are financial market conditions and the value and performance of the
Company at the time of such offering or refinancing. There can be no assurance
that any such offering or refinancing can be successfully completed. Any failure
by the Company to satisfy its obligations with respect to its indebtedness at
maturity or prior thereto would constitute a default under such indebtedness and
could cause a default under agreements governing other indebtedness, if any, of
the Company. Such defaults could result in a default on the Notes and could
delay or preclude payment of interest or principal thereon. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Description of Bank Credit Facilities."
SUBORDINATION OF NOTES
The Indenture governing the Notes limits, but does not prohibit, the
incurrence by the Company of additional indebtedness that is senior in right of
payment to the Notes. In the event of bankruptcy, liquidation, reorganization or
other winding up of the Company, the assets of the Company will be available to
pay the Company's obligations on the Notes only after all Senior Indebtedness
(as defined herein) has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on the Notes. In addition, under certain
circumstances, no payments may be made with respect to principal of,
22
<PAGE>
premium, if any, or interest on the Notes if a default exists with respect to
any Senior Indebtedness. See "Description of the Notes -- Subordination."
In addition, the Notes are effectively subordinated to any indebtedness and
liabilities (including trade payables) of the Company's Subsidiaries that are
not Subsidiary Guarantors.
The Indenture imposes limits on the ability of the Company and its future
Restricted Subsidiaries (as defined herein) to incur additional indebtedness and
liens and to enter into agreements that would restrict the ability of such
future Restricted Subsidiaries to make distributions, loans or other payments to
the Company. These limitations are subject to various qualifications. Subject to
certain limitations, the Company and its Subsidiaries may incur additional
secured indebtedness. For additional details of these provisions and the
applicable qualifications, see "Description of the Notes -- Subordination" and
"-- Certain Covenants."
AVAILABILITY OF FINANCING
The Company has historically addressed its long-term liquidity needs through
the issuance of debt and equity securities when market conditions permit, and
through the use of credit facilities and cash provided by operating activities.
The Company continues to examine alternative sources of long-term capital,
including bank borrowings or the issuance of debt instruments, the sale of
common stock, preferred stock or other equity securities of the Company, the
issuance of nonrecourse production-based financing or 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, including general economic and financial market conditions, oil and
natural gas prices and the value and performance of the Company, some of which
are beyond the control of the Company.
REPLACEMENT OF RESERVES
In general, the volume of production from oil and gas properties declines as
reserves are depleted. The decline rates depend on reservoir characteristics and
vary from the steep declines characteristic of Gulf of Mexico reservoirs, where
the Company has a significant portion of its production, to the relatively slow
declines characteristic of long-lived fields in other regions. Except to the
extent the Company acquires properties containing proved reserves or conducts
successful development and exploration activities, or both, the proved reserves
of the Company will decline as reserves are produced. The Company's future
natural gas and oil production is, therefore, highly dependent upon its level of
success in finding or acquiring additional reserves. The business of exploring
for, developing or acquiring reserves is capital intensive. To the extent cash
flow from operations is reduced and external sources of capital become limited
or unavailable, the Company's ability to make the necessary capital investment
to maintain or expand its asset base of oil and gas reserves would be impaired.
In addition, there can be no assurance that the Company's future development,
acquisition and exploration activities will result in additional proved reserves
or that the Company will be able to drill productive wells at acceptable costs.
INDUSTRY RISKS
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or natural gas reservoirs will be
encountered, that operations may be curtailed, delayed or canceled and that
title problems, weather conditions, compliance with governmental requirements,
mechanical difficulties or shortages or delays in the delivery of drilling rigs,
work boats and other equipment may limit the Company's ability to develop,
produce and market its reserves. The Company has encountered particular
difficulties in securing drilling equipment in certain of its core areas in the
past 12 months. There can be no assurance that new wells drilled by the Company
will be productive or that the Company will recover all or any portion of its
investment. Drilling for oil and natural gas may involve unprofitable efforts,
not only from dry wells but also from wells that are productive but do not
produce
23
<PAGE>
sufficient net revenues to return a profit after drilling, operating and other
costs. In addition, the Company's properties may be susceptible to hydrocarbon
drainage from production by other operators on adjacent properties.
Industry operating risks include the risk of fire, explosions, blow-outs,
pipe failure, abnormally pressured formations and environmental hazards such as
oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of
any of which could result in substantial losses to the Company due to injury or
loss of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations.
Additionally, a substantial portion of the Company's oil and gas operations are
located in the Gulf of Mexico, an area that is subject to tropical weather
disturbances, some of which can be severe enough to cause substantial damage to
facilities and possibly interrupt production. In accordance with customary
industry practice, the Company maintains insurance against some, but not all, of
the risks described above. There can be no assurance that any insurance will be
adequate to cover losses or liabilities. The Company cannot predict the
continued availability of insurance at premium levels that justify its purchase.
CONCENTRATION OF ASSETS
At October 1, 1997, the Company had three offshore Gulf of Mexico
properties, the combined production from which represented approximately 30% of
the Company's daily deliverability. The Company's production, revenue and cash
flow could be adversely affected if production from these properties decreases
to a significant degree.
GAS MARKETING -- TRADING AND CREDIT RISK
The Company's operations include gas marketing through its subsidiary,
Producers Marketing Ltd. ("ProMark"). ProMark's gas marketing operations consist
of the marketing of Canadian Forest's gas production, the purchase and direct
sale of third parties' natural gas, the handling of transportation and
operations of third party gas and spot purchasing and selling of natural gas.
The profitability of such natural gas marketing operations depends in large part
on the ability of the Company to assess and respond to changing market
conditions, including credit risk. Profitability of such natural gas marketing
operations also depends in large part on the ability of the Company to maximize
the volume of third party natural gas which the Company purchases and resells
and on the ability of the Company to obtain a satisfactory margin between the
purchase price and the sales price for such volumes. The inability of the
Company to respond appropriately to changing conditions in the gas marketing
business could materially adversely affect the Company's results of operations.
In addition, a significant portion of the volumes sold by ProMark are sold at
fixed prices under long-term contracts. The loss of one or more such long term
buyers could have a material adverse effect on the Company. ProMark buys and
sells gas in its trading operation for terms as short as one day and as long as
one to two years. Profits generated by trading are derived from the spread
between the prices of gas purchased and sold. ProMark endeavors to offset its
gas purchase or sales commitments with other gas purchase or sales contracts,
thereby limiting its exposure to price risk. The Company is, however, exposed to
credit risk in that there exists the possibility that the counterparties to
agreements will fail to perform their contractual obligations.
INTERNATIONAL OPERATIONS
A substantial portion of the Company's operations is located in Canada. The
expenses of such operations are payable in Canadian dollars and most of the
revenue derived from natural gas and oil sales is based upon U.S. dollar prices.
As a result, the Company's Canadian operations are subject to the risk of
fluctuations in the relative value of the Canadian and U.S. dollar. The
Company's Canadian operations may also be adversely affected by Canadian local
political and economic developments, royalty and tax increases and other
Canadian laws or policies, as well as U.S. policies affecting trade,
24
<PAGE>
taxation and investment in Canada. To the extent that the Company pursues
opportunities in other countries, similar risks will apply.
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with major and independent oil and gas companies for the acquisition of
desirable oil and gas properties, as well as the equipment and labor required to
develop and operate such properties. The Company also competes with major and
independent oil and gas companies in the marketing and sale of oil and natural
gas to marketers and end-users. Many of these competitors have financial and
other resources substantially greater than those of the Company.
DRILLING RISKS
Drilling involves numerous risks, including the risk that no commercially
productive oil or gas reservoirs will be encountered. The cost of drilling and
completing wells is often unpredictable, and drilling operations may be
curtailed, delayed or cancelled as a result of a variety of factors, including
unexpected drilling conditions, pressure or irregularities in formations,
equipment failures or accidents, weather conditions and shortages or delays in
delivery of equipment. There can be no assurance as to the success of the
Company's future drilling activities. The Company's current inventory of 2-D and
3-D seismic surveys will not necessarily increase the likelihood that the
Company will drill or complete commercially productive wells or that the volumes
of reserves discovered, if any, would necessarily be greater than the Company
would have discovered without its current inventory of seismic surveys.
ACQUISITION RISKS
The Company's recent growth has been attributable in part to acquisitions of
producing properties. The successful acquisition of producing properties
requires an assessment of recoverable reserves, future oil and gas prices,
operating costs, potential environmental and other liabilities and other factors
beyond the Company's control. Such assessments are necessarily inexact and their
accuracy inherently uncertain. In connection with such an assessment, the
Company performs a review of the subject properties that it believes to be
generally consistent with industry practices. Such a review, however, will not
reveal all existing or potential problems nor will it permit a buyer to become
sufficiently familiar with the properties to fully assess their deficiencies and
capabilities. Inspections may not always be performed on every platform or well,
and structural and environmental problems are not necessarily observable even
when an inspection is undertaken. The Company is generally not entitled to
contractual indemnification for pre-closing liabilities, including environmental
liabilities, and generally acquires interests in the properties on an "as is"
basis with limited remedies for breaches of representations and warranties. In
addition, competition for producing oil and gas properties is intense and many
of the Company's competitors have financial and other resources which are
substantially greater than those available to the Company. Therefore, no
assurance can be given that the Company will be able to acquire producing oil
and gas properties which contain economically recoverable reserves or that it
will make such acquisitions at acceptable prices.
MARKETABILITY OF OIL AND GAS PRODUCTION
The marketability of the Company's production depends in part upon the
availability, proximity and capacity of gas gathering systems, pipelines and
processing facilities. U.S. federal and state regulation and Canadian regulation
of oil and gas production and transportation, general economic conditions, and
changes in supply and demand all could adversely affect the Company's ability to
produce and market its oil and natural gas. If market factors were to change
dramatically, the financial impact on the Company could be substantial. The
availability of markets is beyond the control of the Company and thus represents
a significant risk.
25
<PAGE>
GOVERNMENT REGULATION
The Company's oil and gas operations are subject to various U.S. federal,
state and local and Canadian federal and provincial governmental regulations.
Matters subject to regulation include discharge permits for drilling operations,
drilling and abandonment bonds, reports concerning operations, the spacing of
wells, and unitization and pooling of properties and taxation. From time to
time, regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and gas wells below actual
production capacity in order to conserve supplies of oil and gas. In addition,
the Oil Pollution Act of 1990 ("OPA") requires operators of offshore facilities
to establish evidence of financial responsibility to address potential oil
spills. OPA, together with other federal and state environmental statutes, also
imposes strict liability on owners and operators of certain defined facilities
for such spills, subject to certain limitations. A substantial spill from one of
the Company's facilities could have a material adverse effect on the Company's
results of operations, competitive position or financial condition. The
production, handling, storage, transportation and disposal of oil and gas,
by-products thereof and other substances and materials produced or used in
connection with oil and gas operations are also subject to regulation under
federal, state, provincial and local laws and regulations primarily relating to
the protection of human health and the environment. To date, expenditures
related to complying with these laws and for remediation of existing
environmental contamination have not been significant in relation to the results
of operations of the Company. Although the Company believes it is in substantial
compliance with all applicable laws and regulations, the requirements imposed by
such laws and regulations are frequently changed and subject to interpretation,
and the Company is unable to predict the ultimate cost of compliance with these
requirements or their effect on its operations. See "Business and Properties --
Regulation."
CEILING LIMITATION WRITEDOWNS
The Company reports its operations using the full cost method of accounting
for oil and gas properties. The Company capitalizes the cost to acquire, explore
for and develop oil and gas properties. Under full cost accounting rules, the
net capitalized costs of oil and gas properties may not exceed a "ceiling limit"
which is based upon the present value of estimated future net cash flows from
proved reserves, discounted at 10%, plus the lower of cost or fair market value
of unproved properties. If net capitalized costs of oil and gas properties
exceed the ceiling limit, the Company is subject to a ceiling limitation
writedown to the extent of such excess. A ceiling limitation writedown is a
charge to earnings which does not impact cash flow from operating activities.
However, such writedowns impact the amount of the Company's shareholders'
equity. The risk that the Company will be required to write down the carrying
value of its oil and gas properties increases when oil and gas prices are
depressed or volatile. In addition, writedowns may occur if the Company has
substantial downward revisions in its estimated proved reserves or if purchasers
abrogate long-term contracts for its natural gas production. Although the
Company did not have a ceiling test writedown in 1996 or 1995, the Company had a
writedown of $58,000,000 in 1994. No assurance can be given that the Company
will not experience additional ceiling limitation writedowns in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may
require the Issuer to purchase all or a portion of such holder's Notes at 101%
of the principal amount of the Notes, together with accrued and unpaid interest,
if any, to the date of purchase. Prior to any such repurchase of the Notes, the
Company may be required to (i) repay or cause to be repaid all or a portion of
the outstanding indebtedness under the Bank Credit Facilities or other
indebtedness of the Company and its subsidiaries which ranks senior to or PARI
PASSU with the Notes, the Company Guarantee or any Subsidiary Guarantee
containing similar change of control provisions, or (ii) obtain any requisite
consent to permit the repurchase of the Notes. If the Company is unable to repay
or cause to be repaid all of such
26
<PAGE>
indebtedness or is unable to obtain the necessary consents, the Issuer would be
unable to offer to repurchase the Notes, which would constitute an Event of
Default under the Indenture. There can be no assurance that the Company and the
Issuer will have sufficient funds available at the time of any Change of Control
to make any debt payment (including repurchase of Notes) as described above. The
definition of "Change of Control" in the Indenture includes a sale, lease,
conveyance or other disposition of "all or substantially all" of the assets of
the Company and the Restricted Subsidiaries, taken as a whole, to a person or
group of persons. There is little case law interpreting the phrase "all or
substantially all" in the context of an indenture. Because there is no precise
established definition of this phrase, the ability of a holder of the Notes to
require the Issuer to repurchase such Notes as a result of a sale, lease,
conveyance or transfer of all or substantially all of the Company's assets to a
person or group of persons may be uncertain. See "Description of the Notes --
Certain Covenants -- Repurchase at the Option of Holders Upon a Change of
Control."
The events that constitute a Change of Control under the Indenture may also
be events of default under the Bank Credit Facilities or other senior
indebtedness of the Company and its subsidiaries. Such events may permit the
lenders under the Bank Credit Facilities to reduce the borrowing base thereunder
or permit such lenders or other holders of indebtedness to accelerate such
indebtedness and, if the indebtedness is not paid, to enforce security interests
in, or commence litigation that could ultimately result in a sale of,
substantially all of the assets of the Company, thereby limiting the Issuer's
ability to raise cash to repurchase the Notes.
POSSIBLE LIMITATIONS ON ENFORCEABILITY OF SUBSIDIARY GUARANTEES
The Issuer's obligations under the Notes may under certain circumstances be
guaranteed on an unsecured senior subordinated basis by the Subsidiary
Guarantors. Various fraudulent conveyance laws have been enacted for the
protection of creditors and may be utilized by a court of competent jurisdiction
to subordinate or void any Subsidiary Guarantee issued by a Subsidiary
Guarantor. It is also possible that under certain circumstances a court could
hold that the direct obligations of a Subsidiary Guarantor could be superior to
the obligations under its Subsidiary Guarantee.
To the extent that a court were to find that at the time a Subsidiary
Guarantor entered into a Subsidiary Guarantee either (x) the Subsidiary
Guarantee was incurred by the Subsidiary Guarantor with the intent to hinder,
delay or defraud any present or future creditor or that the Subsidiary Guarantor
contemplated insolvency with a design to favor one or more creditors to the
exclusion in whole or in part of others or (y) the Subsidiary Guarantor did not
receive fair consideration or reasonably equivalent value for issuing the
Subsidiary Guarantee and, at the time it issued the Subsidiary Guarantee, the
Subsidiary Guarantor (i) was insolvent or rendered insolvent by reason of the
issuance of the Subsidiary Guarantee, (ii) was engaged or about to engage in a
business or transaction for which the remaining assets of the Subsidiary
Guarantor constituted unreasonably small capital or (iii) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, the court could void or subordinate the Subsidiary Guarantee in favor
of the Subsidiary Guarantor's other creditors. Among other things, a legal
challenge of a Subsidiary Guarantee issued by a Subsidiary Guarantor on
fraudulent conveyance grounds may focus on the benefits, if any, realized by the
Subsidiary Guarantor as a result of the issuance by the Company of the Notes. To
the extent that proceeds from the Offering are used to refinance the
indebtedness of the Company, a court might find that the Subsidiary Guarantors
did not benefit from incurrence of the indebtedness represented by the Notes.
The measure of insolvency for purposes of determining whether a transfer is
voidable as a fraudulent transfer varies depending upon the law of the
jurisdiction that is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its debts, including contingent
liabilities, was greater than the value of all its assets at a fair valuation or
if the present fair saleable value of the debtor's assets was less than the
amount required to repay its probable liability on its debts, including
contingent liabilities, as they become absolute and mature.
27
<PAGE>
To the extent that a Subsidiary Guarantee is voided as a fraudulent
conveyance or found unenforceable for any other reason, holders of the Notes
would cease to have any claim in respect of the applicable Subsidiary Guarantor.
In such event, the claims of the holders of the Notes against such Subsidiary
Guarantor would be subject to the prior payment of all liabilities and preferred
stock claims of such Subsidiary Guarantor. There can be no assurance that, after
providing for all prior claims and preferred stock interests, if any, there
would be sufficient assets to satisfy the claims of the holders of the Notes
relating to any voided portion of such Subsidiary Guarantee.
ENFORCEABILITY OF JUDGMENTS
Since substantially all of the assets of the Issuer are outside the United
States, any judgments obtained in the United States against the Issuer,
including judgments with respect to the payments of principal, interest,
redemption price, Change of Control Payment or other amounts payable under the
Notes, may not be collectible within the United States.
The Issuer has been informed by its Canadian counsel, Bennett Jones
Verchere, that the laws of the Province of Alberta and the federal laws of
Canada applicable therein permit an action to be brought in a court of competent
jurisdiction in the Province of Alberta (a "Canadian Court") on any final and
conclusive judgment in personam of any federal or state court located in the
Borough of Manhattan in the City of New York (a "New York Court") that is not
impeachable as void or voidable under the internal laws of the State of New York
for a sum certain in respect of the enforcement of the Indenture or the Notes if
(i) the court rendering such judgment had jurisdiction over the judgment debtor,
as recognized by the Canadian Court (and submission by the Issuer in the
Indenture to the jurisdiction of the New York Court will be sufficient for the
purpose), (ii) the judgment debtor was properly served in connection with any
action leading to final judgment, (iii) such judgment was not obtained by fraud
or in a manner contrary to natural justice and the enforcement thereof would not
be inconsistent with public policy, as that term is applied by a Canadian Court,
or contrary to any order made by the Attorney General of Canada under the
FOREIGN EXTRATERRITORIAL MEASURE ACT (Canada) or the Competition Tribunal under
the Competition Act (Canada), (iv) the enforcement of such judgment does not
constitute, directly or indirectly, the enforcement of foreign revenue,
expropriatory or penal laws and (v) the action to enforce such judgment is
commenced within the applicable limitation period. The Issuer has been advised
by Bennett Jones Verchere that it knows of no reason, based upon public policy
under the laws of the Province of Alberta and the federal laws of Canada
applicable therein for avoiding recognition of a judgment of a New York Court to
enforce the Indenture or the Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESTRICTIONS ON RESALE OF OLD NOTES
The Old Notes not exchanged for Exchange Notes have not been registered
under the Securities Act or any state securities laws and, unless so registered,
may not be offered or sold except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
and applicable state securities laws. See "Transfer Restrictions on Old Notes."
Because the Issuer and the Company anticipated that most holders of Old Notes
will elect to exchange such Old Notes for Exchange Notes due to the general lack
of restrictions on the resale of Exchange Notes under the Securities Act, the
Issuer and the Company anticipate that the liquidity of the market for any Old
Notes remaining after the consummation of the Exchange Offer may be
substantially limited. Additionally, holders (other than Restricted Holders) of
any Old Notes not tendered in the Exchange Offer prior to the Expiration Date
will not be entitled to require the Issuer and the Company to file the Shelf
Registration Statement and the stated interest rate on such Old Notes will
remain at its initial level of 8 3/4%. See "Exchange Offer; Registration
Rights."
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes will be new securities for which currently there is no
trading market. The Company does not intend to apply for listing of the Exchange
Notes on any securities exchange or stock
28
<PAGE>
market. Although the Initial Purchasers have informed the Company that they
currently intend to make a market in the Exchange Notes, the Initial Purchasers
are not obligated to do so, and any such market making may be discontinued at
any time without notice. The liquidity of any market for the Exchange Notes will
depend upon the number of Holders of the Exchange Notes, the interest of
securities dealers in making a market in the Exchange Notes and other factors.
Accordingly, there can be no assurance as to the development or liquidity of any
market for the Exchange Notes, and even if a market does develop, the price at
which the holders of Exchange Notes will be able to sell such Exchange Notes is
not assured and the Exchange Notes could trade at a price above or below either
their purchase price or face value.
OWNERSHIP POSITION OF ANSCHUTZ
Based on the number of shares outstanding on September 30, 1997, Anschutz
owned approximately 31% of the outstanding shares of Common Stock. Pursuant to a
shareholders agreement between Anschutz and the Company (the "Anschutz
Agreement"), Anschutz may designate three of the Company's 11 directors.
Therefore, Anschutz has the ability to exert substantial influence with respect
to matters considered by the Company's Board of Directors. The Anschutz
Agreement prohibits Anschutz from acquiring in excess of 40% of the outstanding
shares of Common Stock. The Anschutz Agreement terminates on July 27, 2000.
Under certain circumstances Anschutz could have a veto power over proposed
transactions between the Company and third parties such as a merger, which,
under applicable law, requires the approval of the holders of two-thirds of the
outstanding shares of Common Stock. 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 if the Board of
Directors should choose to attempt to sell the Company in the future.
PRIVATE PLACEMENT
On September 29, 1997, the Company completed the private sale to the Initial
Purchasers of $125,000,000 principal amount of the Old Notes at a price of
99.245% of the principal amount thereof in a transaction not registered under
the Securities Act in reliance upon Section 4(2) of the Securities Act. The
Initial Purchasers thereupon offered and resold the Old Notes only to "Qualified
Institutional Buyers" (as defined in Rule 144A under the Securities Act) in
compliance with Rule 144A and pursuant to offers and sales that occur outside
the United States within the meaning of Regulation S under the Securities Act at
an initial price to such purchasers of 99.745% of the principal amount thereof.
The net proceeds of $121.6 million received by the Issuer in connection with the
sale of the Old Notes were used as follows: $72.0 million was transferred to the
Company to be used to purchase a portion of the 11 1/4% Notes and $34.5 million
was used to repay the outstanding balance under the Canadian Credit Facility. It
is anticipated that the remainder of the net proceeds will be used for general
corporate purposes.
USE OF PROCEEDS
Neither the Issuer nor the Company will receive any cash proceeds from the
issuance of the Exchange Notes offered hereby. In consideration for issuing the
Exchange Notes as contemplated in this Prospectus, the Issuer and the Company
will receive in exchange a like principal amount of Old Notes, the terms of
which are identical in all material respects to the Exchange Notes. The Old
Notes surrendered in exchange for the Exchange Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes
will not result in any change in capitalization of the Company.
29
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1997 and the pro forma as adjusted capitalization of the Company as
of June 30, 1997 after giving effect to (i) the issuance of the Old Notes, (ii)
the exercise of the Anschutz Warrant and (iii) additional borrowings under the
Company's U.S. Credit Facility, and the use of the aggregate proceeds from such
sources to repay the Canadian Credit Facility and to purchase all of the 11 1/4%
Notes in the Tender Offer. See "Use of Proceeds" and "Prospectus Summary --
Recent Developments."
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
<S> <C> <C>
PRO FORMA
HISTORICAL AS ADJUSTED
------------ ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
U.S. Credit Facility............................................ $ 58,500 56,433
Canadian Credit Facility........................................ 32,948 --
Saxon Credit Facility........................................... 22,104 22,104
8 3/4% Senior Subordinated Notes offered hereby................. -- 124,681
11 1/4% Senior Subordinated Notes............................... 99,452 9,713
Production payment obligation................................... 10,880 10,880
------------ ------------
Total long-term debt.......................................... 223,884 223,812
Minority interest (1)............................................. 12,985 12,985
Shareholders' equity:
Common stock, par value $.10 per share, 32,787,664 shares issued
and 36,287,664 shares issued pro forma as adjusted (2)........ 3,279 3,629
Capital surplus................................................. 456,617 486,367
Accumulated deficit............................................. (212,861) (225,313)
Foreign currency translation.................................... (2,572) (2,572)
Treasury stock (196,856 shares)................................. (2,817) (2,817)
------------ ------------
Total shareholders' equity.................................... 241,646 259,294
------------ ------------
Total capitalization.............................................. $ 478,515 496,091
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Represents a 34% minority economic interest in Saxon.
(2) Does not include a total of 1,415,080 shares reserved for issuance upon
exercise of outstanding stock options.
30
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected historical financial and operating
data for the Company for the six months ended June 30, 1997 and 1996, and for
each of the years in the five-year period ended December 31, 1996. The selected
data presented below under the captions "Consolidated Statement of Operations
Data" and "Consolidated Balance Sheet Data" for, and as of the end of, each of
the years in the five-year period ended December 31, 1996 are derived from the
Consolidated Financial Statements of the Company which have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The Consolidated
Financial Statements as of December 31, 1996 and 1995, and for each of the years
in the three-year period ended December 31, 1996, and the Independent Auditors'
Report thereon, are included elsewhere in this Prospectus. The financial
information for the six months ended June 30, 1997 and 1996 has been derived
from the unaudited Condensed Consolidated Financial Statements included
elsewhere in this Prospectus. The selected financial and operating data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business and
Properties," the Condensed Consolidated Financial Statements and the
Consolidated Financial Statements of the Company (including the Notes thereto).
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993 1992(1)
---------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue (2):
Marketing and processing................. $ 98,209 83,589 187,374 -- -- -- --
Oil and gas sales........................ 72,509 56,522 128,713 82,275 114,541 102,883 99,239
Miscellaneous, net....................... 1,650 303 1,387 181 1,406 2,265 13,947
---------- --------- --------- --------- --------- --------- ---------
Total revenue.......................... $ 172,368 140,414 317,474 82,456 115,947 105,148 113,186
Earnings (loss) before income taxes,
cumulative effects of changes in
accounting principles and extraordinary
items.................................... $ 4,294 18 6,590 (18,003) (67,844) (10,705) 11,286
Earnings (loss) before cumulative effects
of changes in accounting principles and
extraordinary items...................... $ 1,326 (3,287) 1,139 (17,996) (67,853) (9,355) 7,298
Net earnings (loss)........................ $ 1,326 (3,287) 3,305 (17,996) (81,843) (21,213) 7,298
Weighted average number of shares
outstanding.............................. 33,353 22,477 27,163 7,360 5,619 4,399 2,755
Net earnings (loss) attributable to common
stock.................................... $ 1,137 (4,367) 1,147 (20,156) (84,004) (23,463) 4,950
Primary earnings (loss) per share (3):
Earnings (loss) attributable to common
stock before cumulative effects of
changes in accounting principles and
extraordinary items.................... $ .03 (.19) (.04) (2.74) (12.46) (2.64) 1.80
Cumulative effect of changes in
accounting principles (4).............. -- -- -- -- (2.49) (.26) --
Extraordinary items (4).................. -- -- .08 -- -- (2.44) --
---------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) attributable to
common stock........................... $ .03 (.19) .04 (2.74) (14.95) (5.34) 1.80
---------- --------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- --------- ---------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993 1992(1)
---------- --------- ---------- --------- --------- --------- ---------
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SALES PRICES)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets.............................. $ 592,012 520,834 563,458 321,043 324,832 426,755 378,532
Long-term debt (2)........................ $ 223,884 201,886 168,859 193,879 207,054 194,307 168,321
Other long-term liabilities............... $ 53,018 60,818 53,560 27,139 28,166 27,053 25,161
Deferred revenue.......................... $ -- 9,985 7,591 15,137 35,908 67,228 67,066
Shareholders' equity...................... $ 241,646 178,537 242,443 44,297 6,086 88,156 59,881
OPERATING DATA:
Production (5):
Gas (MMCF).............................. 23,033 19,444 42,496 33,342 48,048 41,114 29,174
Liquids (MBBLS)......................... 1,491 1,233 2,749 1,173 1,543 1,493 1,450
Average sales price (5):
Gas (per MCF) (6)....................... $ 1.98 1.82 1.89 1.77 1.90 1.88 1.70
Liquids (per BBL)....................... $ 17.98 17.01 17.59 15.86 14.83 16.97 18.14
Proved Reserves (5) (7):
Gas (MMCF).............................. 337,250 238,128 246,996 273,382 194,655
Liquids (MBBLS)......................... 24,014 10,541 7,532 8,198 7,560
Total (MMCFE)........................... 481,334 301,374 292,188 322,570 240,015
Standardized measure of discounted future
net cash flows relating to proved oil
and gas reserves (7).................... $ 559,869 256,917 207,549 262,176 190,971
Total discounted future net cash flows
relating to proved oil and gas reserves,
including amounts attributable to
volumetric production payments (7)...... $ 562,995 265,393 230,149 299,053 227,009
Weighted Average price used to calculate
discounted future net cash flows
relating to proved oil and gas reserves
at end of period:
Natural gas (per MCF)................. $ 2.88 1.94 1.63 2.22 2.14
Liquids (per BBL)..................... 20.63 17.37 16.33 13.21 17.67
OTHER FINANCIAL DATA:
EBITDA (2) (8)............................ $ 51,244 39,056 92,946 50,912 82,397 73,605 85,710
Cash provided (used) by operating
activities (2).......................... $ 24,290 21,953 67,815 (3,062) 42,441 41,722 97,241
Cash used by investing activities......... $ 73,832 161,227 226,867 17,219 32,307 170,134 83,354
Cash provided (used) by financing
activities.............................. $ 46,583 140,200 164,500 20,698 (14,126) 71,886 30,846
Capital expenditures:
Property acquisitions................... $ 6,135 139,800 158,955 26,807 9,762 144,916 88,772
Exploration............................. 45,957 10,909 43,439 12,739 15,693 5,433 2,297
Development............................. 30,555 13,106 41,724 13,198 17,089 20,472 15,558
---------- --------- ---------- --------- --------- --------- ---------
Total capital expenditures............ $ 82,647 163,815 244,118 52,744 42,544 170,821 106,627
---------- --------- ---------- --------- --------- --------- ---------
---------- --------- ---------- --------- --------- --------- ---------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- ------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992(1)
---------- --------- ---------- --------- --------- --------- ---------
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SALES PRICES)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical credit ratios:
Ratio of earnings to fixed charges
(9)................................... 1.4 -- 1.3 -- -- -- 1.4
Ratio of EBITDA to interest
expense............................... 5.1 3.2 4.0 2.0 3.1 3.1 3.1
Ratio of debt to EBITDA (10)............ 2.2 2.7 1.9 4.1 3.0 3.6 2.8
Pro forma credit ratios:
Pro forma ratio of earnings to fixed
charges (11).......................... 1.3 1.2
Pro forma as adjusted ratio of earnings
to fixed
charges (11) (12)..................... 1.6 1.4
Pro forma as adjusted ratio of
EBITDA to interest expense (12)....... 5.7 4.4
Pro forma as adjusted ratio of
debt to EBITDA (10)(12)............... 2.2 1.8
</TABLE>
- --------------------------
(1) Consolidated statement of operations data, consolidated balance sheet data
and other financial data for the year ended December 31, 1992 include the
effects of a natural gas contract settlement which increased total revenue
by $37,541,000 and net earnings by $24,043,000 or $8.73 per share. Operating
data for the year ended December 31, 1992 exclude the effects of the ONEOK
Settlement.
(2) The following table sets forth certain financial data for Saxon, a
consolidated subsidiary in which the Company holds a 66% economic interest.
Saxon will not initially be a Restricted Subsidiary under the Indenture. See
"Offering Memorandum Summary--Recent Developments" and Note 2 of Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ ---------------------
<S> <C> <C>
(IN THOUSANDS)
Revenue....................................................... $ 7,336 9,722
Long-term debt............................................... $ 22,104 --
EBITDA....................................................... $ 3,544 5,155
Cash provided (used) by operating activities................. $ (1,583) 9,541
</TABLE>
(3) Fully diluted earnings (loss) per share was the same as primary earnings
(loss) per share in all years except 1992. In 1992, fully diluted earnings
per share was $1.45.
(4) In 1996, the Company realized a gain on extinguishment of debt as a result
of the extinguishment of nonrecourse secured debt. The Company changed its
method of accounting for oil and gas sales from the sales method to the
entitlements method effective January 1, 1994. The Company adopted the
provisions of Statements of Financial Accounting Standards No. 106 and No.
109 effective January 1, 1993. These statements required the Company to
accrue the expected cost of postretirement benefits and to adopt the
liability method of accounting for income taxes, respectively. In 1993, the
Company realized a loss on extinguishment of debt of $10,735,000 as a result
of the redemption of its outstanding Senior Secured Notes and long-term
subordinated debentures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 1, 3, 5 and 10 of
Notes to Consolidated Financial Statements.
(5) Includes amounts attributable to required deliveries under volumetric
production payments. See Notes 6 and 18 of Notes to Consolidated Financial
Statements.
(6) Amounts shown for 1995 exclude the effects of a gas contract settlement.
Including such amount, the average sales price for 1995 was $1.90 per MCF.
For further information, regarding the gas contract settlement see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 15 of Notes to Consolidated Financial Statements.
33
<PAGE>
(7) The 1996 and 1995 amounts include 100% of the reserves owned by Saxon, a
consolidated subsidiary in which the Company holds a 66% economic interest.
Saxon will not initially be a Restricted Subsidiary under the Indenture. See
"Prospectus Summary--Recent Developments" and Note 2 of Notes to
Consolidated Financial Statements.
(8) EBITDA represents earnings before income taxes, cumulative effect of changes
in accounting principles, extraordinary items, interest, depreciation and
depletion, and impairment of proved oil and gas properties. EBITDA is
included as supplemental disclosure because it is commonly accepted as
providing useful information regarding a company's ability to incur and
service debt and to fund capital expenditures and because certain covenants
contained in the Indenture are based in part on EBITDA. In evaluating
EBITDA, the Company believes that investors should consider, among other
things, the amount by which EBITDA exceeds interest costs for the period,
how EBITDA compares to principal repayments on debt for the period and how
EBITDA compares to capital expenditures for the period. To evaluate EBITDA,
the components of EBITDA, such as revenue and operating expenses, and the
variability of such components over time, should be also be considered.
Investors should be cautioned, however, that EBITDA should not be construed
as an alternative to operating income (as determined in accordance with
GAAP) as an indicator of the Company's operating performance, or to cash
provided by operating activities (as determined in accordance with GAAP) as
a measure of liquidity. The Company's method of calculating EBITDA may
differ from the methods used by other companies, and as a result the EBITDA
measures disclosed herein may not be comparable to other similarly titled
measures disclosed by other companies.
(9) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of net earnings before income taxes and fixed charges. Fixed charges
consist of interest expense (which includes amortization of debt discount)
and that portion of rental cost equivalent to interest (estimated to be
one-third of rental cost).
The historical earnings for the six months ended June 30, 1996 and the years
ended December 31, 1995, 1994 and 1993 were inadequate to cover fixed
charges. The coverage deficiencies were $324,000, $18,327,000, $68,127,000
and $10,934,000, respectively. Excluding the effects of the gas contract
settlement discussed in Note 1 above, the historical earnings for the year
ended December 31, 1992 were inadequate to cover fixed charges by
$25,434,000.
(10) The historical ratio of debt to EBITDA and the pro forma as adjusted ratio
of debt to EBITDA represent the ratio of debt (consisting of long-term debt,
other long-term liabilities that are interest-bearing and deferred revenue)
at the end of the period to the amount of EBITDA for the period (annualized
in the case of EBITDA for the six months ended June 30, 1997).
(11) The pro forma ratio of earnings to fixed charges gives effect to the
application of $72.0 million of the proceeds from the sale of the Old Notes
to purchase $64.8 million of the $100 million principal amount outstanding
on the 11 1/4% Notes in the Tender Offer, the application of $32.9 million
of the proceeds of the Old Notes to repay outstanding borrowings under the
Canadian Credit Facility, and the retention of $16.5 million by the Issuer
for working capital and to fund capital expenditures.
(12) The pro forma as adjusted ratios of earnings to fixed charges, EBITDA to
interest expense and debt to EBITDA give effect to (i) the issuance of the
Old Notes for net proceeds of $121.6 million, and (ii) the exercise of the
Anschutz Warrant for proceeds of $30.1 million, and the use of the aggregate
proceeds from such sources to repay the outstanding balance of $32.9 million
under the Canadian Credit Facility, to purchase approximately $90.2 million
principal amount of the 11 1/4% Notes in the Tender Offer for approximately
$99.0 million plus approximately $375,000 of related expenses and to retain
the balance of the proceeds for working capital and to fund capital
expenditures.
34
<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 FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net earnings for the first six months of 1997 were $1,326,000 or $.03 per
common share compared to a net loss of $3,287,000 or $.19 per common share in
the first six months of 1996. The improved results for the first six months of
1997 were attributable primarily to increased production as well as higher
natural gas and liquids prices.
The Company's marketing and processing revenue increased 17% to $98,209,000
in the first six months of 1997 from $83,589,000 in the five months of
operations of ProMark subsequent to its purchase on January 31, 1996. The
related marketing and processing expense increased by 19% to $93,906,000 in the
1997 period from $79,165,000 in the 1996 period. The gross margin reported for
marketing and processing activities of $4,303,000 in the first six months of
1997 was slightly lower than the gross margin of $4,424,000 in the first six
months of 1996 because the 1996 period included a non-recurring income item of
approximately $350,000 and also had higher third party contract processing
volumes.
The Company's oil and gas sales revenue increased by 28% to $72,509,000 in
the first six months of 1997 compared to $56,522,000 in the first six months of
1996. The 1996 period includes five months of operations of Canadian Forest
subsequent to its purchase on January 31, 1996. The increase in 1997 is also
attributable to increased production in the U.S. as well as higher natural gas
and liquids prices. Production volumes for natural gas in the first six months
of 1997 increased 18% from the comparable 1996 period due primarily to new
production from Gulf of Mexico properties and to recording six months of
activity for Canadian Forest in 1997 compared to only five months in 1996. The
average sales price for natural gas in the first six months of 1997 increased 9%
compared to the average sales price in the corresponding 1996 period. Production
volumes for liquids (consisting of oil, condensate and natural gas liquids) were
21% higher in the first six months of 1997 than in the first six months of 1996,
due primarily to new production from Gulf of Mexico and Canadian properties. The
average sales price for liquids production during the first six months of 1997
increased 6% compared to the average sales price during the comparable 1996
period.
Oil and gas production expense of $18,671,000 in the first six months of
1997 increased 18% from $15,856,000 in the comparable period of 1996 due
primarily to expenses relating to use of a mobile production unit at High Island
274 and temporary transportation expenses associated with the Bigoray field. On
an MCFE basis, production expense decreased approximately 2% in the first six
months of 1997 to $.58 per MCFE from $.59 per MCFE in the first six months of
1996.
35
<PAGE>
Production volumes, weighted average sales prices and production expenses
during the periods were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------------------------------------
JUNE 30, 1997 JUNE 30, 1996
------------------------------- -------------------------------
UNITED UNITED
STATES CANADA TOTAL STATES CANADA TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Total production (MMCF) (1)................ 16,090 6,943 23,033 13,092 6,352 19,444
Sales price received (per MCF)............. $ 2.37 1.54 2.12 2.27 1.43 1.99
Effects of energy swaps (per MCF) (2)...... (.19) (.01) (.14) (.24) (.03) (.17)
--------- --------- --------- --------- --------- ---------
Average sales price (per MCF).............. $ 2.18 1.53 1.98 2.03 1.40 1.82
LIQUIDS
Oil and condensate:
Total production (MBBLS)................... 498 748 1,246 435 621 1,056
Sales price received (per BBL)............. $ 19.41 19.32 19.35 18.20 19.83 19.16
Effects of energy swaps (per BBL) (2)...... (.61) (.35) (.45) (1.61) (1.58) (1.59)
--------- --------- --------- --------- --------- ---------
Average sales price (per BBL).............. $ 18.80 18.97 18.90 16.59 18.25 17.57
Natural gas liquids:
Total production (MBBLS)................... 53 192 245 46 131 177
Average sales price (per BBL).............. $ 9.00 13.28 14.46 9.31 15.20 13.66
Total liquids production (MBBLS)............. 551 940 1,491 481 752 1,233
Average sales price (per BBL)................ $ 17.86 18.05 17.98 15.90 17.72 17.01
Total production (MMCFE)..................... 19,396 12,583 31,979 15,978 10,864 26,842
Operating expense (per MCFE)................. $ .55 .64 .58 .63 .54 .59
</TABLE>
- ------------------------
(1) Total natural gas production includes scheduled deliveries under volumetric
production payments, net of royalties, of 801 MMCF and 2,082 MMCF in the
1997 and 1996 periods, respectively. Natural gas delivered pursuant to
volumetric production payment agreements represented approximately 4% and
11% of total natural gas production in the 1997 and 1996 periods,
respectively. On June 30, 1997, the Company repurchased its last remaining
volumetric production payment.
(2) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 5,919 MMCF and
5,525 MMCF for the 1997 and 1996 periods, respectively. Hedged oil and
condensate volumes were 437,000 barrels and 597,000 barrels for the 1997 and
1996 periods, respectively. Aggregate losses under energy swap agreements
were $3,741,000 and $5,009,000 in the 1997 and 1996 periods, respectively,
which were accounted for as reductions of revenue.
General and administrative expense was $8,547,000 in the first six months of
1997 compared to $6,337,000 in the comparable period of 1996. Total overhead
costs (capitalized and expensed general and administrative costs) were
$12,612,000 in the first six months of 1997 compared to $10,171,000 in the
comparable period of 1996. The increase is primarily attributable to the
inclusion of six months of costs for Canadian Forest and ProMark in 1997 versus
only five months in 1996, as well as to a larger number of technical and
operating employees who were hired in support of the Company's expanded capital
budget for exploration and development. Direct exploration and development
expenditures in the first six months of 1997 were approximately $72,000,000
compared to approximately $20,000,000 in the first six months of 1996.
36
<PAGE>
The following table summarizes the total overhead costs incurred during the
periods:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Overhead costs capitalized................................ $ 4,065 3,834
General and administrative costs expensed (1)............. 8,547 6,337
--------- ---------
Total overhead costs.................................... $ 12,612 10,171
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Includes $1,462,000 and $1,457,000 related to marketing and processing
operations for the six month periods ended June 30, 1997 and 1996,
respectively.
Interest expense decreased 18% to $10,033,000 in the first six months of
1997 compared to $12,220,000 in the corresponding 1996 period, due primarily to
the extinguishment of the nonrecourse secured loan with JEDI in the fourth
quarter of 1996, offset in part by increased interest charges on higher
outstanding balances under bank credit facilities.
Depreciation and depletion expense increased 36% to $36,756,000 in the first
six months of 1997 from $26,989,000 in the first six months of 1996 due to
higher production and higher per-unit expense. On a per-unit basis, depletion
expense was approximately $1.09 per MCFE in the first six months of 1997
compared to $.94 per MCFE in the corresponding 1996 period. The increase in
per-unit depletion results primarily from higher estimated future development
costs in the U.S. due to expected increased costs for services. At June 30, 1997
the Company had undeveloped properties with a cost basis of approximately
$64,000,000 which were excluded from depletion, compared to approximately
$49,000,000 at June 30, 1996. The increase is attributable primarily to costs of
acquiring undeveloped acreage.
The Company was not required to record a writedown of the carrying value of
its United States or Canadian oil and gas properties in the first half of 1997
or 1996. Writedowns of the full cost pools in the United States and Canada may
be required, however, if prices decline, undeveloped property values decrease,
estimated proved reserve volumes are revised downward or costs incurred in
exploration, development, or acquisition activities in the respective full cost
pools exceed the discounted future net cash flows from the additional reserves,
if any, attributable to each of the cost pools.
CHANGES IN ACCOUNTING. In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings Per Share" (SFAS No. 128), which
revises the calculation and presentation provisions of Accounting Principles
Board Opinion 15 and related interpretations. SFAS No. 128 is effective for the
Company's fiscal year ending December 31, 1997. Retroactive application will be
required but early adoption is not permitted. The Company believes the adoption
of SFAS No. 128 will not have a significant effect on its reported earnings per
share.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NET EARNINGS (LOSS). Net earnings for 1996 were $3,305,000 compared to a
net loss of $17,996,000 in 1995. Earnings for the 1996 period include an
extraordinary gain on extinguishment of debt of $2,166,000. The improved
earnings from continuing operations in 1996 were attributable primarily to
increased natural gas and liquids prices as well as increased natural gas and
liquids production as a result of the acquisitions of Saxon Petroleum Inc.
("Saxon") and Canadian Forest Oil Ltd. ("Canadian Forest"), which were completed
in December 1995 and January 1996, respectively, and to the contribution made by
Forest's Canadian marketing and processing subsidiary ("ProMark"), which was
also acquired in January 1996. The net loss for 1995 was $17,996,000 compared to
a net loss of $81,843,000 in 1994. The 1995 loss was primarily due to decreased
oil and natural gas volumes and lower natural gas prices, offset by $4,263,000
of income associated with a gas contract settlement. The 1994 loss included
37
<PAGE>
a $58,000,000 writedown of the book value of the Company's oil and gas
properties due to a ceiling test limitation and 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 "Accounting Policies".
REVENUE. Total revenue increased 285% to $317,474,000 in 1996 from
$82,456,000 in 1995 and decreased 29% in 1995 from $115,947,000 in 1994. The
significant increase in total revenue in 1996 is due primarily to the
acquisitions of ProMark, Canadian Forest and Saxon.
Marketing and processing revenue attributable to the marketing activities of
ProMark subsequent to its purchase on January 31, 1996 was $187,374,000. For the
eleven months ended December 31, 1996 ProMark marketed approximately 851 MMCF of
natural gas per day.
Oil and gas sales revenue increased to $128,713,000 in 1996 from $82,275,000
in 1995, or by approximately 56%. Oil and gas sales in 1995 included $4,263,000
of income associated with a gas contract settlement with Columbia Gas
Transmission ("Columbia"). The Company had entered into gas sales contracts with
Columbia which were rejected by Columbia in connection with its bankruptcy
proceedings. The income related to the settlement with Columbia represented
approximately 5% of total oil and gas sales in 1995. Natural gas and liquids
volumes increased 27% and 134% in 1996, respectively, primarily as a result of
the Canadian acquisitions and new production from the Company's offshore Gulf of
Mexico platform at High Island 116, partially offset by anticipated production
declines in the United States. The average sales price for natural gas in 1996
increased 7% compared to 1995, exclusive of the effects of income associated
with the gas contract settlement. The average sales price for liquids production
in 1996 increased 11% compared to 1995.
Oil and gas sales revenue decreased to $82,275,000 in 1995 from $114,541,000
in 1994, or by approximately 28%. In 1995, natural gas and oil production
volumes were down 31% and 24%, respectively, compared to 1994. These decreases
resulted primarily from limited capital expenditures in 1994 and 1995 that did
not allow the Company to replace existing production through acquisitions and
drilling. The average sales price for natural gas in 1995 decreased 7% compared
to 1994, exclusive of the effects of the income associated with the gas contract
settlement. The average sales price for oil in 1995 increased 7% compared to
1994.
Oil and gas sales to Enron and certain of its affiliates ("Enron
Affiliates"), the Company's largest customer, represented approximately 25% of
oil and gas sales in 1996, compared to 38% in 1995 and 51% in 1994. The
decreases during these periods are attributable primarily to the decreases in
delivery requirements pursuant to volumetric production payments. In addition,
the Company's spot market sales to Enron Affiliates increased to approximately
11 BCFE in 1996 from approximately 8 BCFE in 1995 as a result of higher
production volumes available for sale. Spot market sales to Enron Affiliates in
1994 were approximately 16 BCFE.
38
<PAGE>
The production volumes and average sales prices for the years ended December
31, 1996, 1995 and 1994 for Forest and its subsidiaries were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996(5) 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
NATURAL GAS
Total production (MMCF)(1)....................... 42,496 33,342 48,048
Sales price received (per MCF)(2)................ $ 2.06 1.65 1.86
Effects of energy swaps (per MCF)(3)............. (.17) .12 .04
--------- --------- ---------
Average sales price (per MCF)(2)................. $ 1.89 1.77 1.90
LIQUIDS
Oil and condensate:
Total production (MBBLS)(4).................... 2,272 1,121 1,482
Sales price received (per BBL)................. $ 20.38 16.36 14.97
Effects of energy swaps (per BBL)(3)........... (1.50) (.50) (.14)
--------- --------- ---------
Average sales price (per BBL).................. $ 18.88 15.86 14.83
Natural gas liquids:
Total production (MBBLS)....................... 477 52 61
Average sales price (per BBL).................. $ 11.46 15.81 14.79
Total liquids production (MBBLS)................. 2,749 1,173 1,543
Average sales price (per BBL).................... $ 17.59 15.86 14.83
</TABLE>
- ------------------------
(1) Total natural gas production includes scheduled deliveries under volumetric
production payments, net of royalties, of 3,168 MMCF, 9,120 MMCF and 16,005
MMCF in 1996, 1995 and 1994, respectively. Natural gas delivered pursuant to
volumetric production payment agreements represented approximately 7%, 27%
and 33% of total natural gas production in 1996, 1995 and 1994,
respectively. For further information concerning volumes and prices recorded
under volumetric production payments, see Notes 6 and 18 of Notes to
Consolidated Financial Statements.
(2) Amounts shown for 1995 exclude the effects of a gas contract settlement.
Including such amount, the sales price received and average sales price for
natural gas in 1995 were $1.78 and $1.90 per MCF, respectively. For further
information regarding the gas contract settlement, see Note 15 of Notes to
Consolidated Financial Statements.
(3) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuation. Hedged natural gas volumes were 12,741 MMCF,
10,146 MMCF and 12,184 MMCF for the years ended December 31, 1996, 1995 and
1994, respectively. Hedged oil and condensate volumes were 895,600 barrels,
498,000 barrels and 370,000 barrels for the years ended December 31, 1996,
1995 and 1994, respectively. The aggregate gains (losses) under energy swap
agreements were $(10,422,000), $3,536,000 and $1,810,000, respectively, for
the years ended December 31, 1996, 1995 and 1994, which were accounted for
as additions to (reductions of) revenue.
(4) An immaterial amount of oil production is covered by scheduled deliveries
under volumetric production payments.
(5) Alberta's royalty program was restructured in 1994 and remained uncertain
throughout much of 1995 and 1996. Production of natural gas liquids for the
year ended December 31, 1996 was reduced by 79,000 barrels as a result of
royalty adjustments, resulting in an increase in the reported average sales
price for natural gas liquids to $11.46 per barrel from $9.70 or by
approximately 18%. The royalty adjustments did not have a significant effect
on reported volumes or average sales prices for natural gas or oil and
condensate. Canadian Forest continues to receive additional information with
respect to royalty calculations and anticipates that revisions to such
calculations will continue to occur throughout 1997. The effects of future
royalty adjustments cannot be predicted at this time.
39
<PAGE>
Miscellaneous net revenue of $1,387,000 in 1996 included the reversal of a
$1,136,000 liability for royalties on the proceeds from the gas contract
settlement with Columbia. Miscellaneous net revenue was $181,000 in 1995.
Miscellaneous net revenue of $1,406,000 in 1994 included income from the sale of
miscellaneous pipeline systems and equipment and the reversal of an accounts
receivable reserve, partially offset by a reserve for settlement of a royalty
dispute and a payment of deferred maintenance costs of a real estate complex
formerly used for general business purposes.
MARKETING AND PROCESSING EXPENSE. In 1996, marketing and processing expense
of $178,706,000 was recorded which relates primarily to the marketing activities
of ProMark subsequent to its purchase on January 31, 1996.
OIL AND GAS PRODUCTION EXPENSE. Oil and gas production expense increased
43% to $32,199,000 in 1996 from $22,463,000 in 1995 due primarily to production
expense associated with the newly-acquired Canadian properties. On an MCFE
basis, production expense was $.55 per MCFE in 1996 compared to $.56 in 1995.
Oil and gas production expense increased slightly to $22,463,000 in 1995 from
$22,384,000 in 1994. On an MCFE basis, however, production expense increased to
$.56 per MCFE in 1995 from $.39 per MCFE in 1994. The increased cost per MCFE
from 1994 to 1995 is directly attributable to fixed components of oil and gas
production expense being allocated over a smaller production base.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased 50% to $13,623,000 in 1996 compared to $9,081,000 in 1995 due
primarily to the effect of Canadian acquisitions. General and administrative
expense decreased 19% to $9,081,000 in 1995 compared to $11,166,000 in 1994 due
primarily to a reduction in the size of the Company's workforce on March 1,
1995. The capitalization rate was approximately 36% of total overhead costs in
1996 compared to 43% in 1995 and 40% in 1994. Changes in the capitalization rate
result from changes in the percentage of employees' time spent working directly
on exploration and development projects.
Total overhead costs (capitalized and expensed general and administrative
costs) were $21,396,000 in 1996, $15,857,000 in 1995 and $18,719,000 in 1994.
Total overhead costs were approximately 35% higher in 1996 compared to 1995 due
primarily to the addition of the Canadian operations, which increased Forest's
salaried workforce to 179 at December 31, 1996 compared to 115 at December 31,
1995. Total overhead costs were approximately 15% lower in 1995 than in 1994.
The Company's salaried workforce in the United States was 115 at December 31,
1995 compared to 143 at December 31, 1994. The decreases in total overhead costs
and personnel in 1995 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>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Overhead costs capitalized....................... $ 7,773 6,776 7,553
General and administrative costs expensed (1).... 13,623 9,081 11,166
--------- --------- ---------
Total overhead costs........................... $ 21,396 15,857 18,719
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Includes $2,555,000 in 1996 related to marketing and processing operations.
INTEREST EXPENSE. Interest expense of $23,307,000 in 1996 decreased
$2,016,000 or 8% compared to 1995 due primarily to the restructuring and
extinguishment of a nonrecourse secured loan and lower effective interest on a
dollar denominated production payment. Interest expense of $25,323,000 in 1995
decreased $1,450,000 or 5% compared to 1994 due primarily to lower effective
interest rates related to such nonrecourse secured loan and dollar denominated
production payment.
40
<PAGE>
DEPRECIATION AND DEPLETION EXPENSE. Depreciation and depletion expense
increased 45% to $63,068,000 in 1996 from $43,592,000 in 1995 due to the
increase in production, offset by a decrease in the depletion rate per unit of
production. The depletion rate decreased to $1.01 per MCFE in 1996 compared to
$1.06 per MCFE in 1995, resulting from the addition of lower cost Canadian
production, partially offset by higher anticipated future costs in the United
States due to expected increased costs for services. Depreciation and depletion
expense decreased 33% to $43,592,000 in 1995 from $65,468,000 in 1994 due to
decreased production, as well as a decrease in the depletion rate per unit of
production. The depletion rate decreased to $1.06 per MCFE for United States
production in 1995 compared to $1.13 in 1994 due to writedowns of the Company's
oil and gas properties taken in the third and fourth quarters of 1994.
At December 31, 1996 the Company had undeveloped properties with a cost
basis of approximately $30,046,000 in the U.S. and $13,870,000 in Canada which
were excluded from depletion compared to $28,380,000 in the U.S. at December 31,
1995 and $30,441,000 in the U.S. at December 31, 1994. The increase in 1996
compared to 1995 is due primarily to the acquisition of undeveloped properties
in the Canadian Forest purchase.
IMPAIRMENT OF OIL AND GAS PROPERTIES. The Company was not required to
record a writedown of the carrying value of its oil and gas properties in 1996
or 1995. The Company recorded a writedown of its oil and gas properties of
$58,000,000 in 1994 due primarily to a decrease in spot market prices for
natural gas.
The average Gulf Coast spot price received by the Company for natural gas
decreased from $3.89 per MCF at December 31, 1996 to approximately $2.63 per MCF
at September 1, 1997. The West Texas Intermediate price for crude oil decreased
from $23.75 per barrel at December 31, 1996 to approximately $16.50 per barrel
at September 1, 1997. The average spot price received for Canadian natural gas
production decreased from CDN$2.76 per MMBTU at December 31, 1996 to
approximately CDN$1.60 per MMBTU at September 1, 1997. The Canadian spot price
received for crude oil decreased from CDN$25.92 per barrel at December 31, 1996
to approximately CDN$24.23 per barrel at September 1, 1997.
Writedowns of the full cost pools in the United States and Canada may be
required if a depressed price environment persists, undeveloped property values
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.
ACCOUNTING POLICIES. 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 1994 was an increase in earnings from operations of
$3,584,000 and an increase in production volumes of 1,555 MMCF. There were no
related income tax effects in 1994.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). Oil and gas properties
accounted for under the full cost method of accounting are excluded from the
scope of SFAS No. 121, but will continue to be subject to the ceiling test
limitation.
41
<PAGE>
SFAS No. 121 requires that impairment losses be recorded on other long-lived
assets used in operations when indicators of impairment are present and either
the undiscounted future cash flows estimated to be generated by those assets or
the fair market value are less than the assets' carrying amount. SFAS No. 121
also addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted SFAS No. 121 effective January 1, 1996. The
adoption of SFAS No. 121 had no effect on the Company's financial statements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS No. 123"), was issued by the Financial Accounting
Standards Board in October 1995. SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans as well as
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. The Company adopted SFAS No. 123 effective
January 1, 1996, and will continue to use the measurement method prescribed by
APB Opinion 25, as permitted under SFAS No. 123. The Company has included the
pro forma disclosures required by SFAS No. 123 in Note 9 of Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically addressed its long-term liquidity needs through
the issuance of debt and equity securities, when market conditions permit, and
through use of bank credit facilities and cash provided by operating activities.
From 1995 through August 1997, the Company completed several transactions
that improved its financial position considerably and increased common equity by
approximately $300,000,000.
In 1995 the Company completed transactions with Anschutz and JEDI which
raised a total of approximately $59,000,000 of equity. (See "The Anschutz and
JEDI Transactions").
On January 31, 1996 the Company and Saxon sold 13,200,000 shares of Common
Stock for $11.00 per share in a public offering (the 1996 Public Offering). Of
this amount, 1,060,000 shares were sold by Saxon and 12,140,000 shares were sold
by Forest. The net proceeds to Forest from the issuance of the shares totaled
approximately $125,000,000 after deducting issuance costs and underwriting fees,
and were used, along with an additional approximately $8,300,000 drawn under the
Company's Credit Facility, to complete the purchase of Canadian Forest and
ProMark. The net proceeds to Saxon of approximately $11,000,000 were used to
reduce its bank debt.
On August 1, 1996 Anschutz exercised an option to purchase 2,250,000 shares
of Common Stock for $26,200,000 or approximately $11.64 per share. Proceeds
received by Forest were used primarily to fund a portion of 1996 capital
expenditures.
On November 5, 1996 the Company exchanged 2,000,000 shares of Common Stock
plus approximately $13,500,000 in cash to extinguish approximately $43,000,000
of nonrecourse secured debt owed to JEDI. In connection with this transaction,
Anschutz acquired 1,628,888 shares of Common Stock by exercising warrants to
purchase 388,888 shares of Common Stock at $10.50 per share and by converting
620,000 shares of Forest's Second Series Preferred Stock into 1,240,000 shares
of Common Stock.
On November 14, 1996 the Company filed a shelf registration (the "Shelf
Registration Statement") with the Securities and Exchange Commission to issue up
to $250,000,000 in one or more forms of debt or equity securities. Except as
otherwise provided in an applicable prospectus supplement, the net proceeds from
the sale of the securities will be used for the acquisition of oil and gas
properties, capital expenditures, the repayment of subordinated debentures or
other debt, repayments of borrowings under revolving credit agreements, or for
other general corporate purposes.
On February 7, 1997, the Company called for redemption all 2,877,673 shares
of its $.75 Convertible Preferred Stock. In response to its call for redemption,
2,783,945 shares or 96.7% of the shares
42
<PAGE>
outstanding were tendered for conversion into Common Stock on or before the
February 21, 1996 deadline. The remaining 93,728 preferred shares were redeemed
by the Company at the redemption price of $10.06 per share (at a total cost of
$942,904) on February 28, 1997. Lehman Brothers Inc. purchased 65,616 shares of
Common Stock issued pursuant to the Shelf Registration Statement to fund the
cash requirement of the redemption in accordance with the terms of its standby
purchase agreement with Forest. This conversion and redemption eliminated all
outstanding preferred stock from the Company's capital structure and eliminates
approximately $2,200,000 of annual preferred dividend payments.
On August 28, 1997, The Anschutz Corporation purchased 3,500,000 shares of
Common Stock through the exercise of the Anschutz Warrant for $8.60 per share,
resulting in cash proceeds to Forest of $30,100,000. Proceeds from the exercise
were used to reduce borrowings under the Credit Facilities.
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 capital, including bank borrowings,
the issuance of debt instruments, the sale of common stock, preferred stock or
other equity securities of the Company, the issuance of net profits interests,
sales of non-strategic assets, 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. In addition, the
prices the Company receives for its future oil and natural gas production and
the level of the Company's 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. At September 1, 1997, the Company has
three offshore Gulf of Mexico properties whose combined production represents
approximately 29% of the Company's daily deliverability. The Company's
production, revenue and cash flow could be adversely affected if production from
these properties decreases to a significant degree.
BANK CREDIT FACILITIES. The Company has a credit agreement with a syndicate
of banks led by The Chase Manhattan Bank (the "U.S. Credit Facility"). The U.S.
Credit Facility is secured by a lien on, and a security interest in, a majority
of the Company's U.S. proved oil and gas properties and related assets, pledges
of accounts receivable and a pledge of 66% of the capital stock of Canadian
Forest. Funds under the U.S. Credit Facility can be used for general corporate
purposes. Under the terms of the U.S. Credit Facility, the Company is subject to
certain covenants and financial tests, including restrictions or requirements
with respect to working capital, cash flow, additional debt, liens, asset sales,
investments, mergers, cash dividends and reporting responsibilities.
A Canadian finance subsidiary of Forest has a credit agreement (the
"Canadian Credit Facility," together with the U.S. Credit Facility, the "Bank
Credit Facilities") with a syndicate of Canadian banks led by The Chase
Manhattan Bank of Canada for the benefit of Canadian Forest and ProMark. The
Canadian Credit Facility is indirectly secured by substantially all the assets
of Canadian Forest. Funds drawn under the Canadian Credit Facility can be used
for general corporate purposes. Under the terms of the Canadian Credit Facility,
the three Canadian subsidiaries are subject to certain covenants and financial
tests, including restrictions or requirements with respect to working capital,
cash flow, additional debt, liens, asset sales, investments, mergers, cash
dividends and reporting responsibilities.
On August 29, 1997, the Company amended both its U.S. Credit Facility and
its Canadian Credit Facility. The primary purpose of the amendments was to
create one Global Borrowing Base for both facilities. The initial Global
Borrowing Base is $130,000,000, representing an increase of approximately
$20,000,000 from the combined borrowing bases under the previous facilities.
Under the Bank Credit Facilities as amended, the Company will be able to
allocate the Global Borrowing base between the United States and Canada, subject
to the limitation that borrowings in either the United States or Canada
43
<PAGE>
cannot exceed $100,000,000. In addition to increasing the Company's global
borrowing capability, the amendments provide for a much less restricted ability
to move funds between the United States and Canada, extend the maturity date for
both facilities to August 2001 and require the Company to guarantee the Canadian
Credit Facility. Other major provisions of the credit facilities remain largely
unchanged.
At September 30, 1997, the outstanding borrowings under the U.S. Credit
Facility were $78,000,000 and there were no outstanding borrowings under the
Canadian Credit Facility. The Company has used the U.S. Credit Facility for a
$1,500,000 Letter of Credit. The Company has also used the Canadian Credit
Facility for a Letter of Credit in the amount of $2,184,000.
In addition to the credit facilities described above, Saxon has a demand
credit facility (the "Saxon Credit Facility") with a borrowing base of
$35,000,000 CDN. The loan is subject to semi-annual review and has demand
features; however, repayments are not required provided that borrowings are not
in excess of the borrowing base and Saxon complies with other existing
covenants. At September 30, 1997, the outstanding balance under this facility
was $31,055,000 CDN.
For a description of these facilities, see "Description of Bank Credit
Facilities."
WORKING CAPITAL. The Company had a working capital deficit of approximately
$1,242,000 at June 30, 1997 compared to a deficit of approximately $12,649,000
at December 31, 1996. The decrease in the deficit was funded by borrowings under
the Company's bank credit facilities.
The Company generally reports a working capital deficit at the end of a
period. The working capital deficit is principally the result of accounts
payable for capitalized exploration and development costs. Settlement of these
payables is funded by cash flow from the Company's operations or, if necessary,
by drawdowns on the Company's long-term bank credit facilities. For cash
management purposes, drawdowns on the credit facilities are not made until the
due dates of the payables.
At June 30, 1997, the Company had available borrowing capacity of
approximately $16,000,000 under its existing bank credit facilities. The
Company's available credit at June 30, 1997 was adequate to fund the working
capital deficit at that date.
CASH FLOW. Historically, one of the Company's primary sources of short-term
capital has been net cash provided by operating activities. The following
summary table reflects comparative cash flow data for the Company for the six
months ended June 30, 1997 and 1996 and the three years ended December 31, 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating
activities...................................... $ 24,290 21,953 67,815 (3,062) 42,441
Net cash used by investing activities............. 73,832 161,227 226,867 17,219 32,307
Net cash provided (used) by financing
activities...................................... 46,583 140,200 164,500 20,698 (14,126)
</TABLE>
Net cash provided by operating activities increased to $24,290,000 in the
first six months of 1997 compared to $21,953,000 in the first six months of
1996, due primarily to increased production as well as higher natural gas and
liquids prices. The 1997 amount is net of $6,832,000 used to settle the
Company's remaining volumetric production payment obligation. The Company used
$73,832,000 for investing activities in the first six months of 1997 compared to
$161,227,000 in the first six months of 1996. The 1996 outlays included
$136,191,000 for the acquisition of Canadian Forest, whereas the 1997 outlays
consisted primarily of exploration and development costs. Cash provided by
financing activities was $46,583,000 in the first six months of 1997 compared to
$140,200,000 in the first six months of 1996. The 1996 period included
$136,591,000 of net proceeds from a common stock offering.
44
<PAGE>
Net cash provided by operating activities increased to $67,815,000 in 1996
compared to a net use of cash for operating activities of $3,062,000 in 1995,
due to higher natural gas and liquids prices, increased natural gas and liquids
production as a result of the Saxon and Canadian Forest acquisitions and the
contribution made by ProMark and an increase in accounts payable during 1996.
The Company used $226,867,000 for investing activities in 1996 compared to
$17,219,000 in 1995. The increase is due primarily to the use of funds to
acquire Canadian Forest and higher capital expenditures. Cash provided by
financing activities was $164,500,000 in 1996 compared to $20,698,000 in 1995.
The increase is due primarily to the net proceeds received from the 1996 Public
Offering and the exercise by Anschutz of options and warrants.
CAPITAL EXPENDITURES. The Company's expenditures for property acquisition,
exploration and development for the first six months of 1997 and 1996 and the
three years ended December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Property acquisition costs:
Proved properties........... $ 3,048 121,992 140,875 26,487 9,553
Undeveloped properties...... 3,087 17,808 18,080 320 209
--------- --------- --------- --------- ---------
6,135 139,800 158,955 26,807 9,762
Exploration costs:
Direct costs................ 44,181 9,713 40,831 11,528 15,229
Overhead capitalized........ 1,776 1,196 2,608 1,211 464
--------- --------- --------- --------- ---------
45,957 10,909 43,439 12,739 15,693
Development costs:
Direct costs................ 28,266 10,468 36,559 7,633 10,000
Overhead capitalized........ 2,289 2,638 5,165 5,565 7,089
--------- --------- --------- --------- ---------
30,555 13,106 41,724 13,198 17,089
--------- --------- --------- --------- ---------
$ 82,647 163,815 244,118 52,744 42,544
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Property acquisition costs for the six months ended June 30, 1996 and the
year ended December 31, 1996 consist primarily of the allocation of purchase
price to the oil and gas properties acquired in the purchase of Canadian Forest.
1995 amounts consist primarily of the allocation of purchase price to the oil
and gas properties acquired in the purchase of Saxon.
Direct exploration costs of $44,181,000 incurred in the six months ended
June 30, 1997 includes approximately $15,000,000 of land and seismic costs,
primarily for acquisition of leases in the Gulf of Mexico, as well as
approximately $29,000,000 expended for drilling, completion and production
facilities on exploratory wells, of which a significant portion (approximately
50%) relates to work at the Company's Eugene Island 53 field.
Direct development spending of $28,266,000 in the first six months of 1997
includes approximately $16,000,000 for wells and plant facilities at the Bigoray
field in Alberta operated by Saxon, approximately $3,000,000 in the Western
Region of U.S. operations and approximately $3,000,000 in the Gulf of Mexico.
The Company's planned 1997 expenditures for exploration and development are
approximately $130,000,000. The Company expects to be able to meet its 1997
capital expenditure financing requirements using cash flows generated by
operations, sales of non-strategic assets and borrowings under
45
<PAGE>
existing lines of credit. However, there can be no assurance that the Company
will have access to sufficient capital to meet its capital requirements. The
planned levels of capital expenditures could be 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 or accesses additional sources of capital.
In addition, while the Company intends to continue a strategy of acquiring
reserves that meet its investment criteria, no assurance can be given that the
Company can locate or finance any property acquisitions.
LONG-TERM SALES CONTRACTS. A significant portion of Canadian Forest's
natural gas production is sold through the ProMark Netback Pool (the "Netback
Pool"). The operations of the Netback Pool are described in "Business and
Properties -- Sales and Markets." At June 30, 1997, the ProMark Netback Pool had
entered into fixed price contracts to sell approximately 4.8 BCF of natural gas
through the remainder of 1997 at an average price of $1.64 CDN per MCF and
approximately 5.4 BCF of natural gas in 1998 at an average price of
approximately $1.90 CDN per MCF. Canadian Forest is obligated to deliver
approximately 27% of the volumes of natural gas subject to these contracts.
HEDGING PROGRAM. In addition to the volumes of natural gas and oil sold
under long-term sales contracts, the Company also uses energy swaps and other
financial agreements to hedge against the effects of fluctuations in the sales
prices for oil and natural gas produced. 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 June 30, 1997, the Company had
natural gas swaps and collars for an aggregate of approximately 33,000 MMBTU per
day of natural gas during the remainder of 1997 at fixed prices ranging from
$1.16 per MMBTU on an Alberta Energy Company "C" (AECO "C") basis to $2.54 per
MMBTU on a New York Mercantile Exchange (NYMEX) basis and an aggregate of
approximately 10,000 MMBTU per day of natural gas during 1998 at fixed prices
ranging from $1.16 (AECO "C" basis) to $2.62 (NYMEX basis) per MMBTU. The
weighted average hedged price for natural gas under such agreements is $2.15 and
$2.13 per MMBTU in 1997 and 1998, respectively. At June 30, 1997, the Company
had oil swaps for an aggregate of 2,534 barrels per day of oil during the
remainder of 1997 at fixed prices ranging from $18.65 to $23.67 (NYMEX basis)
and an aggregate of 547 barrels per day during 1998 at fixed prices of $20.00
and $20.52 (NYMEX basis). The weighted average hedged price for oil under such
agreements is $20.21 and $20.29 per barrel in 1997 and 1998, respectively.
Subsequent to June 30, 1997, the Company entered into three natural gas
swaps. One hedges 10,000 MMBTU of natural gas per day from March 1998 through
October 1998 at a fixed price of $2.15 per MMBTU (NYMEX basis). Another hedges
7,500 MMBTU of natural gas per day for September 1997 and October 1997 at a
fixed price of $2.465 per MMBTU (NYMEX basis). Another hedges 7,500 MMBTU of
natural gas per day for September 1997 and October 1997 at a fixed price of
$2.50 per MMBTU (NYMEX basis).
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 six months of 1997 to approximately 2.5 BCF from approximately 2.6 BCF at
December 31, 1996. At June 30, 1997, the undiscounted value of this imbalance is
approximately $5,065,000, of which $500,000 is recorded as a short-term
liability and the remaining $4,565,000 is included in other long-term
liabilities. In the absence of a gas balancing agreement, the Company is unable
to determine when its partners will 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.
46
<PAGE>
BUSINESS AND PROPERTIES
THE COMPANY
Forest Oil Corporation is an independent oil and natural gas company engaged
in the exploration, exploitation, development and acquisition of oil and gas
properties and the production and marketing of oil and natural gas in North
America. The Company's reserves and producing properties are located primarily
in three core areas: (i) the Gulf of Mexico and Gulf Coast (the "Gulf Region");
(ii) West Texas, Oklahoma and the Rocky Mountain region of the United States
(the "Western Region"); and (iii) Canada (the "Canadian Region"). In 1996,
production from the United States and Canada accounted for approximately 60% and
40%, respectively, of the Company's production on an MCFE basis. The Company
currently operates 40 offshore platforms in the Gulf of Mexico, and 1996
production from the Gulf of Mexico accounted for approximately 42% of the
Company's production on an MCFE basis.
The Company's average daily production in the first six months of 1997 and
estimated proved reserves at December 31, 1996 are summarized below:
<TABLE>
<CAPTION>
ESTIMATED PROVED RESERVES AT DECEMBER
AVERAGE DAILY PRODUCTION
FIRST SIX MONTHS 1997 31, 1996
------------------------------------------------ -------------------------------------
TOTAL TOTAL
OIL (BBLS) GAS (MCF) (MCFE) % OF TOTAL OIL (MBBLS) GAS (MMCF) (MMCFE)
----------- --------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gulf Region..................... 2,713 81,199 97,477 55 4,313 157,448 183,326
Western Region.................. 320 7,370 9,290 5 1,485 76,877 85,787
Canadian Region................. 5,204 38,685 69,909 40 18,216 102,925 212,221
----- --------- ----------- --- ----------- ----------- -----------
Total....................... 8,237 127,254 176,676 100% 24,014 337,250 481,334
<CAPTION>
% OF TOTAL
-----------
<S> <C>
Gulf Region..................... 38
Western Region.................. 18
Canadian Region................. 44
---
Total....................... 100%
</TABLE>
At December 31, 1996, approximately 73% of the Company's estimated proved
reserves was classified as proved developed and approximately 70% was natural
gas. At such date, the Company owned interests in 1,403 gross (572 net)
producing wells in the United States and Canada. The Company currently operates
approximately 77% of its production in the United States and 48% of its
production in Canada.
Forest has been operating offshore in the Gulf Region since 1954 and
currently has interests in 75 lease blocks (approximately 330,000 acres) in the
Gulf of Mexico, of which 49 are held by production. The Company has developed a
significant gathering and processing infrastructure in the Gulf of Mexico that
facilitates production from its lease blocks. The Company has interests in
approximately 72,000 gross acres onshore in the Gulf Region, of which 8% is
undeveloped. The Company currently has an inventory of approximately 35 drilling
projects in the Gulf Region.
The Company re-established its exploration efforts in the Western Region in
1996, focusing on the Rocky Mountain states. The Company's Western Region staff
is also responsible for development of the Company's producing properties in
Wyoming, Oklahoma and West Texas. The Company has interests in approximately
240,000 gross acres in the Western Region, of which 38% is undeveloped. The
Company currently has an inventory of approximately 18 drilling projects in the
Western Region.
The Company established a new core area in Canada in December 1995 with the
acquisition of a 56% economic interest (subsequently increased to 66%) in Saxon
and the January 1996 acquisition of Canadian Forest (formerly ATCOR Resources
Ltd.). The Company believes that the generally longer reserve life and lower
aggregate cost nature of its Canadian properties complements its Gulf of Mexico
properties, which tend to have shorter reserve lives and higher aggregate
finding, development and operating costs. The Company has interests in
approximately 1,021,000 gross acres in Canada, of which 70% is undeveloped. The
Company currently has an inventory of approximately 33 drilling projects in
Canada.
The Company's 1997 planned capital expenditures of approximately $130
million are currently allocated as follows: $69 million to the Gulf Region, $12
million to the Western Region and $49 million to
47
<PAGE>
Canada. Approximately 68% of the 1997 planned expenditures is allocated to
drilling costs and 32% to lease acquisition, seismic and other costs.
Since the first quarter of 1996, the Company has devoted most of its capital
spending program to exploratory, exploitation and development drilling, as well
as lease acquisition and seismic costs. This expanded drilling budget has
resulted in significant discoveries on Company-generated prospects including:
(i) a High Island Block 116 well in March 1996, which had initial daily gross
production of approximately 55 MMCFE (24 MMCFE net); (ii) a Eugene Island Block
53 well in the first quarter of 1997, which had initial daily gross production
of approximately 31 MMCFE (21 MMCFE net) and (iii) 27 BCFE of net estimated
proved reserves in the Bigoray Field in western central Alberta, Canada during
1996. The Company attributes this success to its high quality property base, as
well as to the integration of 3-D seismic with geological interpretations,
advanced drilling and production techniques and other technologies applied by
its experienced regional technical staff.
The Company's acquisition activity and drilling successes have resulted in
production growth and increased revenues and cash provided by operating
activities. The Company's average daily production increased from approximately
111 MMCFE per day in 1995, to approximately 162 MMCFE per day in 1996 and to
approximately 177 MMCFE per day during the first six months of 1997. For the
year ended December 31, 1996, the Company generated revenues of $317.5 million,
cash provided by operating activities of $67.8 million and EBITDA (as defined)
of $92.9 million. For the six months ended June 30, 1997, the Company generated
revenues of $172.4 million, cash provided by operating activities of $24.3
million and EBITDA of $51.2 million.
BUSINESS STRENGTHS
The Company believes it has certain strengths that provide it with
significant competitive advantages, including the following:
WELL POSITIONED IN PROSPECTIVE NORTH AMERICAN BASINS
Management believes that its core regions contain substantial reserve
potential and are among the most prospective areas in North America. Forest
holds interests in approximately 1.5 million total gross acres in its three core
regions and an interest in 22 Canadian frontier licenses in the Beaufort/North
McKenzie region of the Northwest Territories and Sable Island, Nova Scotia.
DIVERSIFIED NATURAL GAS MARKETS
The Company believes that through its acquisitions in Canada and its
operations in the Western Region, it has positioned itself to achieve greater
stability in its overall operating margin in the event of any narrowing of
natural gas pricing differentials between the United States and Canada.
Management believes that improvements in the infrastructure of the North
American gas transportation system have the potential to create a more efficient
transportation grid that may result in price differentials that are more closely
related to proximity to market rather than the availability of transportation.
EXPERTISE AND INFRASTRUCTURE IN THE GULF OF MEXICO
In over 40 years of operating in the Gulf Region, Forest has developed an
extensive proprietary database, including seismic, well logs, velocity surveys
and paleo and regional studies. The Company's exploration team integrates this
data in evaluating drilling prospects. The Company's senior operating personnel,
as well as its geoscientists and engineers, have substantial experience in the
technical challenges arising from exploitation and exploration of this region.
During the period from 1992 through 1996, the Company drilled 39 offshore wells
in this region, of which 77% were completed as commercially productive. The
Company has interests in 75 lease blocks in the Gulf of Mexico of which 49 are
held by production rather than being subject to expiration by the passage of
time. In addition, the
48
<PAGE>
Company has developed an extensive production and transportation infrastructure
to better control costs and minimize the time interval between discoveries and
production. Forest owns interests in 50 platforms, 55 processing facilities, and
an estimated 325 miles of gathering systems in the Gulf Region.
APPLICATION OF TECHNOLOGY
The Company uses advanced technology in its exploration and development
activities to reduce drilling risks and finding costs and to more effectively
prioritize drilling prospects. As of June 30, 1997, the Company had acquired 3-D
seismic surveys on 85 offshore lease blocks and had 425,000 acres of 3-D seismic
data and 300,000 miles of 2-D seismic data. The ability to obtain 3-D seismic
data at reasonable costs and integrate such data into the Company's extensive
proprietary database has enabled the Company to identify multiple development
and exploratory prospects in mature producing fields which had not been
identified through earlier technologies.
In addition, the Company uses new drilling and completion technology to
stimulate production. For example, Saxon has utilized new production and
completion techniques to enhance production in the Pekisko formation in the
Bigoray field. These techniques included horizontal drilling into the formation
with a newly developed mud system, and subsequent artificial lifting of oil and
water with new long-stroke pumps. Saxon's share of the field's current
production is 2,720 equivalent barrels of oil per day. The Company believes this
drilling and completion methodology can be used in other non-commercial
properties in Canada.
STRATEGY
The Company's strategy is to focus on exploration, exploitation, development
and acquisition of oil and gas producing properties located in selected areas in
North America where the Company has expertise and experience. The Company will
pursue this strategy through the following initiatives:
EXPAND EXPLORATION. The Company is expanding exploration as a source of
future growth, particularly opportunities that benefit from the selective use of
advanced technologies such as new 3-D seismic processing techniques and
production and completion methods. The Company is also seeking to apply proven
technologies to deeper water prospects in the Gulf of Mexico and to prospects in
the Northwest Territories in Canada. Since improving its capitalization, the
Company has accelerated the exploration and development of its inventory of
prospects and generally retained a larger working interest in such prospects. In
addition, the Company has continued to acquire additional prospects identified
by the Company's exploration teams. The Company seeks to maintain a balanced
exploration portfolio that includes higher risk exploration prospects that have
the potential for larger reserves, as well as lower risk projects.
INCREASE EXPLOITATION AND DEVELOPMENT OF EXISTING PROPERTIES. The Company
continually evalutates new imaging, drilling and completion technologies and
their potential application to the Company's existing properties in order to
identify additional exploitation and development opportunities. The Company
intends to increase exploitation and development expenditures and activities on
its existing properties in 1997 as compared to prior years. For example, the
Company is reprocessing and reshooting seismic data at Eugene Island Block 292
in order to identify additional drilling prospects at deeper horizons. Wells in
the Eugene Island Block 292 field in which the Company has an interest have
produced cumulative volumes of over 2,900 BCFE, primarily from shallow producing
formations. The Company also pursues workovers, recompletions, secondary
recovery operations and other production enhancement techniques on its
properties to increase production.
CONTINUE TO PURSUE ACQUISITIONS. The Company continues to pursue
acquisitions of producing properties that meet selection criteria that include
(i) strategic location in a core area of operations or establishment of a new
core area through the acquisition of a significant property base, (ii) potential
for
49
<PAGE>
increasing reserves and production through lower risk exploitation and
development, (iii) attractive potential return on investment, and (iv)
opportunities for improved operating efficiencies. In Canada, Forest has an
additional criterion that natural gas properties include sufficient plant
processing capacity and adequate access to markets.
MAINTAIN FINANCIAL FLEXIBILITY. The Company is committed to maintaining
financial flexibility, which management believes is important for the successful
execution of its strategy. The Company has substantially reduced its debt as a
percentage of book capitalization from 98% as of December 31, 1994 to 47% as of
June 30, 1997. From 1995 through August 1997, the Company added a total of
approximately $300 million of common equity. Management seeks to continue to
reduce the Company's level of debt as a percentage of book capitalization.
Giving effect to (i) the issuance of the Old Notes, (ii) the exercise of the
Anschutz Warrant and (iii) additional borrowings under the Company's U.S. Credit
Facility, and the use of the aggregate proceeds from such sources to repay the
Canadian Credit Facility and to purchase all of the 11 1/4% Notes in the Tender
Offer, the Company would have had debt as a percentage of pro forma as adjusted
book capitalization of 45% as of June 30, 1997.
OPERATIONS
GULF REGION
The Company has been active in the Gulf Region both onshore and offshore
since 1954. At December 31, 1996, the Company had estimated proved reserves in
the Gulf Region of 157 BCF of gas and 4.3 MMBBLS of oil (189 BCFE). For the
first six months of 1997, average daily production from this region was
approximately 97 MMCFE.
The Company currently has interests in 75 blocks offshore, eight of which
are considered "deep water blocks" in depths greater than 400 feet. The Company
has 26 blocks that are unexplored and in their primary term and 49 blocks which
are held by production. In the past five years the Company has undertaken nine
3-D seismic surveys on its inventory of existing producing properties. This new
generation of 3-D seismic has enabled the Company to enhance its interpretation
of certain of these properties, resulting in new development and exploration
prospects.
The Company has a database consisting of 300,000 miles of 2-D seismic and
425,000 acres of 3-D seismic, along with 265,000 well logs, 6,000 velocity
surveys and numerous paleo and regional studies relating to the Gulf Region that
the Company has acquired throughout its history. The Company employs seven
geoscientists and has exclusive contracts with an additional eight geoscientists
dedicated to the Gulf Region, including both geologists and geophysicists as
well as three reservoir engineers. The Company has eleven UNIX workstations,
including three in Lafayette, Louisiana and eight in the Denver, Colorado
office.
The Company's primary offshore production comes from High Island Block 116,
Eugene Island Block 53 and Eugene Island Block 65, which combined currently
account for 29% of the Company's average daily production.
The Company intends to continue to increase its ownership of offshore blocks
in the Central and Western Gulf of Mexico both on the Continental Shelf and in
deep water through participation in future lease sales and farm-ins with
existing operators.
In 1996, the Company participated in 18 Gulf of Mexico wells, 14 of which
were successful. The preliminary 1997 Gulf of Mexico planned capital spending is
estimated at $70 million to drill 33 gross wells, acquire additional 3-D seismic
for prospect delineation, lease additional prospects and to put into production
four wells drilled in 1996. This amount represents 54% of the Company's 1997
planned capital spending.
HIGH ISLAND BLOCK 116. The High Island Block 116 B-1 well is the Company's
most prolific well and accounts for approximately 11% of the Company's average
daily production. The Company acquired High Island Block 116 in 1993. The
Company farmed-out a 45% interest in the well in exchange for a
50
<PAGE>
100% carry of the drilling costs of the B-1 well. The well was drilled in March
1996 to a true vertical depth of 11,013 feet and encountered 224 net feet of
pay. Initial production from the well was 50 MMCF per day of gas and 650 BBLS
per day of oil. Subsequent to the discovery, Forest increased its working
interest to 55% and became the operator of the block.
The Company periodically applies acid treatments to the B-1 well in order to
treat scale build-up and maintain high rates of production. The Company
successfully treated the B-1 well in June 1997, increasing gross production from
31 MMCF per day of gas and 600 BBLS per day of oil to 57 MMCF per day of gas and
1,011 BBLS per day of oil. The Company is currently evaluating 3-D seismic and
other data on the block for further exploratory and drilling potential.
EUGENE ISLAND BLOCK 53. Eugene Island Block 53 was acquired in 1993. In the
first quarter of 1997 the Company drilled the #10 exploratory well in which it
had a 100% working interest. The #10 well was logged with 115 feet of net gas
pay in the Cib Carst sands and is currently producing 25 MMCF per day of gas and
1,000 BBLS per day of oil (31 MMCFE per day). Subsequently, the Company drilled
the #11 well which failed due to mechanical problems. The cost of the #11 well
should be reimbursed to the Company with insurance proceeds. The Company
recently completed the #12 well and logged approximately 20 feet of net gas pay,
and is currently evaluating completion alternatives. The Company plans
additional drilling on this block in early 1998.
EUGENE ISLAND BLOCKS 64 & 65. The Company acquired a non-operated 25%
working interest (20% after payout) in Eugene Island Block 65 and the south half
of Eugene Island Block 64 through a farm-in in late 1996. These blocks are
adjacent to Eugene Island Block 53. Two wells drilled in early 1997 commenced
production from Eugene Island Block 65 at initial rates of 54 MMCF per day of
gas and 1,850 BBLS per day of oil (10 MMCF per day of gas and 350 BBL per day of
oil net to the Company).
The Eugene Island Block 65 #1 exploratory well was drilled in January 1997
to a true vertical depth of 13,221 feet and logged 111 net feet of natural gas
and condensate pay from two hydrocarbon-bearing zones. The Eugene Island Block
65 #2 delineation well, drilled in March 1997, logged 145 net feet of pay from
the same zones. Both wells were dual-completed. A used production platform was
refurbished and installed on the block to facilitate early production.
EUGENE ISLAND BLOCK 325. Eugene Island Block 325 was originally discovered
in 1987 by the Company and is currently producing 7.7 MMCF per day of gas and 93
BBLS per day of oil net to the Company's interest. The Company has a 66 2/3%
working interest and has now purchased and is currently evaluating enhanced 3-D
seismic data over a three block area that includes this block. It is anticipated
that this new 3-D will assist in the development of additional drilling
opportunities, which were not previously apparent using older 3-D seismic data
due to poor image quality below the producing shallow gas sands.
EUGENE ISLAND 292 COMPLEX. The Eugene Island 292 Complex consists of 13
blocks. This field was discovered by the Company in 1966. The Company has
working interests that range from 20% to 59% in the complex. To date the wells
in which the Company has an interest have produced 2.4 TCF of gas and 80 MMBBLS
of oil gross (420 BCF of gas and 14.1 MMBBLS of oil net to the Company).
The primary production is from Pleistocene sands which are at depths
shallower than 9,000 feet. In 1997, the Company initiated an enhanced 3-D survey
to be shot over this entire complex. Ocean bottom seismic cables will be used in
order to acquire data which is close to the existing structures which have
previously been identified on the complex. The new 3-D shoot is expected to
enhance the structural and stratigraphic interpretation and will be delivered in
the fourth quarter of 1997.
The Company anticipates that new shallow and deeper prospects may be
identified by the new 3-D seismic which could result in exploratory drilling in
the second quarter of 1998.
KATY FIELD. The Company acquired a working interest in the Katy field in
Texas in December 1993. The Company has exercised its preferential right to
purchase additional working interests, which has
51
<PAGE>
resulted in the Company having working interests ranging from 16% to 44% in the
units in this field. These additions make the Company the second largest working
interest owner in the Katy Field.
The Katy field covers approximately 50 sections and has gross cumulative
production of 6.7 TCF of gas and 168 MBBLS of oil. The Company views this
long-life field as having upside potential which the Company intends to exploit
through more efficient field operations, such as increased pressure maintenance.
The Company and the operator believe there is possible upside in the deeper
formations, such as the Wilcox, where only two penetrations have been drilled
below existing pay sands to date. The Company plans to continue its strategy of
aggressively pursuing unsolicited offers to purchase additional working
interests in the field and intends to pursue the deep potential within the
field.
EUGENE ISLAND BLOCK 43. Eugene Island Block 43 was acquired in the OCS
lease sale in March 1997 for $3.9 million. This block is located in 18 feet of
water and was acquired for three distinct prospects, identified as bright spots
in the 3-D seismic analysis. Two prospects are in the Cib Carst Interval and the
third prospect is deeper at the Cib-op level. The Company is seeking an industry
partner to participate in an exploratory well which is planned for the fourth
quarter of 1997.
WESTERN REGION
The Western Region's existing production and properties are located
primarily in West Texas, Oklahoma, North Dakota and Wyoming. In this region the
Company has 86 BCFE of estimated proved reserves, 28,000 net undeveloped acres
and currently produces approximately 10 MMCFE net daily. The Company has been
active in the Western Region since 1954, beginning with the discovery of the
Grieve Field in the Wind River Basin of Wyoming. The Company intends to focus
its exploration efforts on four to six lower risk plays in the region, where
Forest can control development by being the operator.
WYOMING
WIND RIVER BASIN. The Company's Wind River Basin project areas are the
Austin Creek and Grieve Unit fields. In August 1997, the Company drilled a field
extension well at Austin Creek, where it has a 36% working interest. The well
had an initial gross production rate of 170 BBLS per day of oil. Forest is
evaluating additional offsets to this field extension well.
At Grieve Field, where it has a 94% working interest, the Company will
attempt a shallow (3,000 feet) Cody formation recompletion in the fourth quarter
of 1997. If successful, the Company believes significant additional production
potential exists and approximately 24 additional recompletions may be available
in current well bores. The Grieve field, discovered by Forest, has cumulative
gross production of 52 BCF of gas and 30 MMBBLS of oil.
GREEN RIVER BASIN. The Whiskey Buttes Prospect is located in Lincoln
County, Wyoming, along the western margin of the Moxa Arch of the Green River
Basin. Production from the adjacent Whiskey Buttes Field is from the Second
Frontier, Muddy and Dakota sandstones. The Company has a 100% working interest
in the initial test well and will have a 75% working interest in all subsequent
wells drilled within the prospect.
The initial test well in Whiskey Buttes resulted in a discovery, which is
not yet completed. Pay thickness of approximately 40 feet was found, which is
comparable to, or in excess of, that observed in nearby offset wells. The
northeast offset to the well has cumulative gross production of over 3 BCF and
estimated ultimate recovery of 6 BCF of gas.
Based upon initial well test results, the Company plans three offset wells
in the field. Plans are in progress to secure a pipeline connection and complete
the initial well in the fourth quarter of 1997. An offset may be drilled in late
1997, and all three are anticipated to be drilled by late 1998.
52
<PAGE>
WEST TEXAS
The Company operates the Vermejo field, where it has a 75% working interest
which has current gross production of 3 MMCF per day of gas. Significant
opportunity remains at Vermejo to exploit the deep Ellenburger (21,000 feet),
Fusselman (19,000 feet), Atoka (16,000 feet), Wolfcamp (12,000 feet) and
Delaware (6,000 feet) reservoirs. The Company began a work program in 1997 to
recomplete existing wellbores in the Ellenberger formation, which will carry
through the majority of 1998.
NORTH DAKOTA
WILLISTON BASIN. The Company has acquired 48 square miles of 3-D seismic
data over the Bow Creek Project Area where the Company has interests in
approximately 20,000 gross and 6,000 net acres. Bow Creek is located along the
southwestern flank of the Williston Basin, within an area of significant
multi-pay production from the Lodgepole, Tyler, Mission Canyon, Red River and
Interlake formations. To date, interpretation of the 3-D seismic program has
generated seven drillable prospects. The Company expects to test the first of
these opportunities during the fourth quarter of 1997 and continue the program
into early 1998.
CANADIAN REGION
The Company has been active in Canada since the mid-1950s. Currently, the
Company's operations are located almost exclusively in the provinces of Alberta
and British Columbia. As of December 31, 1996, in Canada, the Company had
estimated proved reserves of 18 MMBBLS of liquids and 103 BCF of gas
representing 212 BCFE of estimated proved reserves.
CENTRAL ALBERTA
CAROLINE UNIT. Caroline Swan Hills Unit was discovered in the mid-1980s and
came into full production in 1993. Following a recent plant expansion, the
Company's net sales from the field have increased to 1,560 BBLS per day of
liquids and 3.1 MMCF per day of natural gas. This long life property forms a
strong producing base for the Company's Canadian operations.
BIGORAY. Saxon is continuing to develop the Pekisko formation in its
Bigoray oil field in central Alberta. Gross production in December 1996 averaged
about 275 BBLS of oil and 2 MMCF per day of natural gas. Current production has
increased to approximately 1,420 BBLS of oil and 7.8 MMCF per day of gas net to
Saxon's interest from three producing wells. Seven additional wells have been
drilled that are expected to be completed over the coming months as production
facilities are further expanded. Saxon has also commenced drilling in the
Ostracod formation in this field, where it has drilled five consecutive wells
that have been completed as commercially productive, and a sixth well that it
believes will also be commercially productive.
HERRONTON. This field is located in Southwestern Alberta, approximately 70
miles from Calgary. Current gross production averages 280 BBLS per day of
liquids and 2.3 MMCF per day of natural gas. A horizontal well is currently
being drilled to evaluate the potential for improved recovery. Should this prove
to be successful, potential exists for up to six additional horizontal
locations.
BRITISH COLUMBIA/PEACE RIVER ARCH. In British Columbia, the Company's
principal producing property is located in the Rigel/Doig area. Current gross
production averages 5 MMCF per day of gas. This total is expected to increase by
2 MMCF per day during the fourth quarter of 1997 with the addition of
compression, as well as the closing of a pending acquisition. Additional
drilling is also planned for this area during the fourth quarter of 1997.
In the Progress Doe Creek field, the Company currently produces 330 BBLS per
day of oil. A portion of this field is currently being water flooded and has
shown good response. Negotiations are under way to expand the flood into
adjacent leases in which a 33% working interest is held by the Company.
53
<PAGE>
The Company has an exploration project which is located in the Slave
Point/Keg River gas producing area of Northeast British Columbia. The Company
has a 30% working interest in 5,120 acres of land that has a 3-D seismically
defined pinnacle reef. The Company has identified an anomaly in this reef within
one mile of an existing pipeline and plans to spud a well on this prospect in
the fourth quarter of 1997.
NORTHWEST TERRITORIES
The Company is participating in a 10,500 foot exploratory well 12 miles from
Amoco's Pointed Mountain field in the southern Northwest Territories, 25 miles
north of the British Columbia/Northwest Territories border. The Company has a
15% working interest in this prospect (3,700 net acres). The Company can also
earn a similar interest on an adjacent 52,000 acre tract that has a similar
prospect.
OTHER FOREIGN OPERATIONS
Forest considers, and from time to time makes, investments in oil and gas
opportunities in other foreign countries. Foreign oil and natural gas operations
are subject to certain risks, such as nationalization, confiscation, terrorism,
renegotiation of existing contracts and currency fluctuations. Forest monitors
the political, regulatory and economic developments in any foreign countries in
which it operates.
54
<PAGE>
OIL AND GAS RESERVES
The following table sets forth summary information with respect to estimates
of proved oil and gas reserves of the Company and the discounted future net cash
flows for these reserves as of December 31, 1996. The Company's United States
Reserves have been reviewed by Ryder Scott. A report on Canadian Forest's
reserves has been prepared by McDaniel. A report on Saxon's reserves has been
prepared by Fekete. For additional information relating to reserves, see "Risk
Factors -- Ceiling Limitation Writedowns," "-- Uncertainty of Estimates of
Reserves," and Note 18 of Notes to Consolidated Financial Statements of the
Company.
<TABLE>
<CAPTION>
CANADIAN TOTAL
FOREST FOREST SAXON (1) CONSOLIDATED
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Proved Developed
Natural Gas (MMCF)......................................... 165,629 58,162 12,694 236,485
Liquids (MBBLS) (2)........................................ 5,311 9,223 4,037 18,571
Total (MMCFE)............................................ 197,495 113,500 36,916 347,911
Proved Undeveloped
Natural Gas (MMCF)......................................... 65,626 21,507 10,562 97,695
Liquids (MBBLS) (2)........................................ 487 202 4,754 5,443
Total (MMCFE)............................................ 68,548 22,719 39,086 130,353
----------- ----------- ----------- -------------
Total Proved (MMCFE)......................................... 266,043 136,219 76,002 478,264
Proved reserves attributable to volumetric production
payments, all of which are proved developed:
Natural gas (MMCF)......................................... 3,070 -- -- 3,070
Liquids (MBBLS) (2)........................................ -- -- -- --
----------- ----------- ----------- -------------
Total proved reserves attributable to volumetric production
payments (MMCFE)........................................... 3,070 -- -- 3,070
----------- ----------- ----------- -------------
Total proved reserves including amounts attributable to
volumetric production payments (MMCFE)..................... 269,113 136,219 76,002 481,334
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Standardized measure of discounted future net cash flows
relating to proved oil and gas reserves (in thousands)..... $ 384,211 106,183 69,475 559,869
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Total discounted future net cash flows relating to proved oil
and gas reserves, including amounts attributable to
volumetric production payments (in thousands).............. $ 387,337 106,183 69,475 562,995
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Weighted average price used to calculate discounted future
net cash flows relating to proved oil and gas reserves at
December 31, 1996:
Natural gas (per MCF)...................................... $ 3.52 1.73 1.55 2.88
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Liquids (per BBL).......................................... $ 23.82 18.03 22.02 20.63
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
</TABLE>
- ------------------------
(1) Includes 100% of the reserves owned by Saxon, a consolidated subsidiary in
which the Company holds a 66% economic interest. Saxon will not initially be
a Restricted Subsidiary under the Indenture. See "Prospectus Summary --
Recent Developments" and Note 2 to the Consolidated Financial Statements.
(2) Includes crude oil, condensate and natural gas liquids.
55
<PAGE>
PRODUCTION
The following table shows net oil and natural gas production for Forest for
each of the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
NET NATURAL GAS AND LIQUIDS
PRODUCTION (1)(2)
---------------------------------
1996 1995 (3) 1994
--------- ----------- ---------
<S> <C> <C> <C>
United States:
Natural Gas (MMCF)..................................... 28,624 33,342 48,048
Liquids (MBBLS)........................................ 1,104 1,173 1,543
Total (MMCFE).......................................... 35,248 40,380 57,306
Canadian Forest:
Natural Gas (MMCF)..................................... 12,173 -- --
Liquids (MBBLS)........................................ 1,249 -- --
Total (MMCFE).......................................... 19,667 -- --
Saxon:
Natural Gas (MMCF)..................................... 1,699 -- --
Liquids (MBBLS)........................................ 396 -- --
Total (MMCFE).......................................... 4,075 -- --
Total Company:
Natural Gas (MMCF)..................................... 42,496 33,342 48,048
Liquids (MBBLS)........................................ 2,749 1,173 1,543
Total (MMCFE).......................................... 58,990 40,380 57,306
</TABLE>
- ------------------------
(1) Includes amounts delivered pursuant to volumetric production payments. See
Note 6 of Notes to Consolidated Financial Statements.
(2) Volumes reported for natural gas include immaterial amounts of sulfur
production on the basis that one long ton of sulfur is equivalent to 15 MCF
of natural gas. Liquids volumes include both oil and condensate and natural
gas liquids.
(3) Does not include any production relating to the acquisition of Saxon on
December 20, 1995 as the amounts involved were not significant.
56
<PAGE>
AVERAGE SALES PRICES AND PRODUCTION COSTS PER UNIT OF PRODUCTION
The following table sets forth the average sales prices per MCF of natural
gas and per barrel of liquids and the average production cost per equivalent
unit of production for the years ended December 31, 1996, 1995 and 1994 for
Forest:
<TABLE>
<CAPTION>
UNITED STATES CANADA (5)
------------------------------- -----------
1996 1995 1994 1996
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Average Sales Prices:
NATURAL GAS
Total production (MMCF)(1)................................... 28,624 33,342 48,048 13,872
Sales price received (per MCF)(2)............................ $ 2.36 1.65 1.86 1.41
Effects of energy swaps (per MCF) (3)........................ (.23) .12 .04 (.04)
--------- --------- --------- -----------
Average sales price (per MCF)(2)............................. $ 2.13 1.77 1.90 1.37
LIQUIDS
Oil and Condensate:
Total production (MBBLS)(4).................................. 964 1,121 1,482 1,308
Sales price received (per BBL)............................... $ 20.03 16.36 14.97 20.64
Effects of energy swaps (per BBL)(3)......................... (1.07) (.50) (.14) (1.82)
--------- --------- --------- -----------
Average sales price (per BBL)................................ $ 18.96 15.86 14.83 18.82
Natural gas liquids:
Total production (MBBLS)..................................... 140 52 61 337
Average sales price (per BBL)................................ $ 10.48 15.81 14.79 11.87
Total liquids production (MBBLS)............................... 1,104 1,173 1,543 1,645
Average sales price (per BBL).................................. $ 17.88 15.86 14.83 17.40
Average production cost (per MCFE)(6)............................ $ .56 .56 .39 .52
</TABLE>
- ------------------------
(1) Total natural gas production includes scheduled deliveries under volumetric
production payments, net of royalties, of 3,168 MMCF, 9,120 MMCF, and 16,005
MMCF in 1996, 1995 and 1994, respectively. Natural gas delivered pursuant to
volumetric production payment agreements represented approximately 7%, 27%
and 33% of total natural gas production in 1996, 1995 and 1994,
respectively. For further information concerning volumes and prices recorded
under volumetric production payments, see Notes 6 and 14 of Notes to
Consolidated Financial Statements.
(2) Amounts shown for 1995 exclude the effects of a gas contract settlement.
Including such amount, the sales price received and average sales price for
natural gas in 1995 were $1.78 and $1.90 per MCF, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 15 of Notes to Consolidated Financial Statements.
(3) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 12,741 MMCF,
10,146 MMCF and 12,184 MMCF for the years ended December 31, 1996, 1995 and
1994, respectively. Hedged oil and condensate volumes were 895,600 barrels,
498,000 barrels and 370,000 barrels for 1996, 1995 and 1994, respectively.
The aggregate gains (losses) under energy swap agreements were
$(10,422,000), $3,536,000 and $1,810,000, respectively, for the years ended
December 31, 1996, 1995 and 1994 and were recorded as additions to
(reductions of) of revenue.
(4) An immaterial amount of oil production is covered by scheduled deliveries
under volumetric production payments.
57
<PAGE>
(5) Alberta's royalty program was restructured in 1994 and remained uncertain
throughout much of 1995 and 1996. Canadian production of natural gas liquids
for the year ended December 31, 1996 was reduced by 79,000 barrels as a
result of royalty adjustments, resulting in an increase in the reported
average sales price for natural gas liquids in Canada to $11.87 per barrel
from $9.44 or by approximately 26%. The royalty adjustments did not have a
significant effect on reported volumes or average sales prices for natural
gas or oil and condensate. Canadian Forest continues to receive additional
information with respect to royalty calculations and anticipates that
revisions to such calculations will continue to occur throughout 1997. The
effects of future royalty adjustments cannot be predicted at this time.
(6) Production costs were converted to common units of measure using a
conversion ratio of one barrel of oil to six MCF of natural gas and one long
ton of sulfur to 15 MCF of natural gas. Such production costs exclude all
depreciation, depletion and provision for impairment associated with
property and equipment.
PRODUCTIVE WELLS
The following summarizes total gross and net productive wells of the Company
at December 31, 1996:
<TABLE>
<CAPTION>
PRODUCTIVE WELLS (1)
----------------------------
UNITED STATES CANADA
--------------- -----------
<S> <C> <C>
Gross (2)
Gas............................................................... 278 379
Oil............................................................... 180 566
----- -----
Total (3)....................................................... 458 945
----- -----
----- -----
Net (4)
Gas............................................................... 100.7 127.0
Oil............................................................... 118.5 225.9
----- -----
Total........................................................... 219.2 352.9
----- -----
----- -----
</TABLE>
- ------------------------
(1) Productive wells are producing wells and wells capable of production,
including wells that are shut-in.
(2) A gross well is a well in which a working interest is owned. The number of
gross wells is the total number of wells in which a working interest is
owned.
(3) Includes 27 dual completions in the United States and 20 dual completions in
Canada. Dual completions are counted as one well. If one completion is an
oil completion, the well is classified as an oil well.
(4) A net well is deemed to exist when the sum of fractional ownership working
interests in gross wells equals one. The number of net wells is the sum of
the fractional working interests owned in gross wells expressed as whole
numbers and fractions thereof.
DEVELOPED AND UNDEVELOPED ACREAGE
Forest and its subsidiaries held acreage as set forth below at December 31,
1996. A majority of the developed acreage is subject to mortgage liens securing
either the bank indebtedness or nonrecourse secured debt of the Company. A
portion of the developed acreage is also subject to production
58
<PAGE>
payments. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes 5 and 6 of Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
UNDEVELOPED ACREAGE
DEVELOPED ACREAGE (1) (2)
---------------------- ----------------------
GROSS (3) NET (4) GROSS (3) NET (4)
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
United States:
Louisiana offshore.................................... 145,549 58,662 53,212 20,774
Oklahoma.............................................. 63,334 21,710 7,504 1,396
Texas onshore......................................... 123,959 61,529 15,813 8,394
Texas offshore........................................ 45,382 22,694 40,347 31,694
Wyoming............................................... 8,517 4,484 51,076 21,343
Other................................................. 26,304 10,959 6,114 1,773
----------- --------- ----------- ---------
413,045 180,038 174,066 85,374
Canada
Alberta............................................... 323,451 111,907 234,625 123,480
Other................................................. 61,301 41,191 283,124 43,731
----------- --------- ----------- ---------
384,752 153,098 517,749 167,211
----------- --------- ----------- ---------
Total acreage at December 31, 1996...................... 797,797 333,136 691,815 252,585
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
- ------------------------
(1) Developed acres are those acres which are spaced or assigned to productive
wells.
(2) Undeveloped acres are those acres on which wells have not been drilled or
completed to a point that would permit the production of commercial
quantities of oil or natural gas, regardless of whether such acreage
contains proved reserves. It should not be confused with undrilled acreage
held by production under the terms of a lease.
(3) A gross acre is an acre in which a working interest is owned. The number of
gross acres is the total number of acres in which a working interest is
owned.
(4) A net acre is deemed to exist when the sum of the fractional ownership
working interests in gross acres equals one. The number of net acres is the
sum of the fractional working interests owned in gross acres expressed as
whole numbers and fractions thereof.
During 1996, the Company's gross and net developed acreage increased
approximately 61% and 57%, respectively, and gross and net undeveloped acreage
increased approximately 301% and 204%, respectively. The increases were due
primarily to the purchase of Canadian Forest. Approximately 29% of the Company's
total net undeveloped acreage is under leases that have terms expiring in 1997,
if not held by production, and another approximately 8% of net undeveloped
acreage will expire in 1998 if not also held by production.
59
<PAGE>
DRILLING ACTIVITY
Forest owned interests in gross and net exploratory and development wells
for the years ended December 31, 1996, 1995 and 1994 as set forth below. This
information does not include wells drilled by others under farmout agreements.
<TABLE>
<CAPTION>
UNITED STATES CANADA
------------------------------- -----------
1996 1995 1994 1996
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Gross Exploratory Wells:
Dry (1).............................................................. 4 3 2 4
Productive (2)....................................................... 9 1 2 2
--- --- --- ---
13 4 4 6
--- --- --- ---
--- --- --- ---
Net Exploratory Wells:(3)
Dry (1).............................................................. 2.0 1.3 2.0 2.9
Productive (2)....................................................... 3.5 0.3 1.3 1.4
--- --- --- ---
5.5 1.6 3.3 4.3
--- --- --- ---
--- --- --- ---
Gross Development Wells:
Dry (1).............................................................. 3 -- -- 4
Productive (2)....................................................... 15 6 5 70
--- --- --- ---
18 6 5 74
--- --- --- ---
--- --- --- ---
Net Development Wells:(3)
Dry (1).............................................................. 0.5 -- -- 0.9
Productive (2)....................................................... 1.9 0.6 2.1 19.9
--- --- --- ---
2.4 0.6 2.1 20.8
--- --- --- ---
--- --- --- ---
</TABLE>
- ------------------------
(1) A dry well (hole) is a well found to be incapable of producing either oil or
natural gas in sufficient quantities to justify completion as an oil or
natural gas well.
(2) Productive wells are producing wells and wells capable of production,
including wells that are shut-in.
(3) A net well is deemed to exist when the sum of fractional ownership working
interests in gross wells equals one. The number of net wells is the sum of
the fractional working interests owned in gross wells expressed as whole
numbers and fractions thereof.
SALES AND MARKETS
Forest's U.S. production is generally sold at the wellhead to oil and
natural gas purchasing companies in the areas where it is produced. Crude oil
and condensate are typically sold at prices which are based upon posted field
prices. Natural gas in the U.S. is generally sold month to month on the spot
market. For the month of March 1997, approximately 94% of the Company's U.S.
natural gas was sold at the wellhead at spot market prices. The term "spot
market" as used herein refers to contracts with a term of six months or less or
contracts which call for a redetermination of sales prices every six months or
earlier. The remainder of the Company's U.S. natural gas was committed to both
interstate and intrastate natural gas pipeline companies, primarily under
volumetric production payment agreements and long-term contracts. The Company
believes that the loss of one or more of its current natural gas spot purchasers
should not have a material adverse effect on the Company's business in the
United States because any individual spot purchaser could be readily replaced by
another spot purchaser who would pay approximately the same sales price.
60
<PAGE>
In Canada, Canadian Forest's natural gas production is sold primarily
through the ProMark Netback Pool. The Netback Pool matches major end users with
providers of gas supply through arranged transportation channels and uses a
netback pricing mechanism to establish the wellhead price paid to producers.
Under this netback arrangement, producers receive the blended market price less
related transportation and other direct costs. ProMark charges a marketing fee
for marketing and administering the gas supply pool.
Canadian Forest sold approximately 81% of its natural gas production through
the Netback Pool in 1996.
The Netback Pool gas sales in 1996 averaged 125 MMCF per day, of which
Canadian Forest supplied approximately 35 MMCF per day or 28%. Approximately 12%
of the volumes sold in the Netback Pool in 1996 were sold at fixed prices under
long-term contracts. The loss of one or more of such long-term buyers could have
a material adverse effect on ProMark and Canadian Forest.
In addition to operating the Netback Pool, ProMark provides two other
marketing services for producers and purchasers of natural gas. ProMark manages
long-term gas supply contracts for its industrial customers by providing
full-service purchasing, accounting and gas nomination services for these
customers on a fee-for-services basis. ProMark also buys and sells gas in its
trading operation for terms as short as one day and as long as one to two years.
Profits generated by trading are derived from the spread between the prices of
gas purchased and sold. ProMark endeavors to offset its gas purchase or sales
commitments with other gas purchase or sales contracts, thereby limiting its
exposure to price risk. The Company is, however, exposed to credit risk in that
there exists the possibility that the counterparties to agreements will fail to
perform their contractual obligations.
Substantially all of Forest's oil production in the United States and Canada
is sold under short-term contracts at prices which are based upon posted field
prices.
COMPETITION
The oil and natural gas industry is intensely competitive. Competition is
particularly intense in the acquisition of prospective oil and natural gas
properties and oil and gas reserves. Forest's competitive position depends on
its geological, geophysical and engineering expertise, on its financial
resources, its ability to develop its properties and its ability to select,
acquire and develop proved reserves. Forest competes with a substantial number
of other companies having larger technical staffs and greater financial and
operational resources. Many such companies not only engage in the acquisition,
exploration, development and production of oil and natural gas reserves, but
also carry on refining operations, generate electricity and market refined
products. The Company also competes with major and independent oil and gas
companies in the marketing and sale of oil and gas to transporters, distributors
and end users. There is also competition between the oil and natural gas
industry and other industries supplying energy and fuel to industrial,
commercial and individual consumers. Forest also competes with other oil and
natural gas companies in attempting to secure drilling rigs and other equipment
necessary for drilling and completion of wells. Such equipment may be in short
supply from time to time. Finally, companies not previously investing in oil and
natural gas may choose to acquire reserves to establish a firm supply or simply
as an investment. Such companies will also provide competition for Forest.
Forest's business is affected not only by such competition, but also by
general economic developments, governmental regulations and other factors that
affect its ability to market its oil and natural gas production. The prices of
oil and natural gas realized by Forest are highly volatile. The price of oil is
generally dependent on world supply and demand, while the price Forest receives
for its natural gas is tied to the specific markets in which such gas is sold.
Declines in crude oil prices or natural gas prices adversely impact Forest's
activities. The Company's financial position and resources may also adversely
affect the Company's competitive position. Lack of available funds or financing
alternatives will prevent the Company from executing its operating strategy and
from deriving the expected benefits therefrom.
61
<PAGE>
For further information concerning the Company's financial position, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ProMark also faces significant competition from other gas marketers, some of
whom are significantly larger in size and have greater financial resources than
ProMark, Canadian Forest or the Company.
REGULATION
UNITED STATES. Various aspects of the Company's oil and natural gas
operations are regulated by administrative agencies under statutory provisions
of the states where such operations are conducted and by certain agencies of the
Federal government for operations on Federal leases. The Federal Energy
Regulatory Commission ("FERC") regulates the transportation and sale for resale
of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938
("NGA") and the Natural Gas Policy Act of 1978 ("NGPA"). In the past, the
Federal government has regulated the prices at which oil and gas could be sold.
While sales by producers of natural gas, and all sales of crude oil, condensate
and natural gas liquids can currently be made at uncontrolled market prices,
Congress could reenact price controls in the future. Deregulation of wellhead
sales in the natural gas industry began with the enactment of the NGPA in 1978.
In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act (the "Decontrol
Act"). The Decontrol Act removed all NGA and NGPA price and nonprice controls
affecting wellhead sales of natural gas effective January 1, 1993.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B and
636-C (Order No. 636), which require interstate pipelines to provide
transportation separate, or "unbundled", from the pipelines' sales of gas. Also,
Order No. 636 requires pipelines to provide open-access transportation on a
basis that is equal for all gas supplies. Although Order No. 636 does not
directly regulate the Company's activities, the FERC has stated that it intends
for Order No. 636 to foster increased competition within all phases of the
natural gas industry. It is unclear what impact, if any, increased competition
within the natural gas industry under Order No. 636 will have on the Company's
activities. Although Order No. 636, assuming it is upheld in its entirety, could
provide the Company with additional market access and more fairly applied
transportation service rates, Order No. 636 could also subject the Company to
more restrictive pipeline imbalance tolerances and greater penalties for
violation of those tolerances. Order 636 and subsequent FERC orders issued in
individual pipeline restructuring proceedings have been the subject of appeals,
the results of which have generally supported the FERC's open-access policy.
Last year, the United States Court of Appeals for the District of Columbia
Circuit largely upheld Order No. 636. Because further review of certain of these
orders is still possible and other appeals remain pending, it is difficult to
predict the ultimate impact of the orders on the Company and its production
efforts.
The FERC has announced several important transportation-related policy
statements and proposed rule changes, including the appropriate manner in which
interstate pipelines release capacity under Order No. 636 and, more recently,
the price which shippers can charge for their released capacity. In addition, in
1995, FERC issued a policy statement on how interstate natural gas pipelines can
recover the costs of new pipeline facilities. In January 1996, the FERC issued a
policy statement and a request for comments concerning alternatives to its
traditional cost-of-service ratemaking methodology. A number of pipelines have
obtained FERC authorization to charge negotiated rates as one such alternative.
In February 1997, the FERC announced a broad inquiry into issues facing the
natural gas industry to assist the FERC in establishing regulatory goals and
priorities in the post-Order No. 636 environment. While these changes would
affect the Company only indirectly, they are intended to further enhance
competition in the natural gas markets. The Company cannot predict what action
the FERC will take on these matters, nor can it predict whether the FERC's
actions will achieve its stated goal of increasing competition in natural gas
markets. However, the Company does not believe that it will be treated
materially differently than other natural gas producers and markets with which
it competes.
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<PAGE>
Commencing in October 1993, the FERC issued a series of rules (Order Nos.
561 and 561-A) establishing an indexing system under which oil pipelines will be
able to change their transportation rates, subject to prescribed ceiling levels.
The indexing system, which allows or may require pipelines to make rate changes
to track changes in the Producer Price Index for Finished Goods, minus one
percent, became effective January 1, 1995. The Company is not able at this time
to predict the effects of Order Nos. 561 and 561-A, if any, on the
transportation costs associated with oil production from the Company's oil
producing operations.
The Outer Continental Shelf Lands Act ("OCSLA") requires that all pipelines
operating on or across the Outer Continental Shelf (the "OCS") provide
open-access, non-discriminatory service. Although the FERC has opted not to
impose the regulations of Order No. 509, in which the FERC implemented the
OCSLA, on gatherers and other non-jurisdictional entities, the FERC has retained
the authority to exercise jurisdiction over those entities if necessary to
permit non-discriminatory access to service or the OCS.
The Company owns certain natural gas pipeline facilities that it believes
meet the traditional tests the FERC has used to establish a pipeline's status as
a gatherer not subject to FERC jurisdiction. Whether on state or federal land or
in offshore waters subject to the OCSLA, natural gas gathering may receive
greater regulatory scrutiny in the post-Order No. 636 environment.
The Company conducts certain operations on federal oil and gas leases, which
the Minerals Management Service (the "MMS") administers. The MMS issues such
leases through competitive bidding. These leases contain relatively standardized
terms and require compliance with detailed MMS regulations and orders (which are
subject to change by the MMS) pursuant to the OCSLA. For offshore operations,
lessees must obtain MMS approval for exploration plans and development and
production plans prior to the commencement of such operations. In addition to
permits required from other agencies (such as the Coast Guard, the Army Corps of
Engineers and the Environmental Protection Agency), lessees must obtain a permit
from the MMS prior to the commencement of drilling. The MMS has promulgated
regulations requiring offshore production facilities located on the OCS to meet
stringent engineering and construction specifications. The MMS proposed
additional safety-related regulations concerning the design and operating
procedures for OCS production platforms and pipelines. These proposed
regulations were withdrawn pending further discussions among interested federal
agencies. The MMS also has regulations restricting the flaring or venting of
natural gas and has recently proposed to amend such regulations to prohibit the
flaring of liquid hydrocarbons and oil without prior authorization. Similarly,
the MMS has promulgated other regulations governing the plugging and abandonment
of wells located offshore and the removal of all production facilities. To cover
the various obligations of lessees on the OCS, the MMS generally requires that
lessees post substantial bonds or other acceptable assurances that such
obligations will be met. The cost of such bonds or other surety can be
substantial and there is no assurance that the Company can continue to obtain
bonds or other surety in all cases. Under certain circumstances, the MMS may
require any Company operations on federal leases to be suspended or terminated.
Any such suspension or termination could materially and adversely affect the
Company's financial condition and operations.
In addition, the MMS is conducting an inquiry into certain contract
agreements from which producers on MMS leases have received settlement proceeds
that are royalty bearing and the extent to which producers have paid the
appropriate royalties on those proceeds. The Company believes that this inquiry
will not have a material impact on its financial condition, liquidity or results
of operations.
The MMS issued a notice of proposed rulemaking in which it proposes to amend
its regulations governing the calculation of royalties and the valuation of
crude oil produced from federal leases. This proposed rule would modify the
valuation procedures for both arm's length and non-arm's length crude oil
transactions to decrease reliance on oil posted prices and assign a value to
crude oil that better reflects market value, establish a new MMS form for
collecting value differential data, and amend the
63
<PAGE>
valuation procedure for the sale of federal royalty oil. The Company cannot
predict what action the MMS will take on this matter, nor can it predict at this
stage of the rulemaking proceeding how the Company might be affected by this
amendment to the MMS' regulations.
In April 1997, after two years of study, the MMS withdrew proposed changes
to the way it values natural gas for royalty payments. These proposed changes
would have established an alternative market-based method to calculate royalties
on certain natural gas sold to affiliates or pursuant to non-arm's length sales
contracts.
Additional proposals and proceedings that might affect the oil and gas
industry are pending before the FERC and the courts. The Company cannot predict
when or whether any such proposals may become effective. In the past, the
natural gas industry has been heavily regulated. There is no assurance that the
regulatory approach currently pursued by the FERC will continue indefinitely.
Notwithstanding the foregoing, the Company does not anticipate that compliance
with existing federal, state and local laws, rules and regulations will have a
material or significantly adverse effect upon the capital expenditures, earnings
or competitive position of the Company or its subsidiaries. No material portion
of Forest's business is subject to renegotiation of profits or termination of
contracts or subcontracts at the election of the Federal government.
STATE REGULATION -- UNITED STATES. The Company's operations are also
subject to regulation at the state level. Such regulation includes requiring
permits for the drilling of wells, maintaining bonding requirements in order to
drill or operate wells and regulating the location of wells, the method of
drilling and casing wells, the surface use and restoration of properties upon
which wells are drilled, the plugging and abandoning of wells and the disposal
of fluids used in connection with operations. The Company's operations are also
subject to various conservation laws and regulations. These include the size of
drilling and spacing units or proration units and the density of wells which may
be drilled and the unitization or pooling of oil and gas properties. In
addition, state conservation laws establish maximum rates of production from oil
and gas wells, generally prohibit the venting or flaring of gas and impose
certain requirements regarding the ratability of production. To the extent any
of the Company's natural gas gathering facilities are subject to state
regulation, regulation of gathering facilities generally includes various
safety, environmental, and in some circumstances, nondiscriminatory take
requirements, but does not generally entail rate regulation. These regulatory
burdens may affect profitability, and the Company is unable to predict the
future cost or impact of complying with such regulations.
OIL SPILL FINANCIAL RESPONSIBILITY REQUIREMENTS -- UNITED STATES. As
originally enacted, the Oil Pollution Act of 1990 ("OPA") would have required
the Company to establish $150 million in financial responsibility to cover oil
spill related liabilities. Under recent amendments to OPA, the responsible
person for an offshore facility located seaward of state waters, including OCS
facilities, will be required to provide evidence of financial responsibility in
the amount of $35 million. Although the financial responsibility requirement for
offshore facilities located landward of the seaward boundary of state waters
(including certain facilities in coastal inland waters) is a lesser amount ($10
million), the Company currently has a number of offshore facilities located
beyond state waters and, thus, is subject to the $35 million financial
responsibility requirement. The amount of financial responsibility may be
increased, to a maximum of $150 million, if the MMS determines that a greater
amount is justified based on specific risks posed by the operations. Financial
responsibility may be established through insurance, guaranty, indemnity, surety
bond, letter of credit, qualification as a self insurer or a combination
thereof. On March 25, 1997, the MMS proposed regulations to implement these
financial assurance requirements, under the terms of which an offshore
facility's worst case oil spill discharge volume would be used to determine
whether the responsible party must demonstrate increased financial
responsibility. The Company cannot predict the final form of any financial
responsibility rule that may be adopted by the MMS under OPA, but in any event,
the impact of the rule is not expected to be any more burdensome to the Company
than it will be to other similarly situated companies involved in oil and gas
exploration and production. The Company currently satisfies similar requirements
for its OCS leases under OCSLA.
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<PAGE>
CANADA. The oil and natural gas industry in Canada is subject to extensive
controls and regulations imposed by various levels of government. It is not
expected that any of these controls or regulations will affect the operations of
the Company in a manner materially different than they would affect other oil
and gas companies of similar size.
In Canada, producers of oil negotiate sales contracts directly with oil
purchasers, with the result that the market determines the price of oil. The
price depends in part on oil quality, prices of competing fuels, distance to
market and the value of refined products. Oil exports may be made pursuant to
export contracts with terms not exceeding one year in the case of light crude,
and not exceeding two years in the case of heavy crude, provided that an order
approving any such export has been obtained from the National Energy Board
("NEB"). Any oil export to be made pursuant to a contract of longer duration
requires an exporter to obtain an export license from the NEB and the issue of
such a license requires the approval of the Canadian federal government.
In Canada, the price of natural gas sold in interprovincial and
international trade is determined by negotiation between buyers and sellers.
Natural gas exported from Canada is subject to regulation by the Government of
Canada through the NEB. Producers and exporters are free to negotiate prices and
other terms with purchasers, provided that the export contracts must continue to
meet certain criteria prescribed by the NEB. As is the case with oil, natural
gas exports for a term of less than two years must be made pursuant to an NEB
order, or, in the case of exports for a longer duration, pursuant to an NEB
license and Canadian federal government approval.
The provincial governments of Alberta, British Columbia and Saskatchewan
also regulate the volume of natural gas which may be removed from those
provinces for consumption elsewhere based on such factors as reserve
availability, transportation arrangements and market considerations.
On January 1, 1994, the North American Free Trade Agreement ("NAFTA") among
the governments of Canada, the United States and Mexico became effective. NAFTA
carries forward most of the material energy terms contained in the Canada-U.S.
Free Trade Agreement. In the context of energy resources, Canada continues to
remain free to determine whether exports to the United States or Mexico will be
allowed provided that any export restrictions do not: (i) reduce the proportion
of energy resource exported relative to domestic use (based upon the proportion
prevailing in the most recent 36 month period), (ii) impose an export price
higher than the domestic price, and (iii) disrupt normal channels of supply. All
three countries are prohibited from imposing minimum export or import price
requirements. NAFTA contemplates clearer disciplines on regulators to ensure
fair implementation of any regulatory changes and to minimize disruption of
contractual arrangements, which is important for Canadian natural gas exports.
In addition to federal regulation, each province has legislation and
regulations which govern land tenure, royalties, production rates, environmental
protection and other matters. The royalty regime is a significant factor in the
profitability of oil and natural gas production. Royalties payable on production
from lands other than Crown lands are determined by negotiations between the
mineral owner and the lessee. Crown royalties are determined by government
regulation and are generally calculated as a percentage of the value of the
gross production, and the rate of royalties payable generally depends in part on
prescribed reference prices, well productivity, geographical location, field
discovery date and the type or quality of the petroleum product produced.
From time to time the governments of Canada, Alberta, British Columbia and
Saskatchewan have established incentive programs which have included royalty
rate deductions, royalty holidays and tax credits for the purpose of encouraging
oil and natural gas exploration or enhanced recovery projects.
In Alberta, a producer of oil or natural gas is entitled to a credit against
the royalties payable to the Crown by virtue of the ARTC (Alberta royalty tax
credit) program. The ARTC program is based on a price sensitive formula, and the
ARTC rate varies between 75%, at prices for oil below $100 per cubic meter,
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<PAGE>
and 25%, at prices above $210 per cubic meter. The ARTC rate is applied to a
maximum of $2,000,000 of Alberta Crown royalties payable for each producer or
associated group of producers. Crown royalties on production from producing
properties acquired from corporations claiming maximum entitlement to ARTC will
generally not be eligible for ARTC. The rate is established quarterly based on
the average "par price", as determined by the Alberta Department of Energy for
the previous quarterly period. Canadian Forest is eligible for ARTC credits only
on eligible properties acquired and wells drilled after the change of control.
Oil and natural gas royalty holidays and reductions for specific wells
reduce the amount of Crown royalties paid by the Company to the provincial
governments. The ARTC program provides a rebate on Crown royalties paid in
respect of eligible producing properties in Alberta.
ENVIRONMENTAL MATTERS. Extensive federal, state, provincial and local laws
affecting oil and natural gas operations, including those carried on by the
Company, regulate the discharge of materials into the environment or otherwise
protect the environment. Numerous governmental agencies issue rules and
regulations to implement and enforce such laws which are often difficult and
costly to comply with and which carry substantial penalties for failure to
comply. Some laws, rules and regulations relating to the protection of the
environment may, in certain circumstances, impose "strict liability" for
environmental contamination, rendering a person liable for environmental
damages, cleanup costs and, in the case of oil spills in certain states,
consequential damages without regard to negligence or fault on the part of such
person. Other laws, rules and regulations may restrict the rate of oil and
natural gas production below the rate that would otherwise exist or even
prohibit exploration or production activities in environmentally sensitive
areas. In addition, state and provincial laws often require some form of
remedial action to prevent pollution from former operations, such as closure of
inactive pits and plugging of abandoned wells. Legislation has been proposed in
Congress from time to time that would reclassify certain oil and gas exploration
and production wastes as "hazardous wastes," which would make the reclassified
wastes subject to much more stringent handling, disposal and clean-up
requirements. If such legislation were to be enacted, it could have a
significant impact on the operating costs of the Company, as well as the oil and
gas industry in general. Initiatives to further regulate the disposal of oil and
gas wastes are also pending in certain states, and these various initiatives
could have a similar impact on the Company. The regulatory burden on the oil and
natural gas industry increases its cost of doing business and consequently
affects its profitability. Compliance with these environmental requirements,
including financial assurance requirements and the costs associated with the
cleanup of any spill, could have a material adverse effect upon the capital
expenditures, earnings or competitive position of the Company and its
subsidiaries. The Company believes that it is in substantial compliance with
current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse impact on
the Company. Nevertheless, changes in environmental law have the potential to
adversely affect the Company's operations. For instance, at least two separate
courts have recently ruled that certain wastes associated with the production of
crude oil may be classified as hazardous substances under the Comprehensive
Environmental Response, Compensation, and Liability Act (commonly called
Superfund) and thus the Company could become subject to the burdensome cleanup
and liability standards established under the federal Superfund program if
significant concentrations of such wastes were determined to be present at the
Company's properties or to have been disposed of at another location as a result
of the Company's operations.
OPA and regulations thereunder impose a variety of requirements on
"responsible parties" related to the prevention of oil spills and liability for
damages resulting from such spills in U.S. waters. A "responsible party"
includes the owner or operator of a facility or vessel, or the lessee or
permittee of the area in which an offshore facility is located. OPA assigns
liability to each responsible party for oil clean-up costs and a variety of
public and private damages. While liability limits apply in some circumstances,
a party cannot take advantage of liability limits if the spill was caused by
gross negligence or willful misconduct or resulted from violation of a federal
safety, construction or operating regulation. If the party
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<PAGE>
fails to report a spill or to cooperate fully in the cleanup, liability limits
likewise do not apply. Even if applicable, the liability limits for offshore
facilities require the responsible party to pay all removal costs, plus up to
$75 million in other damages. Few defenses exist to the liability imposed by
OPA.
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other oil and gas
wastes in navigable waters. Many state discharge regulations and the Federal
National Pollutant Discharge Elimination System generally prohibit the discharge
of produced water and sand, drilling fluids, drill cuttings and certain other
substances related to the oil and gas industry into coastal waters. Although the
costs to comply with these recently-enacted zero discharge mandates under
federal or state law may be significant, the entire industry is expected to
experience similar costs and the Company believes that these costs will not have
a material adverse impact on the Company's financial condition and operations.
In Canada, the oil and natural gas industry is currently subject to
environmental regulation pursuant to provincial and federal legislation.
Environmental legislation provides for restrictions and prohibitions on releases
or emissions of various substances produced or utilized in association with
certain oil and gas industry operations. In addition, legislation requires that
well and facility sites be abandoned and reclaimed so as to prevent pollution
from former operations, and to the satisfaction of provincial authorities. A
breach of such legislation may result in the imposition of fines and penalties,
in addition to the costs of abandonment and reclamation.
Environmental legislation in Alberta has undergone a major revision and has
been consolidated into the ENVIRONMENTAL PROTECTION AND ENHANCEMENT ACT. Under
the new Act, environmental standards and requirements applicable to compliance,
cleanup and reporting are stricter. Also, the range of enforcement actions
available and the severity of penalties have been significantly increased. These
changes will have an incremental increase in the cost of conducting operations
in Alberta.
British Columbia's ENVIRONMENTAL ASSESSMENT ACT became effective June 30,
1995. This legislation rolled the previous process for review of major energy
projects into a single environmental assessment process which contemplates
public participation in the review process.
Although the Company maintains insurance against some, but not all, of the
risks described above, including insuring the costs of clean-up operations,
public liability and physical damage, there is no assurance that such insurance
will be adequate to cover all such costs, that such insurance will continue to
be available in the future or that such insurance will be available at premium
levels that justify its purchase. The occurrence of a significant event not
fully insured or indemnified against could have a material adverse effect on the
Company's financial condition and operations.
The Company has established guidelines to be followed to comply with
environmental laws, rules and regulations. The Company has designated a
compliance officer whose responsibility is to monitor regulatory requirements
and their impacts on the Company and to implement appropriate compliance
procedures. The Company also employs an environmental manager whose
responsibilities include causing Forest's operations to be carried out in
accordance with applicable environmental guidelines and implementing adequate
safety precautions.
LEGAL PROCEEDINGS
The Company, in the ordinary course of business, is a party to various legal
actions. In the opinion of management, none of these actions, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and executive officers of the Company and a
description of their experience and certain other information are listed below
(ages provided are as of September 30, 1997). Executive officers are appointed
by the Company's Board of Directors:
<TABLE>
<CAPTION>
AGE AND
YEARS OF
SERVICE
WITH PRINCIPAL OCCUPATION, POSITIONS WITH COMPANY AND
NAME COMPANY BUSINESS EXPERIENCE DURING LAST FIVE YEARS
- ------------------ -------- ------------------------------------------------
<S> <C> <C>
*William L. Dorn 48 -- 26 Chairman of the Board and Chairman of the
Company's Executive Committee. Chief Executive
Officer until December 1995. President until
November 1993. Chairman of the Company's
Nominating Committee. Chairman of the Board of
Directors of Saxon Petroleum Inc.
*Robert S. Boswell 48 -- 12 President since November 1993 and Chief
Executive Officer since December 1995. Vice
President until November 1993 and Chief
Financial Officer until December 1995. Member
of the Board of Directors since 1986. Employed
by the Company since October 1985. Member of
the Company's Executive Committee. Director of
C.E. Franklin Ltd. and Saxon Petroleum Inc.
David H. Keyte 41 -- 10 Vice President and Chief Financial Officer since
December 1995. Vice President and Chief
Accounting Officer from December 1993 until
December 1995. Prior thereto Corporate
Controller. Chairman of the Company's Employee
Benefits Committee. Director of Saxon
Petroleum Inc.
Forest D. Dorn 42 -- 20 Vice President-Gulf Coast Region since August
1996. Vice President from February 1991 and
General Business Manager from December 1993 to
August 1996. Prior thereto General Manager-
Operations since January 1992.
Kenton M. Scroggs 45 -- 14 Vice President and Treasurer since December 1993
and prior thereto Treasurer. Member of the
Company's Employee Benefits Committee.
Neal A. Stanley 50 -- 1 Vice President-Western Region since August 1996.
Prior thereto President of Teton Oil and Gas
Corporation.
Donald H. Stevens 45 -- 0 Vice President-Capital Markets and Strategic
Initiatives since August 1997. Prior thereto
Vice President of Corporate Relations for
Barrett Resources Corporation.
V. Bruce Thompson 50 -- 3 Vice President and General Counsel since August
1994. Vice President-Legal of Mid-America
Dairymen, Inc. from November 1993 to August
1994. Chief of Staff for U.S. Congressman
James M. Inhofe from February 1990 to November
1993.
Daniel L. McNamara 51 -- 26 Secretary and Corporate Counsel. Member of the
Company's Employee Benefits Committee.
Joan C. Sonnen 44 -- 8 Controller since December 1993. Prior thereto
Director of Financial Accounting and
Reporting.
*Philip F. 57 -- 2 Director and Chairman of the Board of Anschutz,
Anschutz and Anschutz Company, the corporate parent of
Anschutz, for more than five
</TABLE>
- ------------------------
* Director
68
<PAGE>
<TABLE>
<CAPTION>
AGE AND
YEARS OF
SERVICE
WITH PRINCIPAL OCCUPATION, POSITIONS WITH COMPANY AND
NAME COMPANY BUSINESS EXPERIENCE DURING LAST FIVE YEARS
- ------------------ -------- ------------------------------------------------
years, and President of Anschutz and Anschutz
Company until December 1996. Director and
Vice-Chairman of Union Pacific Corporation
since September 1996. Director and Chairman of
Southern Pacific Rail Corporation ("SPRC") to
September 1996, and President and Chief
Executive Officer of SPRC to 1993. Member of
the Company's Nominating Committee.
<S> <C> <C>
*William L. 62 -- 1 Partner in the law firm of Bennett Jones
Britton, Q.C. Verchere. Director of Akita Drilling Ltd.,
ATCO Ltd., Canadian Western Natural Gas Ltd.,
Canadian Utilities Limited, CanUtilities
Holdings Ltd. and Northwestern Utilities
Limited.
*Cortlandt S. 76 -- 1 Chairman and Chief Executive Officer of
Dietler TransMontaigne Oil Company since April 1995.
Prior thereto founder, Chairman and Chief
Executive Officer of Associated Natural Gas
prior to its 1994 merger with Panhandle
Eastern Corporation. Advisory Director of
PanEnergy Corporation. Director of Hallador
Petroleum Company, Key Production Company,
Inc. and Grease Monkey Holding Corporation.
Member of the Company's Compensation
Committee.
*Jordan L. Haines 70 -- 1 Chairman of the Board of Fourth Financial
Corporation, a Kansas based bank holding
company, and its subsidiary Bank IV Wichita,
N.A. from 1983 until his retirement in 1991.
Director of Coleman Company, Inc. and a
Director of KN Energy, Inc. Member of the
Company's Audit Committee.
*James H. Lee 49 -- 6 Managing Partner, Lee, Hite & Wisda Ltd., a
private oil and gas consulting firm. Member of
the Company's Executive Committee since
February 1994. Chairman of the Company's Audit
Committee.
*J. J. Simmons, 72 -- 0 President of The Simmons Company, a consulting
III firm. Mr. Simmons was Vice Chairman of the
Surface Transportation Board from 1995 to 1996
and prior thereto Commissioner-Vice Chairman
of the U.S. Interstate Commerce Commission.
*Craig D. Slater 40 -- 2 Vice President of Anschutz, and Anschutz
Company, the corporate parent of Anschutz,
since 1995. Corporate Secretary of Anschutz
and Anschutz Company from 1991 to 1996, and
other positions with Anschutz from 1988 to
1996. Director of Internet Communications
Corporation since September 1996. Member of
the Company's Executive Committee.
*Drake S. Tempest 44 -- 2 Partner in the law firm of O'Melveny & Myers
LLP. Member of the Company's Compensation
Committee.
*Michael B. Yanney 63 -- 5 Chairman and Chief Executive Officer of the
America First Companies, L.L.C. Director of
Burlington Northern Santa Fe Corporation,
C-Tec Corporation, WorldCom, Inc, and Mid-
America Apartment Communities, Inc. Chairman
of the Company's Compensation Committee.
Member of the Company's Nominating Committee.
</TABLE>
- ------------------------
* Director
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<PAGE>
BENEFICIAL OWNERS OF SECURITIES
The following table summarizes certain information as of September 30, 1997
with respect to the ownership by each person known by the Company to be the
beneficial owner of more than five percent of the Company's Common Stock:
<TABLE>
<CAPTION>
NAME/ADDRESS NUMBER OF SHARES PERCENT AS OF
OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED (1) SEPTEMBER 30, 1997
- ------------------------------------------------ ---------------------- ---------------------
<S> <C> <C>
The Anschutz Corporation (2) 11,136,475 30.7
2400 Anaconda Tower
555 17th Street
Denver, CO 80202
Joint Energy Development 3,680,000 10.1
Investments Limited Partnership
P.O. Box 1188
Houston, TX 77251-1188
Heartland Advisors, Inc. 2,372,500 6.5
790 North Milwaukee Street
Milwaukee, WI 53202
The Crabbe Huson Group, Inc. 2,080,600 5.7
121 SW Morrison, Suite 1400
Portland, OR 97204
</TABLE>
- ------------------------
(1) Based on Schedules 13D, 13G and 13F and amendments thereto filed with the
SEC and/or the Company by the reporting person through September 30, 1997,
and the amount of Common Stock outstanding on September 30, 1997.
(2) Includes 1,587 shares owned by Philip F. Anschutz.
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<PAGE>
THE ANSCHUTZ AND JEDI TRANSACTIONS
During 1995 and 1996, the Company consummated transactions with Anschutz and
JEDI, a Delaware limited partnership the general partner of which is an
affiliate of Enron Corp. See Note 3 to the Consolidated Financial Statements.
Pursuant to a purchase agreement between the Company and Anschutz, Anschutz
purchased 3,760,000 shares of the Company's Common Stock and shares of preferred
stock which were convertible into 1,240,000 additional shares of Common Stock
for a total consideration of $45,000,000. In addition, Anschutz received a
warrant that entitled it to purchase 3,888,888 shares of the Company's Common
Stock for $10.50 per share (the "Anschutz Warrant"). The Anschutz Warrant was
scheduled to expire July 27, 1998.
Concurrent with the Anschutz investment, Forest and JEDI restructured JEDI's
existing loan which had a principal balance of approximately $62,368,000. As a
part of the restructuring, the existing JEDI loan balance was divided into two
tranches: a $40,000,000 tranche, which bore interest at the rate of 12.5% per
annum and was due and payable in full on December 31, 2000; and an approximately
$22,400,000 tranche, which did not bear interest and was due and payable in full
on December 31, 2002. JEDI also relinquished the net profits interest that it
held in certain properties of the Company. In consideration, JEDI received a
warrant (the "JEDI Warrant") that entitled it to purchase 2,250,000 shares of
the Company's Common Stock for $10.00 per share.
Also concurrent with the Anschutz investment, JEDI granted an option to
Anschutz (the "Anschutz Option"), pursuant to which Anschutz was entitled to
purchase from JEDI up to 2,250,000 shares of the Company's Common Stock at a
purchase price per share equal to the lesser of (a) $10.00 plus 18% per annum
from July 27, 1995 to the date of exercise of the option, or (b) $15.50. The
Anschutz Option was scheduled to terminate on July 27, 1998. JEDI was to satisfy
its obligations under the Anschutz Option by exercising the JEDI Warrant. The
Company also agreed to use the proceeds from the exercise of the Anschutz
Warrant to pay principal and interest on the $40,000,000 tranche of the JEDI
loan.
In December 1995, JEDI exchanged the $22,400,000 tranche and the JEDI
Warrant for 1,680,000 shares of Common Stock (the "1995 JEDI Exchange").
Pursuant to the 1995 JEDI Exchange, the Company assumed JEDI's obligations under
the Anschutz Option. Under the Anschutz Option, the Company was then obligated
to issue shares directly to Anschutz that previously would have been issued to
JEDI pursuant to the JEDI Warrant. On August 1, 1996, Anschutz exercised the
Anschutz Option to purchase 2,250,000 shares of Common Stock for $26,200,000 or
approximately $11.64 per share.
On November 5, 1996, the Company exchanged 2,000,000 shares of Common Stock
plus approximately $13,500,000 cash to extinguish approximately $43,000,000 of
nonrecourse secured debt then owed to JEDI. In connection with this transaction,
Anschutz acquired 1,628,888 shares of Common Stock by exercising a portion of
the Anschutz Warrant to purchase 388,888 shares of common stock at $10.50 per
share and by converting 620,000 shares of Forest's Second Series Preferred Stock
into 1,240,000 shares of Common Stock. The term of the remaining Anschutz
Warrant was extended to July 27, 1999.
On August 28, 1997, the Anschutz Corporation purchased 3,500,000 shares of
Common Stock through the exercise of the Anschutz Warrant at an exercise price
of $8.60 per share resulting in cash proceeds to Forest of $30,100,000. The
reduction in exercise price offered to Anschutz reflects an approximate 10%
present value discount computed to the warrants' expiration date of July 27,
1999. As a result of the exercise, outstanding shares of Common Stock increased
from approximately 32,600,000 shares to approximately 36,100,000 shares.
The Company intends to farm out to Anschutz a 50% interest in a prospect in
the Gulf of Mexico. Pursuant to the proposed farmout, Anschutz would pay 50% of
the Company's costs already incurred relating to the prospect and 66.67% of the
drilling costs of an exploratory well on the prospect.
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DESCRIPTION OF BANK CREDIT FACILITIES
GENERAL. The Bank Credit Facilities are comprised of two related
agreements, the U.S. Credit Facility and the Canadian Credit Facility. The U.S.
Credit Facility is among Forest, The Chase Manhattan Bank, as agent (the "U.S.
Agent"), and other lending institutions party thereto (the "U.S. Banks"). The
Canadian Credit Facility is among a Canadian subsidiary of Forest, The Chase
Manhattan Bank of Canada, as administrative agent (the "Canadian Agent"), and
other Canadian lending institutions party thereto (the "Canadian Banks") for the
benefit of Canadian Forest and its subsidiaries. The U.S. Agent, the U.S. Banks,
the Canadian Agent and Canadian Banks are collectively referred to as the
"Lender Group". The Bank Credit Facilities provide for an aggregate principal
amount of revolving loans and letters of credit of up to the lesser of $250
million or the borrowing base as in effect from time to time, which includes a
subfacility from the U.S. Agent for letters of credit of up to $10 million under
the U.S. Credit Facility and a subfacility from the Canadian Agent for letters
of credit of up to CDN $15 million under the Canadian Credit Facility. Loans
under the Canadian Credit Facility may be made in either U.S. or Canadian
dollars. A default under either credit facility would constitute a default under
the other credit facility.
Initially, the borrowing base is $130 million, which may be allocated
between the U.S. Credit Facility and the Canadian Credit Facility. Currently,
the allocated U.S. borrowing base is $100 million and the allocated Canadian
borrowing base is an amount equal to $30 million. The borrowing base may be
redetermined by the Lender Group at its discretion and may be reallocated
periodically by Forest, subject to the approval of the U.S. Banks or the
Canadian Banks, as applicable; PROVIDED that Forest and Canadian Forest may not
allocate more than $100,000,000 (or its equivalent in Canadian dollars) to
either credit facility.
SECURITY. Indebtedness under the U.S. Credit Facility is secured by Liens
on substantially all of the oil and gas properties and other assets of Forest in
the United States and a pledge of 66% of the outstanding capital stock of
Canadian Forest. Indebtedness under the Canadian Credit Facility is secured by
liens on substantially all of the oil and gas properties and other assets of
Forest and Canadian Forest and are guaranteed by Forest.
INTEREST. Indebtedness under the U.S. Credit Facility bears interest at a
floating rate based (at Forest's option) upon (i) the Base Rate with respect to
Base Rate loans, plus the Applicable Margin for Base Rate loans or (ii) the
London Interbank Offered Rate for one, two, three or six months, plus the
Applicable Margin for Eurodollar loans. The Base Rate is the greater of (i) the
Prime Rate or (ii) the Federal Funds Rate plus 1/2 of 1%. The Applicable Margin
for Base Rate loans varies from 0.00% to 0.50% depending on the Borrowing Base
Usage Ratio; and the Applicable Margin for Eurodollar loans varies from 1.00% to
1.50% depending on the Borrowing Base Usage Ratio. Borrowing Base Usage is a
ratio of (i) outstanding loans, letters of credit, swing-line loans and bankers'
acceptances under both the U.S. Credit Facility and the Canadian Credit Facility
to (ii) the then effective borrowing base. Interest on Base Rate loans is
payable quarterly in arrears and interest on Eurodollar loans is payable on the
last day of the interest period therefor and, if longer than three months, at
three month intervals.
Indebtedness under the Canadian Credit Facility bears interest at a floating
rate based (at Forest's option) upon (i) the Bankers' Acceptance rate for
bankers' acceptances having a maturity of 30, 60, 90 or 180 days, plus a
discount rate, (ii) the Canadian Prime Rate with respect to Canadian Prime Rate
loans, plus the Applicable Margin for Canadian Prime Rate loans, (iii) the Base
Rate with respect to Base Rate loans, plus the Applicable Margin for Base Rate
loans, or (iv) the London Interbank Offered Rate for one, two, three or six
months, plus the Applicable Margin for Eurodollar loans. The Applicable Margin
for Canadian Prime Rate loans and Base Rate loans will vary from 0.00% to 0.50%
depending on the Borrowing Base Usage Ratio; and the discount fee for Bankers'
Acceptances and Applicable Margin for Eurodollar loans will vary from 1.00% to
1.50% depending on the Borrowing Base Usage Ratio. Interest on Canadian Prime
Rate loans and Base Rate loans will be payable quarterly in arrears and interest
on
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Eurodollar loans will be payable on the last day of the interest period therefor
and, if longer than three months, at three month intervals.
MATURITY. The Bank Credit Facilities will terminate on August 19, 2001. The
Bank Credit Facilities provide that loans may be borrowed, repaid and reborrowed
from time to time until such termination date, subject to the satisfaction of
certain conditions on the date of any such borrowing and, in the case of
repayment of Eurodollar loans and Bankers' Acceptances, compliance with certain
yield protection provisions.
SCHEDULED PAYMENTS AND PREPAYMENTS. The Bank Credit Facilities do not
require any scheduled payments of principal. The Bank Credit Facilities provide
for mandatory repayments of loans (i) if, following any redetermination of the
Borrowing Base, the aggregate principal amount of the loans, the letters of
credit, swing-line loans and bankers' acceptances under the Bank Credit
Facilities exceed the Borrowing Base, (ii) with the net cash proceeds in excess
of $5,000,000 from any asset sale or sales, and (iii) with the net casualty
proceeds in excess of $2,500,000 from any casualty event. In the case of clause
(i), such prepayment must be within 90 days of the date such deficiency is
determined to exist.
Amounts under the Bank Credit Facilities may be voluntarily prepaid without
premium or penalty, subject to certain notice requirements, certain required
minimum prepayment amounts and, in the case of Eurodollar loans and Bankers'
Acceptances, certain yield protection provisions.
COMMITMENT AND LETTER OF CREDIT FEES. Commitment fees are due and payable
to the Lender Group based on the committed undrawn amount of the lesser of their
respective aggregate commitments or the then effective Allocated U.S. Borrowing
Base or Allocated Canadian Borrowing Base (as applicable) during the preceding
quarter equal to a percent which varies from 0.30% to 0.375% depending on the
Borrowing Base Usage Ratio. Such commitment fees will be payable in arrears on a
quarterly basis. Forest is also required to pay letter of credit fees as
follows: (i) to the Banks, an amount equal to the Applicable Margin for
Eurodollar loans for the daily aggregate amount available to be drawn under each
letter of credit outstanding; and (ii) to the U.S. Agent for the account of the
Issuing Bank, an issuance fee equal to the greater of $1,000 or 0.5% of the
stated amount of each letter of credit. Fees payable under clause (i) will be
payable quarterly in arrears and fees payable under clause (ii) will be payable
on the issuance date. Similar fees are payable under the Canadian Bank Facility
for letters of credit issued thereunder.
COVENANTS. The Bank Credit Facilities require Forest and its subsidiaries
to meet certain financial tests, including meeting a minimum interest coverage
ratio and current ratio. The Bank Credit Facilities also contain covenants
which, among other things, will limit the incurrence of additional indebtedness,
the nature of the business of Forest and its subsidiaries, investments, leases
of assets, ownership of subsidiaries, dividends, transactions with affiliates,
asset sales, acquisitions, mergers and consolidations, Liens and other matters
customarily restricted in such agreements. The Bank Credit Facilities contain
additional covenants which will require Forest to maintain its properties and
those of its subsidiaries, together with insurance thereon, to provide certain
information to the Lender Group, including financial statements, notices and
reports and to permit inspections of the books and records of Forest and its
subsidiaries, to comply with applicable laws, including environmental laws and
ERISA, to pay taxes and contractual obligations and to use the proceeds of the
loans for working capital and other general corporate purposes.
EVENTS OF DEFAULT. The Bank Credit Facilities contain customary events of
default, including payment defaults, breach of representations, warranties and
covenants (subject to certain cure periods), cross-defaults to certain other
indebtedness, certain events of bankruptcy and insolvency, judgment defaults in
excess of $1 million and the failure of any of the loan documents to be in full
force and effect.
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THE EXCHANGE OFFER
GENERAL
In connection with the sale of the Old Notes, the purchasers thereof became
entitled to the benefits of certain registration rights under the Registration
Agreement. The Exchange Notes are being offered hereunder in order to satisfy
the obligations of the Issuer and the Company under the Registration Agreement.
See "-- Registration Rights."
For each $1,000 principal amount of Old Notes surrendered to the Issuer and
the Company pursuant to the Exchange Offer, the holder of such Old Notes will
receive $1,000 principal amount of Exchange Notes. Upon the terms and subject to
the conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal, the Company and the Issuer will accept all Old Notes properly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Holders
may tender some or all of their Old Notes pursuant to the Exchange Offer in
integral multiples of $1,000 principal amount.
Under existing interpretations of the staff of the SEC, including EXXON
CAPITAL HOLDINGS CORPORATION, SEC No-Action Letter (available April 13, 1989),
the Morgan Stanley Letter and MARY KAY COSMETICS, INC., SEC No-Action Letter
(available June 5, 1991), the Issuer and the Company believe that the Exchange
Notes would in general be freely transferable after the Exchange Offer without
further registration under the Securities Act by the respective holders thereof
(other than a "Restricted Holder," being (i) a broker-dealer who purchased Old
Notes exchanged for such Exchange Notes directly from the Company or the Issuer
to resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an affiliate of the Issuer or the
Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of such Exchange Notes. Eligible holders
wishing to accept the Exchange Offer must represent to the Issuer and the
Company that such conditions have been met. Any holder of Old Notes who tenders
in the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes could not rely on the interpretation by the staff of the SEC
enunciated in the Morgan Stanley Letter and similar no-action letters, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange Notes
in the Exchange Offer will be required to make certain representations,
including that (i) it is not an affiliate of the Issuer or the Company nor a
broker-dealer tendering Old Notes acquired directly from the Issuer or the
Company for its own account, (ii) any Exchange Notes to be received by it are
being acquired in the ordinary course of its business and (iii) it is not
participating in, and it has no arrangement with any person to participate in,
the distribution (within the meaning of the Securities Act) of the Exchange
Notes. In addition, in connection with any resales of Exchange Notes, any
broker-dealer (a "Participating Broker-Dealer") who acquired Old Notes for its
own account as a result of market-making activities or other trading activities
must acknowledge that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such Exchange Notes. The
staff of the SEC has taken the position in no-action letters issued to third
parties including SHEARMAN & STERLING, SEC No-Action Letter (available July 2,
1993), that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to the Exchange Notes (other than a resale of an
unsold allotment from the original sale of Old Notes) with this Prospectus, as
it may be amended or supplemented from time to time. Under the Registration
Agreement, the Issuer and the Company are required to allow Participating
Broker-Dealers to use this Prospectus, as it may be amended or supplemented from
time to time, in connection with the resale of such Exchange Notes. See "Plan of
Distribution."
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The Exchange Offer shall be deemed to have been consummated upon the earlier
to occur of (i) the Issuer and the Company having exchanged Exchange Notes for
all outstanding Old Notes (other than Old Notes held by a Restricted Holder)
pursuant to the Exchange Offer and (ii) the Issuer and the Company having
exchanged, pursuant to the Exchange Offer, Exchange Notes for all Old Notes that
have been tendered and not withdrawn on the Expiration Date. In such event,
holders of Old Notes seeking liquidity in their investment would have to rely on
exemptions to registration requirements under the securities laws, including the
Securities Act.
As of the date of this Prospectus, $125,000,000 aggregate principal amount
of Old Notes are issued and outstanding. In connection with the issuance of the
Old Notes, the Company arranged for the Old Notes to be eligible for trading in
the Private Offering, Resale and Trading through Automated Linkages (PORTAL)
Market, the National Association of Securities Dealers' screen based, automated
market trading of securities eligible for resale under Rule 144A.
The Issuer and the Company shall be deemed to have accepted for exchange
validly tendered Old Notes when, as and if the Issuer and the Company have given
oral or written notice thereof to the Exchange Agent. See "-- Exchange Agent."
The Exchange Agent will act as agent for the tendering holders of Old Notes for
the purpose of receiving Exchange Notes from the Company and the Issuer and
delivering Exchange Notes to such holders. If any tendered Old Notes are not
accepted for exchange because of an invalid tender or the occurrence of certain
other events set forth herein, certificates for any such unaccepted Old Notes
will be returned, without expense, to the tendering holder thereof as promptly
as practicable after the Expiration Date. Holders of Old Notes who tender in the
Exchange Offer will not be required to pay brokerage commissions or fees or,
subject to the instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange of Old Notes pursuant to the Exchange Offer. The Company
and the Issuer will pay all charges and expenses, other than certain applicable
taxes, in connection with the Exchange Offer. See "-- Fees and Expenses."
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of the date of this Prospectus.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean December 12, 1997 unless the Issuer
and the Company, in their sole discretion, extend the Exchange Offer, in which
case the term "Expiration Date" shall mean the latest date to which the Exchange
Offer is extended. In order to extend the Expiration Date, the Issuer and the
Company will notify the Exchange Agent of any extension by oral or written
notice and will mail to the record holders of Old Notes an announcement thereof,
each prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date. Such announcement may state that the
Company and the Issuer are extending the Exchange Offer for a specified period
of time. The Issuer and the Company reserve the right (i) to delay acceptance of
any Old Notes, to extend the Exchange Offer or to terminate the Exchange Offer
and to refuse to accept Old Notes not previously accepted, if any of the
conditions set forth herein under "-- Termination" shall have occurred and shall
not have been waived by the Company (if permitted to be waived by the Issuer and
the Company), by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, and (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof. If the
Exchange Offer is amended in a manner determined by the Issuer and the Company
to constitute a material change, the Issuer and the Company will promptly
disclose such amendment in a manner reasonably calculated to inform the holders
of the Old Notes of such amendment. Without limiting the manner in which the
Issuer and the Company may choose to make public announcements of any delay in
acceptance, extension, termination or amendment of the Exchange Offer, the
Issuer and the Company shall have no obligation to
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publish, advertise, or otherwise communicate any such public announcement, other
than by making a timely release to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest payable semi-annually on March 15 and
September 15 of each year, commencing March 15, 1998. Holders of Exchange Notes
of record on March 1, 1998 will receive interest on March 15, 1998 from the date
of issuance of the Exchange Notes, plus an amount equal to the accrued interest
on the Old Notes from the date of issuance of the Old Notes, September 29, 1997,
to the date of exchange thereof. Consequently, assuming the Exchange Offer is
consummated prior to the record date in respect of the March 15, 1998 interest
payment for the Old Notes, holders who exchange their Old Notes for Exchange
Notes will receive the same interest payment on March 15, 1998 that they would
have received had they not accepted the Exchange Offer. Interest on the Old
Notes accepted for exchange will cease to accrue upon issuance of the Exchange
Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, or an Agent's Message,
together with the Old Notes and any other required documents, to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. In
addition, either (i) the certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if such procedure is available, into the Exchange Agent's account at The
Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent along with an Agent's Message prior to the Expiration Date or
(iii) the Holder must comply with the guaranteed delivery procedures described
below. The tender by a holder of Old Notes will constitute an agreement between
such holder and the Issuer and the Company in accordance with the terms and
subject to the conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address set
forth herein. Holders may also request that their respective brokers, dealers,
commercial banks, trust companies or nominees effect such tender for such
holders.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part of
a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility
has received an express acknowledgment from the participant in such Book-Entry
Transfer Facility tendering Old Notes which are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Issuer and the Company may
enforce such agreement against such participant.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Old Notes should
be sent to the Issuer or the Company. Only a holder of Old Notes may tender such
Old Notes in the Exchange Offer. The term "holder" with respect to the Exchange
Offer means any person in whose name Old Notes are registered on the books of
the Issuer or any other person who has obtained a properly completed stock power
from the registered holder.
Any beneficial holder whose Old Notes are registered in the name of such
holder's broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on behalf of the registered
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holder. If such beneficial holder wishes to tender directly, such beneficial
holder must, prior to completing and executing the Letter of Transmittal and
delivering his Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such holder's name or obtain a properly completed
bond power from the registered holder. The transfer of record ownership may take
considerable time. If the Letter of Transmittal is signed by the record
holder(s) of the Old Notes tendered thereby, the signature must correspond with
the name(s) written on the face of the Old Notes without alteration, enlargement
or any change whatsoever. If the Letter of Transmittal is signed by a
participant in Depositary Trust Company ("DTC"), the signature must correspond
with the name as it appears on the security position listing as the holder of
the Old Notes. Signatures on a Letter of Transmittal or a notice of withdrawal,
as the case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution") unless the Old Notes
tendered pursuant thereto are tendered (i) by a registered holder (or by a
participant in DTC whose name appears on a security position listing as the
owner) who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal and the Exchange
Notes are being issued directly to such registered holder (or deposited into the
participant's account at DTC) or (ii) for the account of an Eligible
Institution. If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by appropriate bond powers which authorize such person
to tender the Old Notes on behalf of the registered holder, in either case
signed as the name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Old Notes
(or a timely confirmation received of a book-entry transfer of Old Notes into
the Exchange Agent's account at DTC with an Agent's Message) or a Notice of
Guaranteed Delivery from an Eligible Institution is received by the Exchange
Agent. Issuances of Exchange Notes in exchange for Old Notes tendered pursuant
to a Notice of Guaranteed Delivery by an Eligible Institution will be made only
against delivery of the Letter of Transmittal (and any other required documents)
and the tendered Old Notes (or a timely confirmation received of a book-entry
transfer of Old Notes into the Exchange Agent's account at DTC with an Agent's
Message) with the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Issuer and the Company reserve the absolute right to reject any and
all Old Notes not properly tendered or any Old Notes the Company's acceptance of
which would, in the opinion of the Company or its counsel, be unlawful. The
Issuer and the Company also reserve the absolute right to waive any conditions
of the Exchange Offer or defects or irregularities in tender as to particular
Old Notes. The Issuer and the Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) shall be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Issuer and the Company shall determine. Neither the
Issuer, the Company, the Exchange Agent nor any other person shall be under any
duty to give notification of defects or irregularities with respect to tenders
of Old Notes nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange
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Agent to the tendering holder of such Old Notes unless otherwise provided in the
Letter of Transmittal, as soon as practicable following the Expiration Date. In
addition, the Company reserves the right in its sole discretion to (i) purchase
or make offers for any Old Notes that remain outstanding subsequent to the
Expiration Date, or, as set forth under "-- Termination," to terminate the
Exchange Offer and (ii) to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Old Notes
at DTC within two business days after the date of this Prospectus, and any
financial institution which is a participant in DTC may make book-entry delivery
of the Old Notes by causing DTC to transfer such Old Notes into the Exchange
Agent's account in accordance with DTC's procedure for such transfer. Although
delivery of Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, an Agent's Message must be transmitted to and
received by the Exchange Agent on or prior to the Expiration Date at one of its
addresses set forth below under "-- Exchange Agent", or the guaranteed delivery
procedure described below must be complied with. DELIVERY OF DOCUMENTS TO DTC
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All references in this
Prospectus to deposit or delivery of Old Notes shall be deemed to include DTC's
book-entry delivery method.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or who cannot complete the procedure for book-entry transfer on
a timely basis and deliver an Agent's Message, may effect a tender if: (i) the
tender is made by or through an Eligible Institution; (ii) prior to the
Expiration Date, the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder of the Old Notes, the registration number or numbers of such Old Notes
(if applicable), and the total principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
business days after the Expiration Date, the Letter of Transmittal, together
with the Old Notes in proper form for transfer (or a confirmation of a
book-entry transfer into the Exchange Agent's account at DTC with an Agent's
Message) and any other documents required by the Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent; and (iii) such
properly completed and executed Letter of Transmittal, together with the
certificate(s) representing all tendered Old Notes in proper form for transfer
(or a confirmation of such a book-entry transfer) and all other documents
required by the Letter of Transmittal are received by the Exchange Agent within
five business days after the Expiration Date.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain terms and
conditions which are summarized below and are part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that such holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of the Exchange Notes, and that such holder
is not a Restricted Holder.
Old Notes tendered in exchange for Exchange Notes (or a timely confirmation
of a book-entry transfer of such Old Notes into the Exchange Agent's account at
DTC) must be received by the
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Exchange Agent, with the Letter of Transmittal or an Agent's Message and any
other required documents, by the Expiration Date or within the time periods set
forth above pursuant to a Notice of Guaranteed Delivery from an Eligible
Institution. Each holder tendering the Old Notes for exchange sells, assigns and
transfers the Old Notes to the Exchange Agent, as agent of the Company, and
irrevocably constitutes and appoints the Exchange Agent as the holder's agent
and attorney-in-fact to cause the Old Notes to be transferred and exchanged. The
holder warrants that it has full power and authority to tender, exchange, sell,
assign and transfer the Old Notes and to acquire the Exchange Notes issuable
upon the exchange of such tendered Old Notes, that the Exchange Agent, as agent
of the Issuer and the Company, will acquire good and unencumbered title to the
tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances, and that the Old Notes tendered for exchange are not subject to
any adverse claims when accepted by the Exchange Agent, as agent of the Company.
The holder also warrants and agrees that it will, upon request, execute and
deliver any additional documents deemed by the Issuer, the Company or the
Exchange Agent to be necessary or desirable to complete the exchange, sale,
assignment and transfer of the Old Notes. All authority conferred or agreed to
be conferred in the Letter of Transmittal by the holder will survive the death,
incapacity or dissolution of the holder and any obligation of the holder shall
be binding upon the heirs, personal representatives, successors and assigns of
such holder.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day prior to
the Expiration Date, unless previously accepted for exchange. To withdraw a
tender of Old Notes in the Exchange Offer, a written or facsimile transmission
notice of withdrawal must be received by the Exchange Agent at its address set
forth herein prior to 5:00 p.m., New York City time, on the business day prior
to the Expiration Date and prior to acceptance for exchange thereof by the
Company. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including, if applicable, the registration number
or numbers and total principal amount of such Old Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Old Notes to register the transfer of
such Old Notes into the name of the Depositor withdrawing the tender, (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor and (v) if applicable because the Old Notes have been
tendered pursuant to the book-entry procedures, specify the name and number of
the participant's account at DTC to be credited, if different than that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such withdrawal notices will be determined by the Issuer and
the Company, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Exchange Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes
which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Company and the
Issuer will not be required to accept for exchange any Old Notes not theretofore
accepted for exchange, and may terminate the Exchange Offer if they determine
that the Exchange Offer violates any applicable law or interpretation of the
staff of the SEC.
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If the Issuer and the Company determine that they may terminate the Exchange
Offer, as set forth above, the Issuer and the Company may (i) refuse to accept
any Old Notes and return any Old Notes that have been tendered to the holders
thereof, (ii) extend the Exchange Offer and retain all Old Notes tendered prior
to the Expiration of the Exchange Offer, subject to the rights of such holders
of tendered Old Notes to withdraw their tendered Old Notes or (iii) waive such
termination event with respect to the Exchange Offer and accept all properly
tendered Old Notes that have not been withdrawn. If such waiver constitutes a
material change in the Exchange Offer, the Issuer and the Company will disclose
such change by means of a supplement to this Prospectus that will be distributed
to each registered holder of Old Notes, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered holders of the Old
Notes, if the Exchange Offer would otherwise expire during such period. Holders
of Old Notes will have certain rights against the Company and the Issuer under
the Registration Agreement should the Issuer and the Company fail to consummate
the Exchange Offer.
EXCHANGE AGENT
Marine Midland Bank has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance and requests for additional copies
of this Prospectus or of the Letter of Transmittal should be directed to the
Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Mail: By Overnight Courier:
MARINE MIDLAND BANK MARINE MIDLAND BANK
140 Broadway -- Level A 140 Broadway -- Level A
New York, New York 10005-1180 New York, New York 10005-1180
Attention: Corporate Trust Services Attention: Corporate Trust Services
(registered or certified mail recommended)
By Hand: Facsimile Transmission:
MARINE MIDLAND BANK (212) 658-2292
140 Broadway -- Level A Confirm by Telephone:
New York, New York 10005-1180 (212) 658-5931
Attention: Corporate Trust Services
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Issuer and the Company. The principal solicitation for tenders
pursuant to the Exchange Offer is being made by mail. Additional solicitations
may be made by officers and regular employees of the Issuer and the Company and
their affiliates in person, by telegraph or telephone. The Issuer and the
Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Issuer and the Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse the Exchange Agent for its reasonable out-of-pocket
expenses in connection therewith. The Issuer and the Company may also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus,
Letters of Transmittal and related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for exchange.
The other expenses incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees, will be paid by the Issuer and the
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Company. The Issuer and the Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, Exchange Notes or Old Notes not tendered or accepted for exchange are
to be delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Old Notes tendered, or if tendered Old
Notes are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Issuer or
the Company upon the consummation of the Exchange Offer. The expenses of the
Exchange Offer will be amortized by the Issuer over the term of the Exchange
Notes under generally accepted accounting principles.
DESCRIPTION OF THE NOTES
The Exchange Notes will be issued and the Old Notes were issued under an
indenture dated as of September 29, 1997 (the "Indenture") between the Company,
the Issuer, and State Street Bank and Trust Company, as trustee (the "Trustee").
A copy of the Indenture is available upon request. The following summary of the
material provisions of the Indenture does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Indenture, including the definitions of certain terms contained therein.
The definitions of certain capitalized terms used in the following summary are
set forth below under "-- Certain Definitions."
It is expected that the Old Notes and the Exchange Notes will constitute a
single series of debt securities under the Indenture. If the Exchange Offer is
consummated, Holders of Old Notes who do not exchange their Old Notes for
Exchange Notes will vote together with Holders of the Exchange Notes for all
relevant purposes under the Indenture. In that regard, the Indenture requires
that certain actions by the Holders thereunder (including acceleration following
an Event of Default) must be taken, and certain rights must be exercised, by
specified minimum percentages of the aggregate principal amount of the
outstanding securities issued under the Indenture. In determining whether
Holders of requisite percentage in principal amount have given any notice,
consent or waiver or taken any other action permitted under the Indenture, any
Old Notes that remain outstanding after the Exchange Offer will be aggregated
with the Exchange Notes, and the Holders of the Old Notes and the Exchange Notes
will vote together as a single series for all such purposes. Accordingly, all
references herein to specified percentages in aggregate principal amount of the
outstanding Notes shall be deemed to mean, at any time after the Exchange Offer
is consummated, such percentages in aggregate principal amount of the Old Notes
and the Exchange Notes then outstanding.
The terms of the Notes will include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939 (the
"1939 Act"). The following summary of certain terms and provisions of the Notes
and the Indenture does not purport to be complete and is qualified in its
entirety by reference to the 1939 Act, the Notes and the Indenture. A copy of
the Indenture and the form of Notes is available upon request to the Issuer at
the address set forth above under "Available Information."
The Indenture provides for the issuance of up to $125.0 million of Old Notes
and Exchange Notes in the aggregate and, prior to September 15, 2002, additional
notes or additional series of notes in aggregate principal amount not to exceed
$75.0 million in the aggregate (the Old Notes, any additional notes or series of
notes issued under the Indenture and the Exchange Notes are collectively
referred to
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herein as the "Notes"). All the Notes are identical in all respects other than
purchase price and issuance date, except that the Old Notes contain terms with
respect to transfer restrictions.
The definitions of certain capitalized terms used in the following summary
are set forth below under "Certain Definitions." Capitalized terms used in this
summary and not otherwise defined below have the meanings assigned to them in
the Indenture. For purposes of this "Description of the Notes," references to
the "Issuer" shall mean Canadian Forest Oil Ltd., excluding its subsidiaries,
and references to the "Company" shall mean Forest Oil Corporation, excluding its
subsidiaries.
GENERAL
The Notes will mature on September 15, 2007, and will be limited to an
aggregate principal amount of $200.0 million. The Notes will bear interest at
the rate of 8 3/4% per annum from September 29, 1997, or from the most recent
interest payment date to which interest has been paid. Interest on the Notes
will be payable semiannually on March 15 and September 15 of each year, in the
case of the Old Notes beginning on March 15, 1998, to the Person in whose name
the Note (or any predecessor Note) is registered at the close of business on the
immediately preceding March 1 or September 1, as the case may be. See "The
Exchange Offer -- Interest on the Exchange Notes." Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months.
The obligations of the Issuer under the Notes will be unconditionally
guaranteed on a senior subordinated and unsecured basis by the Company and,
under the circumstances described below, certain Restricted Subsidiaries of the
Company. See "-- Company Guarantee" and "-- Subsidiary Guarantees."
Principal of, premium, if any, on and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at an office or agency of
the Issuer, one of which will be maintained for such purpose in The City of New
York (which initially will be an office of the Trustee) or such other office or
agency permitted under the Indenture. At the option of the Issuer, payment of
interest may be made by check mailed to the person entitled thereto as shown on
the Security Register. The Notes will be issued in denominations of $1,000 and
integral multiples thereof.
The interest rate on the Old Notes is subject to increase in certain
circumstances (such additional interest being referred to as "Special Interest")
if the Issuer and the Company do not file a registration statement relating to
the Registered Exchange Offer on a timely basis, if such registration statement
is not declared effective on a timely basis or if certain other conditions are
not satisfied, all as further described under "Exchange Offer; Registration
Rights." All references herein to interest shall include such Special Interest,
if appropriate.
COMPANY GUARANTEE
Pursuant to the Company Guarantee, the Company will unconditionally
guarantee, on an unsecured senior subordinated basis, to each Holder of Notes
and the Trustee, the full and prompt performance of the Issuer's obligations
under the Indenture and the Notes, including the payment of principal of and
interest, premium, if any, Special Interest, if any, and Additional Amounts, if
any, on the Notes. The Company Guarantee will be subordinated as described under
"-- Subordination."
SUBSIDIARY GUARANTEES
Under the circumstances described below under "-- Certain Covenants --
Future Subsidiary Guarantors," the Issuer's payment obligations under the Notes
will be jointly and severally guaranteed by one or more Subsidiary Guarantors.
The Subsidiary Guarantee of each Subsidiary Guarantor will be an unsecured
senior subordinated obligation of such Subsidiary Guarantor. See "--
Subordination."
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Certain mergers, consolidations and dispositions of Property may result in
the addition of additional Subsidiary Guarantors or the release of Subsidiary
Guarantors. See "-- Merger, Consolidation and Sale of Substantially All Assets."
Any Subsidiary Guarantor that is designated an Unrestricted Subsidiary in
accordance with the terms of the Indenture shall be released from and relieved
of its obligations under its Subsidiary Guarantee upon execution and delivery of
a supplemental indenture satisfactory to the Trustee.
Each of the Issuer, the Company and any Subsidiary Guarantor will agree to
contribute to the Company or any Subsidiary Guarantor which makes payments
pursuant to the Company Guarantee or its Subsidiary Guarantee, as applicable, an
amount equal to the Issuer's, the Company's or such Subsidiary Guarantor's
proportionate share of such payment, based on the net worth of the Issuer, the
Company or such Subsidiary Guarantor relative to the aggregate net worth of the
Issuer, the Company and the Subsidiary Guarantors.
SUBORDINATION
The Notes will be unsecured senior subordinated obligations of the Issuer.
The payment of the principal of, premium, if any, on and interest on the Notes
will be subordinated in right of payment, as set forth in the Indenture, to the
payment when due in cash of all Senior Indebtedness of the Issuer. The Notes
will rank subordinate in right of payment to all existing and future Senior
Indebtedness of the Issuer, PARI PASSU with any future Pari Passu Indebtedness
of the Issuer and senior to any future Subordinated Indebtedness of the Issuer.
The Company Guarantee and the Subsidiary Guarantee of any Subsidiary Guarantor
will rank subordinate in right of payment to all existing and future Senior
Indebtedness, PARI PASSU with any future Pari Passu Indebtedness and senior to
any future Subordinated Indebtedness of the Company or such Subsidiary
Guarantor, as applicable.
At September 30, 1997, the Issuer had no outstanding Senior Indebtedness and
the Company had outstanding Senior Indebtedness of $78.0 million (not including
approximately $48.0 million of aggregate borrowing capacity available to the
Company and the Issuer under the Bank Credit Facilities which, if borrowed,
would be Senior Indebtedness of either the Issuer or the Company). As of such
date, the Issuer had no outstanding Pari Passu Indebtedness or Subordinated
Indebtedness, other than the Notes. As of such date, the Company had no
outstanding Subordinated Indebtedness. The approximately $9.8 million principal
amount of 11 1/4% Notes which remains outstanding constitutes Pari Passu
Indebtedness of the Company. Although the Indenture contains limitations on the
amount of additional Indebtedness that the Company and its Restricted
Subsidiaries, including the Issuer, may Incur, the amounts of such Indebtedness
could be substantial and such Indebtedness may be Senior Indebtedness or Pari
Passu Indebtedness. In addition, any Subsidiary Guarantees could be effectively
subordinated to all the obligations of the Subsidiary Guarantors under certain
circumstances. The Notes, the Company Guarantee and any Subsidiary Guarantees
will also be effectively subordinated to any secured Indebtedness of the Issuer,
the Company and the Subsidiary Guarantors that is not otherwise Senior
Indebtedness. See "-- Certain Covenants -- Limitation on Indebtedness" and "Risk
Factors -- Subordination" and "-- Possible Limitations on Enforceability of
Guarantees."
Neither the Issuer nor the Company may pay principal of, premium, if any, on
or interest on, the Notes or the Company Guarantee or make any deposit pursuant
to the provisions of the Indenture described under "-- Defeasance and Covenant
Defeasance" or repurchase, redeem or otherwise retire any Notes (collectively,
"pay the Notes") if (i) any principal, premium, interest or other amounts due in
respect of any Senior Indebtedness of the Issuer or the Company is not paid
within any applicable grace period (including at maturity) or (ii) any other
default on Senior Indebtedness of the Issuer or the Company occurs and the
maturity of such Senior Indebtedness is accelerated in accordance with its terms
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Senior Indebtedness has been paid in
full; PROVIDED, HOWEVER, that the Issuer or the Company, as applicable, may pay
the Notes without regard to the foregoing if the Issuer or the Company and the
Trustee receive written
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notice approving such payment from the Representative of each issue of
Designated Senior Indebtedness of the Issuer or the Company. During the
continuance of any default (other than a default described in clause (i) or
clause (ii) of the preceding sentence) with respect to any Designated Senior
Indebtedness of the Issuer or the Company pursuant to which the maturity thereof
may be accelerated immediately without further notice (except such notice as may
be required to effect such acceleration), neither the Issuer nor the Company, as
applicable, may pay the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Issuer or the Company and the Trustee of
written notice of such default from the Representative of the holders of such
Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period (a "Payment Blockage Notice") and ending 179 days after receipt
of such notice by the Issuer or the Company and the Trustee unless earlier
terminated (a) by written notice to the Issuer or the Company and the Trustee
from the Representative which gave such Payment Blockage Notice, (b) because
such default is no longer continuing or (c) because such Designated Senior
Indebtedness has been repaid in full in cash. Notwithstanding the provisions
described in the immediately preceding sentence, unless the holders of such
Designated Senior Indebtedness or the Representative of such holders have
accelerated the maturity of such Designated Senior Indebtedness and not
rescinded such acceleration, the Issuer or the Company, as applicable, may
(unless otherwise prohibited as described in the first sentence of this
paragraph) resume payments on the Notes after the end of such Payment Blockage
Period. No more than one Payment Blockage Notice may be given in any consecutive
360-day period regardless of the number of defaults with respect to one or more
issues of Senior Indebtedness of the Issuer or the Company.
Upon any payment or distribution of the assets of the Issuer or the Company
upon a total or partial liquidation, dissolution or winding up of the Issuer or
the Company or in a bankruptcy, reorganization, insolvency, receivership, or
similar proceeding relating to the Issuer or the Company or its property, the
holders of Senior Indebtedness of the Issuer or the Company will be entitled to
receive payment in full in cash before the Holders of the Notes are entitled to
receive any payment of principal of, or premium, if any, or interest on, the
Notes or the Company Guarantee. In addition, until the Senior Indebtedness of
the Issuer or the Company is paid in full, any distribution made by or on behalf
of the Issuer or the Company to which Holders of Notes would be entitled but for
the subordination provisions of the Indenture will be made to holders of the
Senior Indebtedness of the Issuer or the Company, except that Holders of Notes
may receive and retain shares of stock and any debt securities that are
subordinated to all Senior Indebtedness of the Issuer or the Company to at least
the same extent as the Notes or the Company Guarantee.
The Subsidiary Guarantee of any Subsidiary Guarantor will be subordinated to
Senior Indebtedness of such Subsidiary Guarantor to the same extent and in the
same manner as the Notes and the Company Guarantee are subordinated to Senior
Indebtedness of the Issuer and the Company.
The Indenture provides that the subordination provisions of the Indenture
applicable to the Notes, the Company Guarantee and any Subsidiary Guarantees may
not be amended, waived or modified in a manner that would adversely affect the
rights of the holders of any Designated Senior Indebtedness unless the holders
of such Indebtedness consent in writing (in accordance with the provisions of
such Indebtedness) to such amendment, waiver or modification.
OPTIONAL REDEMPTION
Except as provided in the next succeeding paragraph, the Notes are not
redeemable prior to September 15, 2002. At any time on or after September 15,
2002, the Notes are redeemable at the option of the Issuer, in whole or in part
(equal to $1,000 in principal amount or an integral multiple thereof), on not
less than 30 nor more than 60 days' prior notice, at the following redemption
prices (expressed as percentages of principal amount), plus accrued and unpaid
interest, if any, to the date of redemption (subject to the right of Holders of
record on the relevant record date to receive interest due on the
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relevant interest date), if redeemed during the 12-month period commencing on
September 15 of the years indicated below.
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---------------------------------------------------------------------- ------------
<S> <C>
2002.................................................................. 104.375%
2003.................................................................. 102.917%
2004.................................................................. 101.458%
2005 and thereafter................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to September 15, 2000 the Issuer may,
at any time or from time to time, redeem up to 33 1/3% of the aggregate
principal amount of the Notes originally issued at a redemption price of 108.75%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of redemption (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), with the net proceeds of one or more Equity Offerings of the Company,
PROVIDED that at least 66 2/3% of the aggregate principal amount of the Notes
originally issued remains outstanding after the occurrence of such redemption
and PROVIDED, FURTHER, that such redemption shall occur not later than 90 days
after the date of the closing of any such Equity Offering. The redemption shall
be made in accordance with procedures set forth in the Indenture.
If less than all the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate.
REDEMPTION FOR CHANGES IN CANADIAN WITHHOLDING TAXES
The Notes will be subject to redemption as a whole, but not in part, at the
option of the Issuer at any time, on not less than 30 nor more than 60 days'
prior written notice, at 100% of the principal amount thereof, plus accrued and
unpaid interest thereon (if any) to the redemption date, in the event that any
Obligor (as defined in "-- Additional Amounts") has become, or would become,
obligated to pay, on the next date on which any amount would be payable with
respect to the Notes, any Additional Amounts (as defined in "-- Additional
Amounts") as a result of a change in the laws (including any regulations
promulgated thereunder) of Canada (or any political subdivision or taxing
authority thereof or therein), or any change in any official position regarding
the application or interpretation of such laws or regulations, which change is
announced or becomes effective on or after the Issue Date; PROVIDED, HOWEVER,
that (a) no such notice of redemption shall be given earlier than 60 days prior
to the earliest date on which such Obligor would be obligated to pay such
Additional Amounts if a payment in respect of the Notes were then due, and (b)
at the time any such redemption notice is given, such obligation to pay
Additional Amounts must remain in effect. Prior to any redemption of the Notes,
the Issuer shall deliver to the Trustee or any paying agent an Officer's
Certificate stating that the Issuer is entitled to effect such redemption and
setting forth a statement of facts showing that the conditions precedent to the
right of redemption have occurred.
ADDITIONAL AMOUNTS
All payments made by the Issuer under or with respect to the Notes, by the
Company under or with respect to the Company Guarantee and by any Subsidiary
Guarantor under or with respect to its Subsidiary Guarantee (the Issuer, the
Company and any such Subsidiary Guarantor being referred to for purposes of this
section "Additional Amounts" individually as an "Obligor" and collectively as
the "Obligors") will be made free and clear of, and without withholding or
deduction for or on account of, any present or future tax, duty, levy, impost,
assessment or other governmental charge imposed or levied by or on behalf of the
Government of Canada or of any province or territory thereof or by any authority
or agency therein or thereof having power to tax (or the jurisdiction of
incorporation of any successor of any
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Obligor) (hereunder "Taxes"), unless the applicable Obligor or any successor, as
the case may be, is required to withhold or deduct Taxes by law or by the
interpretation or administration thereof by the relevant governmental authority
or agency. If any Obligor or any successor, as the case may be, is so required
to withhold or deduct any amount for or on account of Taxes from any payment
made under or with respect to the Notes, the Company Guarantee or any Subsidiary
Guarantee, such Obligor will pay such additional amounts ("Additional Amounts")
as may be necessary so that the net amount received by each Holder (including
Additional Amounts) after such withholding or deduction will not be less than
the amount the Holder would have received if such Taxes had not been withheld or
deducted; PROVIDED that no Additional Amounts will be payable with respect to a
payment made to a Holder (an "Excluded Holder") in respect of a beneficial owner
(i) with which the Issuer does not deal at arm's length (within the meaning of
the Income Tax Act (Canada)) at the time of making such payment or (ii) which is
subject to such Taxes by reason of its being connected with Canada or any
province or territory thereof otherwise than by the mere acquisition, holding or
disposition of Notes or the receipt of payments thereunder. The Obligors will
also (i) make such withholding or deduction and (ii) remit the full amount
deducted or withheld to the relevant government authority in accordance with
applicable law. The Obligors will furnish to the Holders, within 30 days after
the date the payment of any Taxes is due pursuant to applicable law, certified
copies of tax receipts evidencing such payment. The Obligors will, jointly and
severally, indemnify and hold harmless each Holder (other than an Excluded
Holder) and upon written request reimburse each such Holder for the amount of
(i) any Taxes so levied or imposed and paid by such Holder as a result of
payments made under or with respect to the Notes, the Company Guarantee or any
Subsidiary Guarantee, (ii) any liability (including penalties, interest and
expenses) arising therefrom or with respect thereto, and (iii) any Taxes imposed
with respect to any reimbursement under (i) or (ii) so that the net amount
received by such Holder after such reimbursement will not be less than the net
amount the Holder would have received if Taxes on such reimbursement had not
been imposed.
At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable, if the Issuer will be obligated to pay
Additional Amounts with respect to such payment, the Issuer will deliver to the
Trustee an Officers' Certificate stating the fact that such Additional Amounts
will be payable, the amounts so payable and will set forth such other
information necessary to enable the Trustee to pay such Additional Amounts to
Holders on the payment date. Whenever in the Indenture there is mentioned, in
any context, the payment of principal (and premium, if any), redemption price,
Change of Control Payment, Prepayment Offer, purchase price, interest or any
other amount payable under or with respect to any Note, such mention shall be
deemed to include mention of the payment of Additional Amounts to the extent
that, in such context, Additional Amounts are, were or would be payable in
respect thereof.
The Issuer will pay any present or future stamp, court or documentary taxes
or any other excise or property taxes, charges or similar levies that arise in
any jurisdiction from the execution, delivery, enforcement or registration of
the Notes or any other document or instrument in relation thereto, or the
receipt of any payments with respect to the Notes, excluding such taxes, charges
or similar levies imposed by any jurisdiction outside of Canada, the
jurisdiction of incorporation of any successor of the Issuer or any jurisdiction
in which a paying agent is located, and has agreed to indemnify the Holders for
any such taxes paid by such Holders.
The foregoing obligations shall survive any termination, defeasance or
discharge of the Indenture.
For a discussion of the exemption from Canadian withholding taxes applicable
to payments under or with respect to the Notes and the Subsidiary Guarantees,
see "Certain United States and Canadian Federal Income Tax Considerations --
Certain Canadian Federal Income Tax Considerations."
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
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REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes shall have
the right to require the Issuer to repurchase all or any part (equal to $1,000
in principal amount or an integral multiple thereof) of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at a
purchase price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of purchase, subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date (the "Change of Control Payment").
Within 30 days following any Change of Control, the Issuer shall mail a
notice to each Holder stating, among other things: (i) that a Change of Control
has occurred and a Change of Control Offer is being made pursuant to the
Indenture and that all Notes (or portions thereof) properly tendered will be
accepted for payment; (ii) the purchase price and the purchase date, which shall
be, subject to any contrary requirements of applicable law, no fewer than 30
days nor more than 60 days from the date the Issuer mails such notice (the
"Change of Control Payment Date"); (iii) that any Note (or portion thereof)
accepted for payment (and duly paid on the Change of Control Payment Date)
pursuant to the Change of Control Offer shall cease to accrue interest on the
Change of Control Payment Date; (iv) that any Notes (or portions thereof) not
properly tendered will continue to accrue interest; (v) a description of the
transaction or transactions constituting the Change of Control; (vi) the
procedures that Holders of Notes must follow in order to tender their Notes (or
portions thereof) for payment and the procedures that Holders of Notes must
follow in order to withdraw an election to tender Notes (or portions thereof)
for payment; and (vii) all other instructions and materials necessary to enable
Holders to tender Notes pursuant to the Change of Control Offer. Prior to the
mailing of the notice to Holders of Notes described above, but in any event
within 30 days following any Change of Control, the Company covenants to (i)
repay or cause to be repaid in full all Indebtedness of the Company, the Issuer
and any Subsidiary Guarantor that would prohibit the repurchase of the Notes
pursuant to such Change of Control Offer or (ii) obtain any requisite consents
under instruments governing any such Indebtedness of the Company, the Issuer and
any Subsidiary Guarantor to permit the repurchase of the Notes. The Company
shall first comply with the covenant in the preceding sentence before it shall
repurchase Notes pursuant to this "Repurchase at the Option of Holders Upon a
Change of Control" covenant.
If the Company is unable to repay or cause to be repaid all Indebtedness
that would prohibit the repurchase of the Notes or is unable to obtain the
consents of the Holders of Indebtedness, if any, outstanding at the time of a
Change of Control whose consent would be so required to permit the repurchase of
the Notes validly tendered, then the Company will have breached such covenant.
This breach will constitute an Event of Default under the Indenture if it
continues for a period of 30 consecutive days after written notice is given to
the Company by the Trustee or the Holders of at least 25% in aggregate principal
amounts of the Notes outstanding. In addition, the failure by the Issuer to
repurchase Notes at the conclusion of the Change of Control Offer will
constitute an Event of Default under the Indenture without any waiting period or
notice requirements. Such Event of Default would, in turn, constitute a default
under the existing Bank Credit Facilities and may constitute a default under the
terms of any other Indebtedness of the Issuer, the Company or any Subsidiary
Guarantor then outstanding. In such circumstances, the subordination provisions
in the Indenture would likely prohibit payments to Holders of Notes. See "--
Subordination."
The Company and the Issuer will comply, to the extent applicable, with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the purchase of Notes in connection with a Change
of Control. To the extent that the provisions of any securities laws or
regulations conflict with the provisions relating to the Change of Control
Offer, the Company and the Issuer will comply with the applicable securities
laws and regulations and will not be deemed to have breached its obligations
described above by virtue thereof.
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The Issuer's obligation to repurchase the Notes upon a Change of Control
will be guaranteed on a senior subordinated basis by the Company pursuant to the
Company Guarantee and, to the extent any Restricted Subsidiary becomes a
Subsidiary Guarantor, by such Subsidiary Guarantor pursuant to its Subsidiary
Guarantee.
If a Change of Control were to occur, there can be no assurance that the
Issuer, the Company and the Subsidiary Guarantors, if any, would have sufficient
financial resources, or would be able to arrange financing, to repay any
Indebtedness that would prohibit the repurchase of the Notes and pay the
purchase price for all Notes tendered by the Holders thereof. In addition, as of
the Issue Date the existing Bank Credit Facilities will, and any future Bank
Credit Facilities or other agreements relating to indebtedness (including Senior
Indebtedness or Pari Passu Indebtedness) to which the Issuer, the Company or a
Subsidiary Guarantor becomes a party may, contain restrictions on the purchase
of Notes. The provisions under the Indenture related to the Issuer's obligation
to make an offer to repurchase the Notes as a result of a Change of Control may
be waived or modified (at any time prior to the occurrence of such Change of
Control) with the written consent of the Holders of a majority in principal
amount of the Notes, PROVIDED that the written consent of all the Holders of
outstanding Notes is required with respect to any such waiver or modification
that would result in the imposition of any Taxes or the payment of any
Additional Amounts.
The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party (including the Company or another Subsidiary
of the Company) makes the Change of Control Offer in the manner, at the times
and otherwise in compliance with the requirements set forth in the Indenture
applicable to a Change of Control Offer made by the Issuer and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
A "Change of Control" shall be deemed to occur if (i) any "person" or
"group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange
Act or any successor provision to either of the foregoing, including any group
acting for the purpose of acquiring, holding or disposing of securities within
the meaning of Rule 13d-5(b)(1) under the Exchange Act), becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a Person will be deemed to have "beneficial ownership" of all shares that any
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time) of more than 50% of the total
voting power of all classes of the Voting Stock of the Company or, unless such
person is a Restricted Subsidiary, the Issuer or currently exercisable warrants
or options to acquire such Voting Stock, (ii) the sale, lease, conveyance or
transfer of all or substantially all the assets of the Company and the
Restricted Subsidiaries taken as a whole (other than to any Wholly Owned
Subsidiary) shall have occurred, (iii) the shareholders of the Company or the
Issuer shall have approved any plan of liquidation or dissolution of the Company
or the Issuer, (iv) the Company or the Issuer consolidates with or merges into
another Person or any Person consolidates with or merges into the Company or the
Issuer in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company or the Issuer is reclassified into or exchanged for
cash, securities or other property, other than any such transaction where the
outstanding Voting Stock of the Company or the Issuer is reclassified into or
exchanged for Voting Stock of the surviving corporation that is Capital Stock
and the holders of the Voting Stock of the Company or the Issuer immediately
prior to such transaction own, directly or indirectly, not less than a majority
of the Voting Stock of the surviving corporation immediately after such
transaction in substantially the same proportion as before the transaction or
(v) during any period of two consecutive years, individuals who at the beginning
of such period constituted the Company's or the Issuer's Board of Directors
(together with any new directors whose election or appointment by such Board or
whose nomination for election by the shareholders of the Company or the Issuer
was approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Company's or the Issuer's Board of Directors then
in office.
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The definition of Change of Control includes a phrase relating to the sale,
lease, conveyance or transfer of "all or substantially all" the Company's and
its Restricted Subsidiaries' assets taken as a whole. The Indenture will be
governed by New York law, and there is no established quantitative definition
under New York law of "substantially all" the assets of a corporation.
Accordingly, if the Company and its Restricted Subsidiaries were to engage in a
transaction in which they disposed of less than all the assets of the Company
and its Restricted Subsidiaries taken as a whole, a question of interpretation
could arise as to whether such disposition was of "substantially all" their
assets and whether the Issuer was required to make a Change of Control Offer.
Except as described above with respect to a Change of Control, the Indenture
does not contain any other provisions that permit the Holders of the Notes to
require that the Issuer repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar restructuring.
BOOK-ENTRY SYSTEM
The Notes will initially be issued in the form of one or more Global
Securities held in book-entry form. The Notes will be deposited with the Trustee
as custodian for the Depository, and the Depository or its nominee will
initially be the sole registered holder of the Notes for all purposes under the
Indenture. Except as set forth below, a Global Security may not be transferred
except as a whole by the Depository to a nominee of the Depository or by a
nominee of the Depository to the Depository.
Upon the issuance of a Global Security, the Depository or its nominee will
credit, on its internal system, the accounts of persons holding through it with
the respective principal amounts of the individual beneficial interests
represented by such Global Security purchased by such persons in the Offering.
Such accounts shall initially be designated by the Initial Purchasers with
respect to Notes placed by the Initial Purchasers for the Issuer. Ownership of
beneficial interests in a Global Security will be limited to persons that have
accounts with the Depository ("participants") or persons that may hold interests
through participants. Any Person acquiring an interest in a Global Security
through an offshore transaction in reliance on Regulation S of the Securities
Act may hold such interest through Cedel or Euroclear. Ownership of beneficial
interests by participants in a Global Security will be shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by the Depository or its nominee for such Global Security. Ownership
of beneficial interests in such Global Security by persons that hold through
participants will be shown on, and the transfer of that ownership interest
within such participant will be effected only through, records maintained by
such participant. The laws of some jurisdictions require that certain purchasers
of securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Security.
Payment of principal of, premium, if any, on and interest on Notes
represented by any such Global Security will be made to the Depository or its
nominee, as the case may be, as the sole registered owner and the sole Holder of
the Notes represented thereby for all purposes under the Indenture. None of the
Issuer, the Company, the Trustee, any agent of the Issuer or the Company and the
Initial Purchasers will have any responsibility or liability for any aspect of
the Depository's reports relating to or payments made on account of beneficial
ownership interests in a Global Security representing any Notes or for
maintaining, supervising or reviewing any of the Depository's records relating
to such beneficial ownership interests.
The Issuer has been advised by the Depository that upon receipt of any
payment of principal of, premium, if any, on or interest on any Global Security,
the Depository will immediately credit, on its book-entry registration and
transfer system, the accounts of participants with payments in amounts
proportionate to their respective beneficial interests in the principal or face
amount of such Global Security, as shown on the records of the Depository. The
Issuer expects that payments by participants to owners of beneficial interests
in a Global Security held through such participants will be governed by standing
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instructions and customary practices as is now the case with securities held for
customer accounts registered in "street name" and will be the sole
responsibility of such participants.
So long as the Depository or its nominee is the registered owner or holder
of such Global Security, the Depository or such nominee, as the case may be,
will be considered the sole owner or holder of the Notes represented by such
Global Security for the purposes of receiving payment on the Notes, receiving
notices and for all other purposes under the Indenture and the Notes. Beneficial
interests in Notes will be evidenced only by, and transfers thereof will be
effected only through, records maintained by the Depository and its
participants. Except as provided above, owners of beneficial interests in a
Global Security will not be entitled to and will not be considered the holders
of such Global Security for any purposes under the Indenture. Accordingly, each
person owning a beneficial interest in a Global Security must rely on the
procedures of the Depository and, if such person is not a participant, on the
procedures of the participant through which such person owns its interest, to
exercise any rights of a holder under the Indenture. The Issuer understands that
under existing industry practices, if the Issuer requests any action of holders
or that an owner of a beneficial interest in a Global Security desires to give
or take any action that a Holder is entitled to give or take under the
Indenture, the Depository would authorize the participants holding the relevant
beneficial interest to give or take such action, and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
The Depository has advised the Issuer that it will take any action permitted
to be taken by a Holder of Notes (including the presentation of Notes for
exchange as described below) only at the direction of one or more participants
to whose account with the Depository interests in a Global Security are credited
and only in respect of such portion of the aggregate principal amount of the
Notes as to which such participant or participants has or have given such
direction.
The Depository has advised the Issuer that the Depository is a
limited-purpose trust company organized under the Banking Law of the State of
New York, a "banking organization" within the meaning of New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the Exchange Act. The Depository was created to hold the
securities of its participants and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (including the
Initial Purchasers), banks, trust companies, clearing corporations and certain
other organizations some of whom (or their representatives) own the Depository.
Access to the Depository's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
CERTIFICATED NOTES
The Notes represented by a Global Security are exchangeable for certificated
Notes only if (i) the Depository notifies the Issuer that it is unwilling or
unable to continue as a depository for such Global Security or if at any time
the Depository ceases to be a clearing agency registered under the Exchange Act,
and a successor depository is not appointed by the Company within 90 days, (ii)
the Issuer executes and delivers to the Trustee a notice that such Global
Security shall be so transferable, registrable and exchangeable, and such
transfer shall be registrable, or (iii) there shall have occurred and be
continuing a Default or Event of Default with respect to the Notes represented
by such Global Security. Any Global Security that is exchangeable for
certificated Notes pursuant to the preceding sentence will be transferred to,
and registered and exchanged for, certificated Notes in authorized denominations
and registered in such names as the Depository or its nominee holding such
Global Security may direct. Subject to the foregoing, a Global Security is not
exchangeable, except for a Global Security of like denomination
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to be registered in the name of the Depository or its nominee. If a Global
Security becomes exchangeable for certificated Notes, (i) certificated Notes
will be issued only in fully registered form in denominations of $1,000 or an
integral multiple thereof, (ii) payment of principal of, and premium, any
repurchase price and interest on, the certificated Notes will be payable, and
the transfer of the certificated Notes will be registrable, at the office or
agency of the Issuer maintained for such purposes and (iii) no service charge
will be made for any issuance of the certificated Notes, although the Issuer may
require payment of a sum sufficient to cover any transfer tax, assessment or
similar governmental charge imposed in connection therewith. In addition,
certificates representing the Old Notes will bear the legend referred to under
"Notice to Investors" (unless the Issuer determines otherwise in accordance with
applicable law) subject, with respect to such Notes, to the provisions of such
legend.
CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS. The Indenture provides that the Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, Incur any Indebtedness unless, after giving pro forma effect to the
Incurrence of such Indebtedness and the receipt and application of the proceeds
thereof, no Default or Event of Default would occur as a consequence of, or be
continuing following, such Incurrence and application and either (a) after
giving pro forma effect to such Incurrence and application, the Consolidated
Interest Coverage Ratio would exceed 2.5 to 1.0 or (b) such Indebtedness is
Permitted Indebtedness.
"PERMITTED INDEBTEDNESS" means any and all of the following: (i)
Indebtedness arising under the Indenture with respect to the Old Notes and the
Exchange Notes and the Company Guarantee and any Subsidiary Guarantees relating
thereto; (ii) Indebtedness (including guarantees) under Bank Credit Facilities,
PROVIDED that the aggregate principal amount of all Indebtedness under Bank
Credit Facilities, together with all Indebtedness Incurred pursuant to clause
(x) of this paragraph in respect of Indebtedness previously Incurred under Bank
Credit Facilities, at any one time outstanding does not exceed the greater of
(a) $150.0 million, which amount shall be permanently reduced by the amount of
Net Available Cash from Asset Sales used to permanently repay Indebtedness under
Bank Credit Facilities and not subsequently reinvested in Additional Assets or
used to permanently reduce other Indebtedness to the extent permitted pursuant
to the provisions of the Indenture described under "-- Limitation on Asset
Sales" and (b) an amount equal to the sum of (1) $35.0 million and (2) 25% of
Adjusted Consolidated Net Tangible Assets determined as of the date of the
Incurrence of such Indebtedness; (iii) Indebtedness to the Company or any Wholly
Owned Subsidiary by any of its Restricted Subsidiaries or Indebtedness of the
Company to any of its Wholly Owned Subsidiaries (but only so long as such
Indebtedness is held by the Company or a Wholly Owned Subsidiary); (iv)
Indebtedness in respect of bid, performance, reimbursement or surety obligations
issued by or for the account of the Company or any Restricted Subsidiary in the
ordinary course of business, including Guarantees and letters of credit
functioning as or supporting such bid, performance, reimbursement or surety
obligations (in each case other than for an obligation for money borrowed); (v)
Indebtedness under Permitted Hedging Agreements; (vi) in-kind obligations
relating to oil or gas balancing positions arising in the ordinary course of
business; (vii) Indebtedness outstanding on the Issue Date not otherwise
permitted in clauses (i) through (vi) above; (viii) Non-recourse Purchase Money
Indebtedness; (ix) Indebtedness not otherwise permitted to be Incurred pursuant
to this paragraph (excluding any Indebtedness Incurred pursuant to clause (a) of
the immediately preceding paragraph), PROVIDED that the aggregate principal
amount of all Indebtedness Incurred pursuant to this clause (ix), together with
all Indebtedness Incurred pursuant to clause (x) of this paragraph in respect of
Indebtedness previously Incurred pursuant to this clause (ix), at any one time
outstanding does not exceed $30.0 million; (x) Indebtedness Incurred in exchange
for, or the proceeds of which are used to refinance, (a) Indebtedness referred
to in clauses (i), (ii), (vii), (viii) and (ix) of this paragraph (including
Indebtedness previously Incurred pursuant to this clause (x)) and (b)
Indebtedness Incurred pursuant to clause (a) of the immediately preceding
paragraph, PROVIDED that, in the case of each of the foregoing clauses (a) and
(b), such Indebtedness is Permitted Refinancing
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Indebtedness and (xi) Indebtedness consisting of obligations in respect of
purchase price adjustments, indemnities or Guarantees of the same or similar
matters in connection with the acquisition or disposition of Property.
LIMITATION ON LIENS. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter
into, create, Incur, assume or suffer to exist any Lien on or with respect to
any Property of the Company or such Restricted Subsidiary, whether owned on the
Issue Date or acquired after the Issue Date, or any interest therein or any
income or profits therefrom, unless the Notes, the Company Guarantee or any
Subsidiary Guarantee of such Restricted Subsidiary, as applicable, are secured
equally and ratably with (or prior to) any and all other obligations secured by
such Lien, except that the Company and its Restricted Subsidiaries may enter
into, create, incur, assume or suffer to exist Liens securing Senior
Indebtedness and Permitted Liens.
LIMITATION ON RESTRICTED PAYMENTS.
(a) The Indenture provides that the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, make any Restricted
Payment if, at the time of and after giving effect to the proposed Restricted
Payment, (i) any Default or Event of Default would have occurred and be
continuing, (ii) the Company could not Incur at least $1.00 of additional
Indebtedness pursuant to clause (a) of the first paragraph under "-- Limitation
on Indebtedness" or (iii) the aggregate amount expended or declared for all
Restricted Payments from the Issue Date would exceed the sum (without
duplication) of the following:
(A) 50% of the aggregate Consolidated Net Income of the Company accrued
on a cumulative basis commencing on the last day of the fiscal quarter
immediately preceding the Issue Date, and ending on the last day of the
fiscal quarter ending on or immediately preceding the date of such proposed
Restricted Payment (or, if such aggregate Consolidated Net Income shall be a
loss, minus 100% of such loss), plus
(B) the aggregate net cash proceeds, or the Fair Market Value of
Property other than cash, received by the Company on or after the Issue Date
from the issuance or sale (other than to a Subsidiary of the Company) of
Capital Stock of the Company or any options, warrants or rights to purchase
Capital Stock of the Company, plus
(C) the aggregate net cash proceeds, or the Fair Market Value of
Property other than cash, received by the Company as capital contributions
to the Company (other than from a Subsidiary of the Company) on or after the
Issue Date, plus
(D) the aggregate net cash proceeds received by the Company from the
issuance or sale (other than to any Subsidiary of the Company) on or after
the Issue Date of convertible Indebtedness that has been converted into or
exchanged for Capital Stock of the Company, together with the aggregate cash
received by the Company at the time of such conversion or exchange or
received by the Company from any such conversion or exchange of convertible
Indebtedness issued or sold (other than to any Subsidiary of the Company)
prior to the Issue Date, plus
(E) to the extent not otherwise included in the Company's Consolidated
Net Income, an amount equal to the net reduction in Investments made by the
Company and its Restricted Subsidiaries subsequent to the Issue Date in any
Person resulting from (1) payments of interest on debt, dividends,
repayments of loans or advances or other transfers or distributions of
Property, in each case to the Company or any Restricted Subsidiary from any
Person other than the Company or a Restricted Subsidiary, and in an amount
not to exceed the book value of such Investments previously made in such
Person that were treated as Restricted Payments, or (2) the designation of
any Unrestricted Subsidiary as a Restricted Subsidiary, and in an amount not
to exceed the lesser of
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(x) the book value of all Investments previously made in such Unrestricted
Subsidiary that were treated as Restricted Payments and (y) the Fair Market
Value of such Unrestricted Subsidiary, plus
(F) $25.0 million.
(b) The limitations set forth in paragraph (a) above will not prevent the
Company or any Restricted Subsidiary from making the following Restricted
Payments so long as, at the time thereof, no Default or Event of Default shall
have occurred and be continuing (except in the case of clause (i) below under
which the payment of a dividend is permitted):
(i) the payment of any dividend on Capital Stock or Redeemable Stock of
the Company or any Restricted Subsidiary within 60 days after the
declaration thereof, if at such declaration date such dividend could have
been paid in compliance with paragraph (a) above;
(ii) the repurchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any of its Subsidiaries held by
any current or former officers, directors or employees of the Company or any
of its Subsidiaries pursuant to the terms of agreements (including
employment agreements) or plans approved by the Company's Board of
Directors, including any such repurchase, redemption, acquisition or
retirement of shares of such Capital Stock that is deemed to occur upon the
exercise of stock options or similar rights if such shares represent all or
a portion of the exercise price or are surrendered in connection with
satisfying United States or Canadian Federal income tax obligations;
PROVIDED, HOWEVER, that the aggregate amount of such repurchases,
redemptions, acquisitions and retirements shall not exceed the sum of (a)
$1.0 million in any twelve-month period and (b) the aggregate net proceeds,
if any, received by the Company during such twelve-month period from any
issuance of such Capital Stock pursuant to such agreements or plans;
(iii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock or Redeemable Stock of the Company or any
Restricted Subsidiary, in exchange for, or out of the aggregate net cash
proceeds of, a substantially concurrent issuance and sale (other than to a
Subsidiary of the Company or an employee stock ownership plan or trust
established by the Company or any of its Subsidiaries, for the benefit of
their employees) of Capital Stock of the Company;
(iv) the making of any principal payment on or the repurchase,
redemption, legal defeasance or other acquisition or retirement for value,
prior to any scheduled principal payment, scheduled sinking fund payment or
maturity, of any Subordinated Indebtedness (other than Redeemable Stock) in
exchange for, or out of the aggregate net cash proceeds of, a substantially
concurrent issuance and sale (other than to a Subsidiary of the Company or
an employee stock ownership plan or trust established by the Company or any
of its Subsidiaries, for the benefit of their employees) of Capital Stock of
the Company;
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(v) the making of any principal payment on or the repurchase,
redemption, legal defeasance or other acquisition or retirement for value of
Subordinated Indebtedness in exchange for, or out of the aggregate net cash
proceeds of a substantially concurrent Incurrence (other than a sale to a
Subsidiary of the Company) of Subordinated Indebtedness so long as such new
Indebtedness is Permitted Refinancing Indebtedness and (A) has an Average
Life that is longer than the Average Life of the Notes and (B) has a Stated
Maturity for its final scheduled principal payment that is more than one
year after the Stated Maturity of the final scheduled principal payment of
the Notes; and
(vi) loans made to officers, directors or employees of the Company or
any Restricted Subsidiary approved by the Board of Directors (or a duly
authorized officer), the net cash proceeds of which are used solely (A) to
purchase common stock of the Company in connection with a restricted stock
or employee stock purchase plan, or to exercise stock options received
pursuant to an employee or director stock option plan or other incentive
plan, in a principal amount not to exceed the exercise price of such stock
options or (B) to refinance loans, together with accrued interest thereon,
made pursuant to item (A) of this clause (vi).
The actions described in clauses (i) and (ii) of this paragraph (b) shall be
included in the calculation of the amount of Restricted Payments. The actions
described in clauses (iii), (iv), (v) and (vi) of this paragraph (b) shall be
excluded in the calculation of the amount of Restricted Payments, PROVIDED that
the net cash proceeds from any issuance or sale of Capital Stock of the Company
pursuant to such clauses (iii), (iv) or (vi) shall be excluded from any
calculations pursuant to clauses (B) or (C) under the immediately preceding
paragraph (a).
LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The Indenture provides that the Company will not (a) permit any
Restricted Subsidiary to issue any Capital Stock or Redeemable Stock other than
to the Company or one of its Wholly Owned Subsidiaries or (b) permit any Person
other than the Company or a Wholly-Owned Subsidiary to own any Capital Stock or
Redeemable Stock of any other Restricted Subsidiary (other than directors'
qualifying shares), except, in each case, for (i) the sale of the Capital Stock
or Redeemable Stock of a Restricted Subsidiary owned by the Company or any other
Restricted Subsidiary effected in accordance with the provisions of the
Indenture described under "-- Limitation on Asset Sales"; (ii) the issuance of
Capital Stock or Redeemable Stock by a Restricted Subsidiary to a Person other
than the Company or a Restricted Subsidiary and (iii) the Capital Stock or
Redeemable Stock of a Restricted Subsidiary owned by a Person at the time such
Restricted Subsidiary became a Restricted Subsidiary or acquired by such Person
in connection with the formation of the Restricted Subsidiary, or transfers
thereof; PROVIDED, that the Issuer shall at all times remain a Restricted
Subsidiary; PROVIDED FURTHER, that any sale or issuance of Capital Stock of a
Restricted Subsidiary shall be deemed to be an Asset Sale to the extent the
percentage of the total outstanding Voting Stock of such Restricted Subsidiary
owned directly and indirectly by the Company is reduced as a result of such sale
or issuance; PROVIDED, FURTHER that if a Person whose Capital Stock was issued
or sold in a transaction described in this paragraph is, as a result of such
transaction, no longer a Restricted Subsidiary, then the Fair Market Value of
Capital Stock of such Person retained by the Company and the other Restricted
Subsidiaries shall be treated as an Investment for purposes of the provisions of
the Indenture described under "-- Limitation on Restricted Payments". In the
event of the consummation of a sale of all the Capital Stock of a Restricted
Subsidiary pursuant to the foregoing clause (i) and the execution and delivery
of a supplemental indenture in form satisfactory to the Trustee, any such
Restricted Subsidiary that is also a Subsidiary Guarantor shall be released from
all its obligations under its Subsidiary Guaranty.
LIMITATION ON ASSET SALES. The Indenture provides that the Company will
not, and will not permit any Restricted Subsidiary to, consummate any Asset Sale
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the Property subject to such Asset Sale and (ii) all of the
consideration paid to the
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Company or such Restricted Subsidiary in connection with such Asset Sale is in
the form of cash, cash equivalents, Liquid Securities, Exchanged Properties or
the assumption by the purchaser of liabilities of the Company (other than
liabilities of the Company that are by their terms subordinated to the Company
Guarantee) or liabilities of any Restricted Subsidiary that made such Asset Sale
(other than liabilities of the Issuer that are by their terms subordinated to
the Notes or liabilities of any Subsidiary Guarantor that are by their terms
subordinated to such Subsidiary Guarantor's Subsidiary Guarantee), in each case
as a result of which the Company and its remaining Restricted Subsidiaries are
no longer liable for such liabilities ("Permitted Consideration"); PROVIDED,
HOWEVER, that the Company and its Restricted Subsidiaries shall be permitted to
receive Property other than Permitted Consideration, so long as the aggregate
Fair Market Value of all such Property other than Permitted Consideration
received from Asset Sales and held by the Company and the Restricted
Subsidiaries at any one time shall not exceed 10.0% of Adjusted Consolidated Net
Tangible Assets.
The Net Available Cash from Asset Sales by the Company or a Restricted
Subsidiary may be applied by the Company or such Restricted Subsidiary, to the
extent the Company or such Restricted Subsidiary elects (or is required by the
terms of any Senior Indebtedness of the Issuer, the Company or a Subsidiary
Guarantor), to (i) prepay, repay or purchase Senior Indebtedness of the Issuer,
the Company or a Subsidiary Guarantor (in each case excluding Indebtedness owed
to the Company or an Affiliate of the Company other than Indebtedness owed by
the Issuer to 611852 Saskatchewan Ltd. pursuant to the Canadian Credit
Facility), (ii) to reinvest in Additional Assets (including by means of an
Investment in Additional Assets by a Restricted Subsidiary with Net Available
Cash received by the Company or another Restricted Subsidiary) or (iii) purchase
Notes or purchase both Notes and one or more series or issues of other Pari
Passu Indebtedness on a pro rata basis (excluding Notes and Pari Passu
Indebtedness owned by the Company or an Affiliate of the Company).
Any Net Available Cash from an Asset Sale not applied in accordance with the
preceding paragraph within 365 days from the date of such Asset Sale shall
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, an offer to purchase Notes having an aggregate principal
amount equal to the aggregate amount of Excess Proceeds (the "Prepayment Offer")
must be made by the Issuer or the Company at a purchase price equal to 100% of
the principal amount of such Notes plus accrued and unpaid interest, if any, to
the Purchase Date (as defined) in accordance with the procedures (including
prorating in the event of oversubscription) set forth in the Indenture, but, if
the terms of any Pari Passu Indebtedness require that a Pari Passu Offer be made
contemporaneously with the Prepayment Offer, then the Excess Proceeds shall be
prorated between the Prepayment Offer and such Pari Passu Offer in accordance
with the aggregate outstanding principal amounts of the Notes and such Pari
Passu Indebtedness, and the aggregate principal amount of Notes for which the
Prepayment Offer is made shall be reduced accordingly. If the aggregate
principal amount of Notes tendered by Holders thereof exceeds the amount of
available Excess Proceeds, then such Excess Proceeds will be allocated pro rata
according to the principal amount of the Notes tendered and the Trustee will
select the Notes to be purchased in accordance with the Indenture. To the extent
that any portion of the amount of Excess Proceeds remains after compliance with
the second sentence of this paragraph and PROVIDED that all Holders of Notes
have been given the opportunity to tender their Notes for purchase as described
in the following paragraph in accordance with the Indenture, the Company and its
Restricted Subsidiaries may use such remaining amount for purposes permitted by
the Indenture and the amount of Excess Proceeds will be reset to zero.
Within 30 days after the 365th day following the date of an Asset Sale, the
Company or the Issuer shall, if it is obligated to make an offer to purchase the
Notes pursuant to the preceding paragraph, send a written Prepayment Offer
notice, by first-class mail, to the Holders of the Notes (the "Prepayment Offer
Notice"), accompanied by such information regarding the Company and its
Subsidiaries as the Company believes will enable such Holders of the Notes to
make an informed decision with respect to the Prepayment Offer. The Prepayment
Offer Notice will state, among other things, (i) that the Company or
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the Issuer is offering to purchase Notes pursuant to the provisions of the
Indenture, (ii) that any Note (or any portion thereof) accepted for payment (and
duly paid on the Purchase Date) pursuant to the Prepayment Offer shall cease to
accrue interest on the Purchase Date, (iii) that any Notes (or portions thereof)
not properly tendered will continue to accrue interest, (iv) the purchase price
and purchase date, which shall be, subject to any contrary requirements of
applicable law, no less than 30 days nor more than 60 days after the date the
Prepayment Offer Notice is mailed (the "Purchase Date"), (v) the aggregate
principal amount of Notes to be purchased, (vi) a description of the procedure
which Holders of Notes must follow in order to tender their Notes and the
procedures that Holders of Notes must follow in order to withdraw an election to
tender their Notes for payment and (vii) all other instructions and materials
necessary to enable Holders to tender Notes pursuant to the Prepayment Offer.
The Company and the Issuer will comply, to the extent applicable, with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
or regulations thereunder to the extent such laws and regulations are applicable
in connection with the purchase of Notes as described above. To the extent that
the provisions of any securities laws or regulations conflict with the
provisions relating to the Prepayment Offer, the Company or the Issuer will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations described above by virtue thereof.
INCURRENCE OF LAYERED INDEBTEDNESS. The Indenture provides that (i) the
Issuer will not Incur any Indebtedness which is subordinated or junior in right
of payment to any Senior Indebtedness of the Issuer unless such Indebtedness
constitutes Indebtedness junior to, or PARI PASSU with, the Notes in right of
payment, (ii) the Company will not Incur any Indebtedness which is subordinated
or junior in right of payment to any Senior Indebtedness of the Company unless
such Indebtedness constitutes Indebtedness which is junior to, or PARI PASSU
with, the Company Guarantee in right of payment and (iii) no Subsidiary
Guarantor will Incur any Indebtedness that is subordinated or junior in right of
payment to any Senior Indebtedness of such Subsidiary Guarantor unless such
Indebtedness constitutes Indebtedness which is junior to, or PARI PASSU with,
such Subsidiary Guarantor's Subsidiary Guarantee in right of payment.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture provides that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, conduct any business or enter into any transaction or
series of transactions (including the sale, transfer, disposition, purchase,
exchange or lease of Property, the making of any Investment, the giving of any
Guarantee or the rendering of any service) with or for the benefit of any
Affiliate of the Company (other than the Company or a Restricted Subsidiary),
unless (i) such transaction or series of transactions is on terms no less
favorable to the Company or such Restricted Subsidiary than those that could be
obtained in a comparable arm's-length transaction with a Person that is not an
Affiliate of the Company or such Restricted Subsidiary, and (ii) with respect to
a transaction or series of transactions involving aggregate payments by or to
the Company or such Restricted Subsidiary having a Fair Market Value equal to or
in excess of (a) $1.0 million but less than $7.5 million, an officer of the
Company or, in the case of any such transaction or series of transactions
involving the Issuer, an officer of the Issuer, certifies that such transaction
or series of transactions complies with clause (i) of this paragraph, as
evidenced by an Officer's Certificate delivered to the Trustee, (b) $7.5 million
but less than $30.0 million, the Board of Directors of the Company or, in the
case of any such transaction or series of transactions involving the Issuer, the
Board of Directors of the Issuer (including a majority of the disinterested
members of such Board of Directors) approves such transaction or series of
transactions and certifies that such transaction or series of transactions
complies with clause (i) of this paragraph, as evidenced by a certified
resolution delivered to the Trustee or (c) $30.0 million, (1) the Company or, in
the case of any such transaction or series of transactions involving the Issuer,
the Issuer receives from an independent, nationally recognized investment
banking firm or appraisal firm, in either case specializing or having a
specialty in the type and subject matter of the transaction (or series of
transactions) at issue, a written opinion that such transaction (or series of
transactions) is fair, from a financial point of view, to the Company or such
Restricted Subsidiary and (2) the Board of Directors of the
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Company or, in the case of any such transaction or series of transactions
involving the Issuer, the Board of Directors of the Issuer (including a majority
of the disinterested members of such Board of Directors) approves such
transaction or series of transactions and certifies that such transaction or
series of transactions complies with clause (i) of this paragraph, as evidenced
by a certified resolution delivered to the Trustee.
The limitations of the preceding paragraph do not apply to (i) the payment
of reasonable and customary regular fees to directors of the Company or any of
its Restricted Subsidiaries who are not employees of the Company or any of its
Restricted Subsidiaries, (ii) indemnities of officers and directors of the
Company or any Subsidiary consistent with such Person's charter, bylaws and
applicable statutory provisions, (iii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans
approved by the Board of Directors of the Company, (iv) loans made (a) to
officers, directors or employees of the Company or any Restricted Subsidiary
approved by the Board of Directors (or by a duly authorized officer) of the
Company, the proceeds of which are used solely to purchase common stock of the
Company in connection with a restricted stock or employee stock purchase plan,
or to exercise stock options received pursuant to an employee or director stock
option plan or other incentive plan, in a principal amount not to exceed the
exercise price of such stock options, or (b) to refinance loans, together with
accrued interest thereon, made pursuant to this clause (iv), (v) advances and
loans to officers, directors and employees of the Company or any Subsidiary,
PROVIDED such loans and advances (excluding loans or advances made pursuant to
the preceding clause (iv)) do not exceed $5.0 million at any one time
outstanding, (vi) any Restricted Payment permitted to be paid pursuant to the
provisions of the Indenture described under "-- Limitations on Restricted
Payments," (vii) any transaction or series of transactions between the Company
and one or more Restricted Subsidiaries or between two or more Restricted
Subsidiaries in the ordinary course of business, PROVIDED that no more than 10%
of the total voting power of the Voting Stock of any such Restricted Subsidiary
is owned by an Affiliate of the Company (other than a Restricted Subsidiary),
(viii) the payment of Indebtedness outstanding under, or the extension,
revision, amendment or modification of, or any guarantee of, the Canadian Credit
Facility, or (ix) any transaction or series of transactions pursuant to any
agreement or obligation of the Company or any of its Restricted Subsidiaries in
effect on the Issue Date.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the legal right of any Restricted Subsidiary to
(i) pay dividends, in cash or otherwise, or make any other distributions on or
in respect of its Capital Stock or Redeemable Stock, or pay any Indebtedness or
other obligation owed, to the Company or any other Restricted Subsidiary, (ii)
make loans or advances to the Company or any other Restricted Subsidiary or
(iii) transfer any of its Property to the Company or any other Restricted
Subsidiary. Such limitation will not apply (a) with respect to clauses (i), (ii)
and (iii), to encumbrances and restrictions (1) in Bank Credit Facilities and
other agreements and instruments, in each case as in effect on the Issue Date,
(2) relating to Indebtedness of a Restricted Subsidiary and existing at the time
it became a Restricted Subsidiary if such encumbrance or restriction was not
created in anticipation of or in connection with the transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or (3) which
result from the renewal, refinancing, extension or amendment of an agreement
that is the subject of clause (a)(1) or (2) above or clause (b)(1) or (2) below,
PROVIDED that such encumbrance or restriction is not materially less favorable
to the Holders of Notes than those under or pursuant to the agreement so
renewed, refinanced, extended or amended, and (b) with respect to clause (iii)
only, to (1) any restriction on the sale, transfer or other disposition of
Property relating to Indebtedness that is permitted to be Incurred and secured
under the provisions of the Indenture described under "-- Limitation on
Indebtedness" and "-- Limitation on Liens," (2) any encumbrance or restriction
applicable to Property at the time it is acquired by the Company or a Restricted
Subsidiary, so long as such encumbrance or restriction relates solely to the
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Property so acquired and was not created in anticipation of or in connection
with such acquisition, (3) customary provisions restricting subletting or
assignment of leases and customary provisions in other agreements that restrict
assignment of such agreements or rights thereunder and (4) customary
restrictions contained in asset sale agreements limiting the transfer of such
assets pending the closing of such sale.
FUTURE SUBSIDIARY GUARANTORS. The Company shall cause each Restricted
Subsidiary having an aggregate of $10.0 million or more of Indebtedness and
Preferred Stock outstanding at any time to promptly execute and deliver to the
Trustee a Subsidiary Guarantee, PROVIDED that (i) Saxon Petroleum Inc. shall not
be required to execute and deliver a Subsidiary Guarantee until such time as it
becomes a Wholly Owned Subsidiary and (ii) in determining the outstanding
Indebtedness and Preferred Stock for purposes of this covenant of (a) Producers
Marketing Limited, Indebtedness described in clause (vii) of the definition of
Indebtedness shall be excluded and (b) Forest I Development Company ("Forest
Development"), Indebtedness pursuant to the Production Payment Agreement dated
February 1, 1992, as amended on April 30, 1995, between Forest Development and
Bank of America, National Association, as successor to Strake Jesuit College
Preparatory, Inc. shall be excluded.
RESTRICTED AND UNRESTRICTED SUBSIDIARIES. Unless defined or designated as
an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company
or any of its Restricted Subsidiaries shall be classified as a Restricted
Subsidiary subject to the provisions of the next paragraph. The Company may
designate a Subsidiary (other than the Issuer) (including a newly formed or
newly acquired Subsidiary) of the Company or any of its Restricted Subsidiaries
as an Unrestricted Subsidiary if (i) such Subsidiary does not at such time own
any Capital Stock or Indebtedness of, or own or hold any Lien on any Property
of, the Company or any other Restricted Subsidiary, (ii) such Subsidiary does
not at such time have any Indebtedness or other obligations which, if in
default, would result (with the passage of time or notice or otherwise) in a
default on any Indebtedness of the Company or any Restricted Subsidiary and
(iii)(a) such designation is effective immediately upon such Subsidiary becoming
a Subsidiary of the Company or of a Restricted Subsidiary, (b) the Subsidiary to
be so designated has total assets of $1,000 or less or (c) if such Subsidiary
has assets greater than $1,000, then such redesignation as an Unrestricted
Subsidiary is deemed to constitute a Restricted Payment in an amount equal to
the Fair Market Value of the Company's direct and indirect ownership interest in
such Subsidiary and such Restricted Payment would be permitted to be made at the
time of such designation under the provisions of the Indenture described under
"-- Limitation on Restricted Payments." Notwithstanding the foregoing, Saxon
Petroleum Inc. (i) may be designated as an Unrestricted Subsidiary until such
time as it becomes a Wholly Owned Subsidiary and (ii) shall be designated as a
Restricted Subsidiary at such time as it becomes a Wholly Owned Subsidiary.
Except as provided in the second sentence of this paragraph, no Restricted
Subsidiary may be redesignated as an Unrestricted Subsidiary. The designation of
an Unrestricted Subsidiary or removal of such designation shall be made by the
Board of Directors of the Company or a committee thereof pursuant to a certified
resolution delivered to the Trustee and shall be effective as of the date
specified in the applicable certified resolution, which shall not be prior to
the date such certified resolution is delivered to the Trustee.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, take any action or enter into any transaction or series of transactions that
would result in a Person becoming a Restricted Subsidiary (whether through an
acquisition or otherwise) unless, after giving effect to such action,
transaction or series of transactions, on a pro forma basis, (i) the Company
could Incur at least $1.00 of additional Indebtedness pursuant to clause (a) of
the first paragraph under "-- Limitation on Indebtedness" and (ii) no Default or
Event of Default would occur or be continuing.
THE ISSUER. The Company will ensure that the Issuer remains a Restricted
Subsidiary so long as any of the Notes remain outstanding.
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MERGER, CONSOLIDATION AND SALE OF SUBSTANTIALLY ALL ASSETS
The Company shall not consolidate with or merge with or into any Person, or
convey, transfer or lease, in one transaction or a series of transactions, all
or substantially all the Property of the Company and its Restricted
Subsidiaries, taken as a whole, unless: (i) the resulting, surviving or
transferee person (the "Successor Company") shall be a Person organized or
existing under the laws of (a) the United States of America, any State thereof
or the District of Columbia or (b) Canada or any province thereof; (ii) a
supplemental indenture is executed and delivered to the Trustee, in form
satisfactory to the Trustee, by the Successor Company expressly assuming, if the
Successor Company is neither the Company nor the Issuer, or confirming, if the
Successor Company is the Company, the obligations of the Company to pay the
principal of and interest on the Notes pursuant to the Company Guarantee and to
perform all the covenants of the Company under the Indenture; (iii) each
Subsidiary Guarantor shall execute and deliver to the Trustee a supplemental
indenture, in form satisfactory to the Trustee, confirming the obligation of
such Subsidiary Guarantor to pay the principal of and interest on the Notes
pursuant to such Subsidiary Guarantor's Subsidiary Guarantee; (iv) in the case
of a conveyance, transfer or lease of all or substantially all the Property of
the Company and its Restricted Subsidiairies, taken as a whole, such Property
shall have been so conveyed, transferred or leased as an entirety or virtually
as an entirety to one Person; (v) immediately after giving effect to such
transaction (and treating, for purposes of this clause (v) and clauses (vi) and
(vii) below, any Indebtedness which becomes or is anticipated to become an
obligation of the Successor Company or any Restricted Subsidiary as a result of
such transaction as having been Incurred by such Successor Company or such
Restricted Subsidiary at the time of such transaction), no Default or Event of
Default shall have occurred and be continuing; (vi) other than with respect to
the consolidation of the Company with or merger of the Company with or into, or
the conveyance, transfer or lease of all or substantially all the Property of
the Company and its Restricted Subsidiaries, taken as a whole, to, the Issuer or
a Wholly Owned Subsidiary, immediately after giving effect to such transaction,
the Successor Company would be able to Incur an additional $1.00 of Indebtedness
pursuant to clause (a) of the first paragraph under "-- Limitation on
Indebtedness;" (vii) other than with respect to the consolidation of the Company
with or merger of the Company with or into, or the conveyance, transfer or lease
of all or substantially all the Property of the Company and its Restricted
Subsidiaries, taken as a whole, to, the Issuer or a Wholly Owned Subsidiary,
immediately after giving effect to such transaction, the Successor Company shall
have Consolidated Net Worth in an amount that is not less than the Consolidated
Net Worth of the Company immediately prior to such transaction; (viii) the
Company shall have delivered to the Trustee an Officer's Certificate, stating
that such consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture; and (ix) the Trustee shall have received an
opinion of counsel to the effect that such consolidation, merger, conveyance,
transfer or lease will not result in the Company (or the Successor Company, if
the Company is not the Successor Company) being required to make any deduction
for or on account of Taxes (as defined under "Additional Amounts") from payments
made under or in respect of the Company Guarantee.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of
the Company under the Indenture, and, except in the case of the lease of all or
substantially all the Property of the Company and its Restricted Subsidiaries,
taken as a whole, the Company shall be released from its obligations under the
Company Guarantee and the Indenture.
The Issuer shall not consolidate with or merge with or into any Person,
except that the Issuer may consolidate with or merge into any Person so long as:
(i) the Successor Company shall be the Issuer, the Company or a Wholly Owned
Subsidiary; (ii) if the Company or a Wholly Owned Subsidiary is the Successor
Company, the Successor Company shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Issuer to pay the principal of and interest
on the Notes and to perform all the covenants of the Issuer under the
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Indenture (in which case the Successor Company shall be considered as the issuer
of the Notes); (iii) unless the Company shall be the Successor Company, the
Company shall have executed and delivered to the Trustee, in form satisfactory
to the Trustee, a supplemental indenture confirming the obligations of the
Company to pay the principal of and interest on the Notes pursuant to the
Company Guarantee and to perform all the covenants of the Company under the
Indenture; (iv) each Subsidiary Guarantor shall have executed and delivered to
the Trustee, in form satisfactory to the Trustee, a supplemental indenture
confirming such Subsidiary Guarantor's obligations to pay the principal of and
interest on the Notes pursuant to its Subsidiary Guarantee; (v) the Successor
Company (if not the Issuer) shall be a Person organized or existing under the
laws of (a) the United States of America, any State thereof or the District of
Columbia or (b) Canada or any province thereof; (vi) immediately after giving
effect to such transaction (and treating, for purposes of this clause (vi) and
clauses (vii) and (viii) below, any Indebtedness which becomes or is anticipated
to become an obligation of the Issuer or any Restricted Subsidiary as a result
of such transaction as having been Incurred by the Issuer or such Restricted
Subsidiary at the time of such transaction) no Default or Event of Default shall
have occurred or be continuing; (vii) other than with respect to the
consolidation of the Issuer with or the merger of the Issuer with or into the
Company or a Wholly Owned Subsidiary, immediately after giving effect to such
transaction the Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to clause (a) of the first paragraph under "Limitation on
Indebtedness;" (viii) other than with respect to the consolidation of the Issuer
with or the merger of the Issuer with or into the Company or a Wholly Owned
Subsidiary, immediately after giving effect to such transaction, the Company
shall have Consolidated Net Worth in an amount that is not less than the
Consolidated Net Worth of the Company immediately prior to such transaction;
(ix) the Issuer shall have delivered to the Trustee an Officer's Certificate
stating that such consolidation, merger or transfer complies with the Indenture;
and (x) the Trustee shall have received an opinion of counsel to the effect that
such consolidation, merger, conveyance, transfer or lease will not result in the
Issuer being required to make any deduction for or on account of Taxes from
payments made under or in respect of the Notes. The Issuer shall not convey,
transfer or lease, in one transaction or a series of transactions, any of its
Property other than in a transaction or series of transactions which comply with
the provisions of the Indenture described under "-- Limitation on Asset Sales,"
PROVIDED that a conveyance, transfer or lease of all or substantially all the
Property of the Issuer shall be subject to the provisions of the first paragraph
of this covenant to the extent that such transaction constitutes the conveyance,
transfer or lease of all or substantially all the Property of the Company and
its Restricted Subsidiaries, taken as a whole.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will file with the Commission and furnish to the Holders of Notes all quarterly
and annual financial information required to be contained in a filing with the
Commission on Forms 10-Q and 10-K, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual consolidated financial statements only, a report thereon by the
Company's independent auditors.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"ADDITIONAL ASSETS" means (i) any Property (other than cash, Permitted
Short-Term Investments or securities) used in the Oil and Gas Business or any
business ancillary thereto, (ii) Investments in any other Person engaged in the
Oil and Gas Business or any business ancillary thereto (including the
acquisition from third parties of Capital Stock of such Person) as a result of
which such other Person
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becomes a Restricted Subsidiary in compliance with the provisions of the
Indenture described under "-- Certain Covenants -- Restricted and Unrestricted
Subsidiaries," (iii) the acquisition from third parties of Capital Stock of a
Restricted Subsidiary or (iv) Permitted Business Investments.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" means (without duplication), as
of the date of determination, the remainder of:
(i) the sum of (a) discounted future net revenues from proved oil and gas
reserves of the Company and its Restricted Subsidiaries calculated in accordance
with Commission guidelines before any provincial, territorial, state, federal or
foreign income taxes, as estimated by the Company and confirmed by a nationally
recognized firm of independent petroleum engineers in a reserve report prepared
as of the end of the Company's most recently completed fiscal year for which
audited financial statements are available, as increased by, as of the date of
determination, the estimated discounted future net revenues from (1) estimated
proved oil and gas reserves acquired since such year-end, which reserves were
not reflected in such year-end reserve report, and (2) estimated oil and gas
reserves attributable to upward revisions of estimates of proved oil and gas
reserves since such year-end due to exploration, development or exploitation
activities, in each case calculated in accordance with Commission guidelines
(utilizing the prices utilized in such year-end reserve report), and decreased
by, as of the date of determination, the estimated discounted future net
revenues from (3) estimated proved oil and gas reserves produced or disposed of
since such year-end and (4) estimated oil and gas reserves attributable to
downward revisions of estimates of proved oil and gas reserves since such
year-end due to changes in geological conditions or other factors which would,
in accordance with standard industry practice, cause such revisions, in each
case calculated in accordance with Commission guidelines (utilizing the prices
utilized in such year-end reserve report); PROVIDED that, in the case of each of
the determinations made pursuant to clauses (1) through (4), such increases and
decreases shall be as estimated by the Company's petroleum engineers, unless
there is a Material Change as a result of such acquisitions, dispositions or
revisions, in which event the discounted future net revenues utilized for
purposes of this clause (i)(a) shall be confirmed in writing by a nationally
recognized firm of independent petroleum engineers, (b) the capitalized costs
that are attributable to oil and gas properties of the Company and its
Restricted Subsidiaries to which no proved oil and gas reserves are
attributable, based on the Company's books and records as of a date no earlier
than the date of the Company's latest available annual or quarterly financial
statements, (c) the Net Working Capital on a date no earlier than the date of
the Company's latest annual or quarterly financial statements and (d) the
greater of (1) the net book value on a date no earlier than the date of the
Company's latest annual or quarterly financial statements and (2) the appraised
value, as estimated by independent appraisers, of other tangible assets
(including, without duplication, Investments in unconsolidated Restricted
Subsidiaries) of the Company and its Restricted Subsidiaries, as of the date no
earlier than the date of the Company's latest audited financial statements,
minus
(ii) the sum of (a) minority interests, (b) any net gas balancing
liabilities of the Company and its Restricted Subsidiaries reflected in the
Company's latest audited financial statements, (c) to the extent included in
(i)(a) above, the discounted future net revenues, calculated in accordance with
Commission guidelines (utilizing the prices utilized in the Company's year-end
reserve report), attributable to reserves which are required to be delivered to
third parties to fully satisfy the obligations of the Company and its Restricted
Subsidiaries with respect to Volumetric Production Payments (determined, if
applicable, using the schedules specified with respect thereto) and (d) the
discounted future net revenues, calculated in accordance with Commission
guidelines, attributable to reserves subject to Dollar-Denominated Production
Payments which, based on the estimates of production and price assumptions
included in determining the discounted future net revenues specified in (i)(a)
above, would be necessary to fully satisfy the payment obligations of the
Company and its Restricted Subsidiaries with respect to Dollar-Denominated
Production Payments (determined, if applicable, using the schedules specified
with respect thereto). If the Company changes its method of accounting from the
full cost method to the successful efforts method or
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a similar method of accounting, "Adjusted Consolidated Net Tangible Assets" will
continue to be calculated as if the Company were still using the full cost
method of accounting.
"AFFILIATE" of any specified Person means any other Person (i) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person or (ii)
which beneficially owns or holds directly or indirectly 10% or more of any class
of the Voting Stock of such specified Person or of any Subsidiary of such
specified Person. For the purposes of this definition, "control," when used with
respect to any specified Person, means the power to direct the management and
policies of such Person directly or indirectly, whether through the ownership of
Voting Stock, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"ASSET SALE" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (collectively, "dispositions," and including
dispositions pursuant to any consolidation or merger) by such Person in any
single transaction or series of transactions of (i) shares of Capital Stock or
other ownership interests of another Person (including Capital Stock of
Restricted Subsidiaries and Unrestricted Subsidiaries) or (ii) any other
Property of such Person; PROVIDED, HOWEVER, that the term "Asset Sale" shall not
include: (a) the disposition of Permitted Short-Term Investments, inventory,
accounts receivable, surplus or obsolete equipment or other Property (excluding
the disposition of oil and gas in place and other interests in real property
unless made in connection with a Permitted Business Investment) in the ordinary
course of business; (b) the abandonment, assignment, lease, sublease or farm-out
of oil and gas properties, or the forfeiture or other disposition of such
properties pursuant to standard form operating agreements, in each case in the
ordinary course of business in a manner that is customary in the Oil and Gas
Business; (c) the disposition of Property received in settlement of debts owing
to such Person as a result of foreclosure, perfection or enforcement of any Lien
or debt, which debts were owing to such Person in the ordinary course of its
business; (d) any disposition that constitutes a Restricted Payment made in
compliance with the provisions of the Indenture described under "-- Certain
Covenants -- Limitation on Restricted Payments;" (e) when used with respect to
the Company, any disposition of all or substantially all of the Property of such
Person permitted pursuant to the provisions of the Indenture described under "--
Merger, Consolidation and Sale of Substantially All Assets;" (f) the disposition
of any Property by such Person to the Company or a Wholly Owned Subsidiary; (g)
the disposition of any asset with a Fair Market Value of less than $2.0 million;
or (h) any Production Payments and Reserve Sales, PROVIDED that any such
Production Payments and Reserve Sales, other than incentive compensation
programs on terms that are reasonably customary in the Oil and Gas Business for
geologists, geophysicists and other providers of technical services to the
Company or a Restricted Subsidiary, shall have been created, Incurred, issued,
assumed or Guaranteed in connection with the financing of, and within 60 days
after the acquisition of, the Property that is subject thereto.
"AVERAGE LIFE" means, with respect to any Indebtedness, at any date of
determination, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years (and any portion thereof) from the date of determination
to the date or dates of each successive scheduled principal payment (including
any sinking fund or mandatory redemption payment requirements) of such
Indebtedness multiplied by (b) the amount of each such principal payment by (ii)
the sum of all such principal payments.
"BANK CREDIT FACILITIES" means, with respect to any Person, one or more debt
facilities or commercial paper facilities with banks or other institutional
lenders (including pursuant to the Second Amended and Restated Credit Agreement
dated as of January 31, 1997, as amended on April 1, 1997, August 19, 1997 and
September 26, 1997, among the Company, the Lenders named therein and The Chase
Manhattan Bank, as agent, and the Second Amended and Restated Credit Agreement
dated as of April 1, 1997, as amended on August 19, 1997 and September 26, 1997,
among 611852 Saskatchewan Ltd., the Lenders named therein and The Chase
Manhattan Bank of Canada, as agent) providing for revolving credit loans, term
loans, receivables financing (including through the sale of receivables to
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such lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or trade letters of credit, together with any
extensions, revisions, amendments, modifications, refinancings or replacements
thereof by a lender or syndicate of lenders.
"CAPITAL LEASE OBLIGATION" means any obligation which is required to be
classified and accounted for as a capital lease obligation in accordance with
GAAP, and the amount of Indebtedness represented by such obligation shall be the
capitalized amount of such obligation determined in accordance with GAAP, and
the Stated Maturity thereof shall be the date of the last payment date of rent
or any other amount due in respect of such obligation.
"CAPITAL STOCK" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than debt securities convertible into an
equity interest), warrants or options to subscribe for or to acquire an equity
interest in such Person; PROVIDED, HOWEVER, that "Capital Stock" shall not
include Redeemable Stock.
"COMPANY GUARANTEE" means an unconditional, unsecured senior subordinated
Guarantee of the Notes given by the Company pursuant to the terms of the
Indenture.
"CONSOLIDATED INTEREST COVERAGE RATIO" means, as of the date of the
transaction giving rise to the need to calculate the Consolidated Interest
Coverage Ratio (the "Transaction Date"), the ratio of (i) the aggregate amount
of EBITDA of the Company and its consolidated Restricted Subsidiaries for the
four full fiscal quarters immediately prior to the Transaction Date for which
financial statements are available to (ii) the aggregate Consolidated Interest
Expense of the Company and its Restricted Subsidiaries that is anticipated to
accrue during a period consisting of the fiscal quarter in which the Transaction
Date occurs and the three fiscal quarters immediately subsequent thereto (based
upon the pro forma amount and maturity of, and interest payments in respect of,
Indebtedness of the Company and its Restricted Subsidiaries expected by the
Company to be outstanding on the Transaction Date), assuming for the purposes of
this measurement the continuation of market interest rates prevailing on the
Transaction Date and base interest rates in respect of floating interest rate
obligations equal to the base interest rates on such obligations in effect as of
the Transaction Date; PROVIDED, that if the Company or any of its Restricted
Subsidiaries is a party to any Interest Rate Protection Agreement which would
have the effect of changing the interest rate on any Indebtedness of the Company
or any of its Restricted Subsidiaries for such four quarter period (or a portion
thereof), the resulting rate shall be used for such four quarter period or
portion thereof; PROVIDED FURTHER that any Consolidated Interest Expense with
respect to Indebtedness Incurred or retired by the Company or any of its
Restricted Subsidiaries during the fiscal quarter in which the Transaction Date
occurs shall be calculated as if such Indebtedness was so Incurred or retired on
the first day of the fiscal quarter in which the Transaction Date occurs. In
addition, if since the beginning of the four full fiscal quarter period
preceding the Transaction Date, (a) the Company or any of its Restricted
Subsidiaries shall have engaged in any Asset Sale, EBITDA for such period shall
be reduced by an amount equal to the EBITDA (if positive), or increased by an
amount equal to the EBITDA (if negative), directly attributable to the assets
which are the subject of such Asset Sale for such period calculated on a pro
forma basis as if such Asset Sale and any related retirement of Indebtedness had
occurred on the first day of such period or (b) the Company or any of its
Restricted Subsidiaries shall have acquired any material assets, EBITDA shall be
calculated on a pro forma basis as if such asset acquisitions had occurred on
the first day of such four fiscal quarter period.
"CONSOLIDATED INTEREST EXPENSE" means with respect to any Person for any
period, without duplication, (i) the sum of (a) the aggregate amount of cash and
noncash interest expense (including capitalized interest) of such Person and its
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP in respect of Indebtedness (including (1) any amortization
of debt discount, (2) net costs associated with Interest Rate Protection
Agreements (including any amortization of discounts), (3) the interest portion
of any deferred payment obligation, (4) all accrued interest and (5) all
commissions, discounts, commitment fees, origination fees and other fees and
charges owed with
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respect to any Bank Credit Facilities and other Indebtedness) paid, accrued or
scheduled to be paid or accrued during such period; (b) Redeemable Stock
dividends of such Person (and of its Restricted Subsidiaries if paid to a Person
other than such Person or its Restricted Subsidiaries) and Preferred Stock
dividends of such Person's Restricted Subsidiaries if paid to a Person other
than such Person or its other Restricted Subsidiaries; (c) the portion of any
rental obligation of such Person or its Restricted Subsidiaries in respect of
any Capital Lease Obligation allocable to interest expense in accordance with
GAAP; (d) the portion of any rental obligation of such Person or its Restricted
Subsidiaries in respect of any Sale and Leaseback Transaction that is
Indebtedness allocable to interest expense (determined as if such obligation
were treated as a Capital Lease Obligation); and (e) to the extent any
Indebtedness of any other Person (other than Restricted Subsidiaries) is
Guaranteed by such Person or any of its Restricted Subsidiaries, the aggregate
amount of interest paid, accrued or scheduled to be paid or accrued by such
other Person during such period attributable to any such Indebtedness; less (ii)
to the extent included in (i) above, amortization or write-off of deferred
financing costs of such Person and its Restricted Subsidiaries during such
period; in the case of both (i) and (ii) above, after elimination of
intercompany accounts among such Person and its Restricted Subsidiaries and as
determined in accordance with GAAP.
"CONSOLIDATED NET INCOME" of any Person means, for any period, the aggregate
net income (or net loss, as the case may be) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED that there shall be excluded therefrom, without duplication,
(i) items classified as extraordinary gains or losses net of taxes (less all
fees and expenses relating thereto), including, with respect to the Company, any
loss realized in connection with the purchase of the 11 1/4% Notes; (ii) any
gain or loss net of taxes (less all fees and expenses relating thereto),
realized on the sale or other disposition of Property, including the Capital
Stock of any other Person (but in no event shall this clause (ii) apply to any
gains or losses on the sale in the ordinary course of business of oil, gas or
other hydrocarbons produced or manufactured); (iii) the net income of any
Restricted Subsidiary of such specified person to the extent the transfer to
that Person of that income is restricted by contract or otherwise, except for
any cash dividends or cash distributions actually paid by such Restricted
Subsidiary to such Person during such period; (iv) the net income (or loss) of
any other Person in which such Person or any of its Restricted Subsidiaries has
an interest (which interest does not cause the net income of such other Person
to be consolidated with the net income of such Person in accordance with GAAP or
is an interest in a consolidated Unrestricted Subsidiary), except to the extent
of the amount of cash dividends or other cash distributions actually paid to
such Person or its consolidated Restricted Subsidiaries by such other Person
during such period; (v) for the purposes of "-- Certain Covenants -- Limitation
on Restricted Payments" only, the net income of any Person acquired by such
Person or any of its Restricted Subsidiaries in a pooling-of-interests
transaction for any period prior to the date of such acquisition; (vi) any gain
or loss, net of taxes, realized on the termination of any employee pension
benefit plan; (vii) any adjustments of a deferred tax liability or asset
pursuant to Statement of Financial Accounting Standards No. 109 which result
from changes in enacted tax laws or rates; (viii) the cumulative effect of a
change in accounting principles; (ix) any write-downs of non-current assets,
PROVIDED that any ceiling limitation write-downs under Commission guidelines
shall be treated as capitalized costs, as if such write-downs had not occurred;
and (x) any non-cash compensation expense realized for grants of performance
shares, stock options or stock awards to officers, directors and employees of
such Person or any of its Restricted Subsidiaries.
"CONSOLIDATED NET WORTH" of any Person means the stockholders' equity of
such Person and its Restricted Subsidiaries, as determined on a consolidated
basis in accordance with GAAP, less (to the extent included in stockholders'
equity) amounts attributable to Redeemable Stock of such Person or its
Restricted Subsidiaries.
"DEFAULT" means any event, act or condition the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
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"DESIGNATED SENIOR INDEBTEDNESS" means (i) Bank Credit Facilities of the
Company or the Issuer and (ii) any other Senior Indebtedness of the Company or
Senior Indebtedness of the Issuer which has, at the time of determination, an
aggregate principal amount outstanding of at least $10.0 million that is
specifically designated in the instrument evidencing such Indebtedness and is
designated in a notice delivered by the Company or the Issuer, as applicable, to
the holders or a Representative of the holders of such Senior Indebtedness of
the Company or the Issuer and the Trustee as "Designated Senior Indebtedness."
"DOLLAR-DENOMINATED PRODUCTION PAYMENTS" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"EBITDA" means, with respect to any Person for any period, an amount equal
to the Consolidated Net Income of such Person for such period, plus (i) the sum
of, to the extent reflected in the consolidated income statement of such Person
and its Restricted Subsidiaries for such period from which Consolidated Net
Income is determined and deducted in the determination of such Consolidated Net
Income, without duplication, (a) income tax expense (but excluding income tax
expense relating to sales or other dispositions of Property, including the
Capital Stock of any other Person, the gains from which are excluded in the
determination of such Consolidated Net Income), (b) Consolidated Interest
Expense, (c) depreciation and depletion expense, (d) amortization expense, (e)
exploration expense (if applicable), and (f) any other noncash charges including
unrealized foreign exchange losses (excluding, however, any such other noncash
charge which requires an accrual of or reserve for cash charges for any future
period); less (ii) the sum of, to the extent reflected in the consolidated
income statement of such Person and its Restricted Subsidiaries for such period
from which Consolidated Net Income is determined and added in the determination
of such Consolidated Net Income, without duplication (a) income tax recovery
(excluding, however, income tax recovery relating to sales or other dispositions
of Property, including the Capital Stock of any other Person, the losses from
which are excluded in the determination of such Consolidated Net Income) and (b)
unrealized foreign exchange gains.
"EQUITY OFFERING" means a bona fide underwritten sale to the public of
common stock of the Company pursuant to a registration statement (other than a
Form S-8 or any other form relating to securities issuable under any employee
benefit plan of the Company) that is declared effective by the Commission
following the Issue Date.
"EXCHANGED PROPERTIES" means properties used or useful in the Oil and Gas
Business received by the Company or a Restricted Subsidiary in trade or as a
portion of the total consideration for other such properties or assets.
"EXCHANGE RATE CONTRACT" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or any combination thereof, entered into by such
Person in the ordinary course of its business for the purpose of limiting or
managing exchange rate risks to which such Person is subject.
"FAIR MARKET VALUE" means, with respect to any assets to be transferred
pursuant to any Asset Sale or Sale and Leaseback Transaction or any noncash
consideration or property transferred or received by any Person, the fair market
value of such consideration or other property as determined by (i) any officer
of the Company if such fair market value is less than $7.5 million and (ii) the
Board of Directors of the Company as evidenced by a certified resolution
delivered to the Trustee if such fair market value is equal to or in excess of
$7.5 million.
"GAAP" means United States generally accepted accounting principles as in
effect on the date of the Indenture, unless stated otherwise.
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"GOVERNMENT OBLIGATIONS" means securities that are (i) direct obligations of
the United States of America or Canada for the timely payment of which the full
faith and credit of the United States of America or Canada is pledged or (ii)
obligations of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or Canada, the timely payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or Canada which, in either case, are not callable or
redeemable at the option of the issuer thereof, and shall also include a
depository receipt issued by a bank (as defined in Section 3(a)(2) of the
Securities Act), as custodian, with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt; PROVIDED, HOWEVER, that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
principal of or interest on the Government Obligation evidenced by such
depository receipt.
"GUARANTEE" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing or having the economic effect of guaranteeing any
Indebtedness of any other Person (the "primary obligor") in any manner, whether
directly or indirectly, and including any Lien on the assets of such Person
securing obligations to pay Indebtedness of the primary obligor and any
obligation of such Person (i) to purchase or pay (or advance or supply funds for
the purchase or payment of) such Indebtedness or to purchase (or to advance or
supply funds for the purchase or payment of) any security for the payment of
such Indebtedness, (ii) to purchase Property, securities or services for the
purpose of assuring the holder of such Indebtedness of the payment of such
Indebtedness or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Indebtedness (and "Guaranteed",
"Guaranteeing" and "Guarantor" shall have meanings correlative to the
foregoing); PROVIDED, HOWEVER, that a Guarantee by any Person shall not include
(a) endorsements by such Person for collection or deposit, in either case, in
the ordinary course of business or (b) a contractual commitment by one Person to
invest in another Person for so long as such Investment is reasonably expected
to constitute a Permitted Investment under clause (ii) of the definition of
Permitted Investments.
"HOLDER" means the Person in whose name a Note is registered on the
Securities Register.
"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or become liable in respect of such Indebtedness or other obligation
or the recording, as required pursuant to GAAP or otherwise, of any such
Indebtedness or obligation on the balance sheet of such Person (and
"Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); PROVIDED, HOWEVER, that a change in GAAP that
results in an obligation of such Person that exists at such time, and is not
theretofore classified as Indebtedness, becoming Indebtedness shall not be
deemed an Incurrence of such Indebtedness. For purposes of this definition,
Indebtedness of the Company or a Restricted Subsidiary held by a Wholly Owned
Subsidiary shall be deemed to be Incurred by the Company or such Restricted
Subsidiary in the event such Wholly Owned Subsidiary ceases to be a Wholly Owned
Subsidiary or in the event such Indebtedness is transferred to a Person other
than the Company or a Wholly Owned Subsidiary. For purposes of this definition,
any non-interest bearing or other discount Indebtedness shall be deemed to have
been Incurred (in an amount equal to its aggregate principal amount at its
Stated Maturity) only on the date of original issue thereof.
"INDEBTEDNESS" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for borrowed
money, (ii) any obligation of such Person evidenced by bonds, debentures, notes,
Guarantees or other similar instruments, including any such obligations Incurred
in connection with the acquisition of Property, assets or businesses, (iii) any
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the
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account of such Person, (iv) any obligation of such Person issued or assumed as
the deferred purchase price of Property or services (other than Trade Accounts
Payable), (v) any Capital Lease Obligation of such Person, (vi) the maximum
fixed redemption or repurchase price of Redeemable Stock of such Person at the
time of determination, (vii) any payment obligation of such Person under
Exchange Rate Contracts, Interest Rate Protection Agreements, Oil and Gas
Hedging Contracts or under any similar agreements or instruments, (viii) any
obligation to pay rent or other payment amounts of such Person with respect to
any Sale and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
paragraph of another Person and all dividends of another Person the payment of
which, in either case, such Person has Guaranteed or is responsible or liable,
directly or indirectly, as obligor, Guarantor or otherwise; PROVIDED, HOWEVER,
that Indebtedness shall not include Production Payments and Reserve Sales. For
purposes of this definition, the maximum fixed repurchase price of any
Redeemable Stock that does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Stock as if such Redeemable
Stock were repurchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture; PROVIDED, HOWEVER, that if such Redeemable
Stock is not then permitted to be repurchased, the repurchase price shall be the
book value of such Redeemable Stock. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability at such date in respect
of any contingent obligations described above.
"INTEREST RATE PROTECTION AGREEMENT" means, with respect to any Person, any
interest rate swap agreement, forward rate agreement, interest rate cap or
collar agreement or other financial agreement or arrangement entered into by
such Person in the ordinary course of its business for the purpose of limiting
or managing interest rate risks to which such Person is subject.
"INVESTMENT" means, with respect to any Person (i) any amount paid by such
Person, directly or indirectly, to any other Person for Capital Stock or other
Property of, or as a capital contribution to, any other Person or (ii) any
direct or indirect loan or advance to any other Person (other than accounts
receivable of such Person arising in the ordinary course of business); PROVIDED,
HOWEVER, that Investments shall not include (a) in the case of clause (i) as
used in the definition of "Restricted Payments" only, any such amount paid
through the issuance of Capital Stock of the Company and (b) in the case of
clause (i) or (ii), extensions of trade credit on commercially reasonable terms
in accordance with normal trade practices and any increase in the equity
ownership in any Person resulting from retained earnings of such Person.
"ISSUE DATE" means the date on which the Old Notes first were issued under
the Indenture.
"LIEN" means, with respect to any Property, any mortgage or deed of trust,
pledge, hypothecation, assignment, deposit arrangement, security interest, lien
(statutory or other), charge, easement, encumbrance, preference, priority or
other security or similar agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such Property (including any conditional
sale or other title retention agreement having substantially the same economic
effect as any of the foregoing). For purposes of the provisions of the Indenture
described under "-- Certain Covenants -- Limitation on Liens," a Capital Lease
Obligation shall be deemed to be secured by a Lien on the property being leased.
"LIQUID SECURITIES" means securities (i) of an issuer that is not an
Affiliate of the Company, (ii) that are publicly traded on the New York Stock
Exchange, the American Stock Exchange, the Toronto Stock Exchange or the Nasdaq
National Market and (iii) as to which the Company or the Restricted Subsidiary
holding such securities is not subject to any restrictions on sale or transfer
(including any volume restrictions under Rule 144 under the Securities Act or
any other restrictions imposed by the Securities Act) or as to which a
registration statement under the Securities Act covering the resale thereof is
in effect for as long as the securities are held; PROVIDED that securities
meeting the requirements of clauses (i),
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(ii) and (iii) above shall be treated as Liquid Securities from the date of
receipt thereof until and only until the earlier of (x) the date on which such
securities are sold or exchanged for cash or Permitted Short-Term Investments
and (y) 180 days following the date of receipt of such securities. If such
securities are not sold or exchanged for cash or Permitted Short-Term
Investments within 180 days of receipt thereof, for purposes of determining
whether the transaction pursuant to which the Company or a Restricted Subsidiary
received the securities was in compliance with the provisions of the Indenture
described under "--Certain Covenants--Limitation on Asset Sales," such
securities shall be deemed not to have been Liquid Securities at any time.
Notwithstanding the foregoing, securities meeting the requirements of clauses
(i) and (ii) above received by the Company or a Wholly Owned Subsidiary in
connection with the disposition, in whole or in part, of the capital stock of
Saxon Petroleum Inc. shall be treated as Liquid Securities from the date of
receipt thereof until the earlier of (1) the date on which such securities are
sold or exchanged for cash or Permitted Short-Term Investments and (2) 24 months
following the date of receipt of such securities.
"MATERIAL CHANGE" means an increase or decrease (except to the extent
resulting from changes in prices) of more than 30% during a fiscal quarter in
the estimated discounted future net revenues from proved oil and gas reserves of
the Company and its Restricted Subsidiaries, calculated in accordance with
clause (i)(a) of the definition of Adjusted Consolidated Net Tangible Assets;
PROVIDED, HOWEVER, that the following will be excluded from the calculation of
Material Change: (i) any acquisitions during the quarter of oil and gas reserves
with respect to which the Company's estimate of the discounted future net
revenues from proved oil and gas reserves has been confirmed by independent
petroleum engineers; and (ii) any dispositions of Properties during such quarter
that were disposed of in compliance with the provisions of the Indenture
described under "-- Certain Covenants -- Limitation on Asset Sales."
"NET WORKING CAPITAL" means (i) all current assets of the Company and its
Restricted Subsidiaries, less (ii) all current liabilities of the Company and
its Restricted Subsidiaries, except current liabilities included in
Indebtedness, in each case as set forth in consolidated financial statements of
the Company prepared in accordance with GAAP.
"NON-RECOURSE PURCHASE MONEY INDEBTEDNESS" means Indebtedness (other than
Capital Lease Obligations) of the Company or any Restricted Subsidiary Incurred
in connection with the acquisition by the Company or such Restricted Subsidiary
in the ordinary course of business of fixed assets used in the Oil and Gas
Business (including office buildings and other real property used by the Company
or such Restricted Subsidiary in conducting its operations) with respect to
which (i) the holders of such Indebtedness agree that they will look solely to
the fixed assets so acquired which secure such Indebtedness, and neither the
Company nor any Restricted Subsidiary (a) is directly or indirectly liable for
such Indebtedness or (b) provides credit support, including any undertaking,
Guarantee, agreement or instrument that would constitute Indebtedness (other
than the grant of a Lien on such acquired fixed assets), and (ii) no default or
event of default with respect to such Indebtedness would cause, or permit (after
notice or passage of time or otherwise), any holder of any other Indebtedness of
the Company or a Restricted Subsidiary to declare a default or event of default
on such other Indebtedness or cause the payment, repurchase, redemption,
defeasance or other acquisition or retirement for value thereof to be
accelerated or payable prior to any scheduled principal payment, scheduled
sinking fund payment or maturity.
"OFFICERS' CERTIFICATE" means a certificate signed by (i) the President or
the Chief Executive Officer and (ii) the Chief Financial Officer, the Chief
Accounting Officer or the Treasurer, of the Issuer and delivered to the Trustee,
which shall comply with the Indenture.
"OIL AND GAS BUSINESS" means the business of exploiting, exploring for,
developing, acquiring, operating, producing, processing, gathering, marketing,
storing, selling, hedging, treating, swapping, refining and transporting
hydrocarbons and other related energy businesses.
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"OIL AND GAS HEDGING CONTRACT" means, with respect to any Person, any
agreement or arrangement, or any combination thereof, relating to oil and gas or
other hydrocarbon prices, transportation or basis costs or differentials or
other similar financial factors, that is customary in the Oil and Gas Business
and is entered into by such Person in the ordinary course of its business for
the purpose of limiting or managing risks associated with fluctuations in such
prices, costs, differentials or similar factors.
"OIL AND GAS LIENS" means (i) Liens on any specific property or any interest
therein, construction thereon or improvement thereto to secure all or any part
of the costs incurred for surveying, exploration, drilling, extraction,
development, operation, production, construction, alteration, repair or
improvement of, in, under or on such property and the plugging and abandonment
of wells located thereon (it being understood that, in the case of oil and gas
producing properties, or any interest therein, costs incurred for "development"
shall include costs incurred for all facilities relating to such properties or
to projects, ventures or other arrangements of which such properties form a part
or which relate to such properties or interests); (ii) Liens on an oil or gas
producing property to secure obligations Incurred or guarantees of obligations
Incurred in connection with or necessarily incidental to commitments for the
purchase or sale of, or the transportation or distribution of, the products
derived from such property; (iii) Liens arising under partnership agreements,
oil and gas leases, overriding royalty agreements, net profits agreements,
production payment agreements, royalty trust agreements, incentive compensation
programs on terms that are reasonably customary in the Oil and Gas Business for
geologists, geophysicists and other providers of technical services to the
Company or a Restricted Subsidiary, master limited partnership agreements,
farmout agreements, farmin agreements, division orders, contracts for the sale,
purchase, exchange, transportation, gathering or processing of oil, gas or other
hydrocarbons, unitizations and pooling designations, declarations, orders and
agreements, development agreements, operating agreements, production sales
contracts, area of mutual interest agreements, gas balancing or deferred
production agreements, injection, repressuring and recycling agreements, salt
water or other disposal agreements, seismic or geophysical permits or
agreements, and other agreements which are customary in the Oil and Gas
Business; PROVIDED, HOWEVER, in all instances that such Liens are limited to the
assets that are the subject of the relevant agreement, program, order or
contract; (iv) Liens arising in connection with Production Payments and Reserve
Sales; and (v) Liens on pipelines or pipeline facilities that arise by operation
of law.
"PARI PASSU INDEBTEDNESS" means any Indebtedness of the Issuer, the Company
or a Subsidiary Guarantor that is PARI PASSU in right of payment to the Notes,
the Company Guarantee or a Subsidiary Guarantee, as applicable.
"PARI PASSU OFFER" means an offer by the Issuer, the Company or a Subsidiary
Guarantor to purchase all or a portion of Pari Passu Indebtedness to the extent
required by the indenture or other agreement or instrument pursuant to which
such Pari Passu Indebtedness was issued.
"PERMITTED BUSINESS INVESTMENTS" means Investments and expenditures made in
the ordinary course of, and of a nature that is or shall have become customary
in, the Oil and Gas Business as a means of actively engaging therein through
agreements, transactions, interests or arrangements which permit one to share
risks or costs, comply with regulatory requirements regarding local ownership or
satisfy other objectives customarily achieved through the conduct of Oil and Gas
Business jointly with third parties, including (i) ownership interests in oil
and gas properties or gathering, transportation, processing, storage or related
systems and (ii) Investments and expenditures in the form of or pursuant to
operating agreements, processing agreements, farmin agreements, farmout
agreements, development agreements, area of mutual interest agreements,
unitization agreements, pooling arrangements, joint bidding agreements, service
contracts, joint venture agreements, partnership agreements (whether general or
limited), and other similar agreements (including for limited liability
companies) with third parties, excluding however, Investments in corporations
other than Restricted Subsidiaries.
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"PERMITTED HEDGING AGREEMENTS" means (i) Exchange Rate Contracts and Oil and
Gas Hedging Contracts and (ii) Interest Rate Protection Agreements but only to
the extent that the stated aggregate notional amount thereunder does not exceed
100% of the aggregate principal amount of the Indebtedness of the Company or a
Restricted Subsidiary covered by such Interest Rate Protection Agreements at the
time such agreements were entered into.
"PERMITTED INVESTMENTS" means any and all of the following: (i) Permitted
Short-Term Investments; (ii) Investments in property, plant and equipment used
in the ordinary course of business and Permitted Business Investments; (iii)
Investments by any Restricted Subsidiary in the Company; (iv) Investments by the
Company or any Restricted Subsidiary in any Restricted Subsidiary; (v)
Investments by the Company or any Restricted Subsidiary in (a) any Person that
will, upon the making of such Investment, become a Restricted Subsidiary or (b)
any Person if as a result of such Investment such Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its
Property to, the Company or a Restricted Subsidiary; (vi) Investments in the
form of securities received from Asset Sales, PROVIDED that such Asset Sales are
made in compliance with the provisions of the Indenture described under "--
Certain Covenants -- Limitation on Asset Sales;" (vii) Investments in negotiable
instruments held for collection; lease, utility and other similar deposits; and
stock, obligations or other securities received in settlement of debts
(including under any bankruptcy or other similar proceeding) owing to the
Company or any of its Restricted Subsidiaries as a result of foreclosure,
perfection or enforcement of any Liens or Indebtedness, in each of the foregoing
cases in the ordinary course of business of the Company or such Restricted
Subsidiary; (viii) relocation allowances for, and advances and loans to,
officers, directors and employees of the Company or any of its Restricted
Subsidiaries; PROVIDED such items do not exceed in the aggregate $5.0 million at
any one time outstanding; (ix) Investments intended to promote the Company's
strategic objectives in the Oil and Gas Business in an aggregate amount not to
exceed 7.5% of Adjusted Consolidated Net Tangible Assets (determined as of the
date of the making of any such Investment) at any one time outstanding (which
Investments shall be deemed to be no longer outstanding only upon the return of
capital thereof); (x) Investments made for the purpose of acquiring gas
marketing contracts in an aggregate amount not to exceed $10.0 million at any
one time outstanding; (xi) Investments made pursuant to Permitted Hedging
Agreements of the Company and the Restricted Subsidiaries; and (xii) Investments
pursuant to any agreement or obligation of the Company or any of its Restricted
Subsidiaries as in effect on the Issue Date (other than Investments described in
clauses (i) through (x) above).
"PERMITTED LIENS" means any and all of the following: (i) Liens existing as
of the Issue Date; (ii) Liens securing the Notes, the Company Guarantee, any
Subsidiary Guarantees and other obligations arising under the Indenture; (iii)
any Lien existing on any Property of a Person at the time such Person is merged
or consolidated with or into the Issuer, the Company or a Restricted Subsidiary
or becomes a Restricted Subsidiary (and not incurred in anticipation of or in
connection with such transaction), PROVIDED that such Liens are not extended to
other Property of the Issuer, the Company or the Restricted Subsidiaries; (iv)
any Lien existing on any Property at the time of the acquisition thereof (and
not incurred in anticipation of or in connection with such transaction),
PROVIDED that such Liens are not extended to other Property of the Issuer, the
Company or the Restricted Subsidiaries; (v) any Lien incurred in the ordinary
course of business incidental to the conduct of the business of the Company or
the Restricted Subsidiaries or the ownership of their Property (including (a)
easements, rights of way and similar encumbrances, (b) rights or title of
lessors under leases (other than Capital Lease Obligations), (c) rights of
collecting banks having rights of setoff, revocation, refund or chargeback with
respect to money or instruments of the Company or the Restricted Subsidiaries on
deposit with or in the possession of such banks, (d) Liens imposed by law,
including Liens under workers' compensation or similar legislation and
mechanics', carriers', warehousemen's, materialmen's, suppliers' and vendors'
Liens, (e) Liens incurred to secure performance of obligations with respect to
statutory or regulatory requirements, performance or return-of-money bonds,
surety bonds or other obligations of a like nature and incurred in a manner
consistent with industry practice and (f) Oil and Gas Liens, in each case which
are not incurred in connection with the borrowing of money, the obtaining of
advances or credit or the payment of the
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deferred purchase price of Property (other than Trade Accounts Payable); (vi)
Liens for taxes, assessments and governmental charges not yet due or the
validity of which are being contested in good faith by appropriate proceedings,
promptly instituted and diligently conducted, and for which adequate reserves
have been established to the extent required by GAAP as in effect at such time;
(vii) Liens incurred to secure appeal bonds and judgment and attachment Liens,
in each case in connection with litigation or legal proceedings that are being
contested in good faith by appropriate proceedings so long as reserves have been
established to the extent required by GAAP as in effect at such time and so long
as such Liens do not encumber assets by an aggregate amount (together with the
amount of any unstayed judgments against the Company or any Restricted
Subsidiary but excluding any such Liens to the extent securing insured or
indemnified judgments or orders) in excess of $15.0 million; (viii) Liens
securing Permitted Hedging Agreements of the Company and its Restricted
Subsidiaries; (ix) Liens securing purchase money Indebtedness or Capital Lease
Obligations, PROVIDED that such Liens attach only to the Property acquired with
the proceeds of such purchase money Indebtedness or the Property which is the
subject of such Capital Lease Obligations; (x) Liens securing Non-recourse
Purchase Money Indebtedness granted in connection with the acquisition by the
Company or any Restricted Subsidiary in the ordinary course of business of fixed
assets used in the Oil and Gas Business (including office buildings and other
real property used by the Company or such Restricted Subsidiary in conducting
its operations), PROVIDED that (a) such Liens attach only to the fixed assets
acquired with the proceeds of such Non-recourse Purchase Money Indebtedness and
(b) such Non-recourse Purchase Money Indebtedness is not in excess of the
purchase price of such fixed assets; (xi) Liens resulting from the deposit of
funds or evidences of Indebtedness in trust for the purpose of decreasing or
legally defeasing Indebtedness of the Company or any Restricted Subsidiary so
long as such deposit of funds is permitted by the provisions of the Indenture
described under "-- Limitation on Restricted Payments;" (xii) Liens resulting
from a pledge of Capital Stock of a Person that is not a Restricted Subsidiary
to secure obligations of such Person and any refinancings thereof; (xiii) Liens
to secure any permitted extension, renewal, refinancing, refunding or exchange
(or successive extensions, renewals, refinancings, refundings or exchanges), in
whole or in part, of or for any Indebtedness secured by Liens referred to in
clauses (i), (ii), (iii), (iv), (ix) and (x) above; PROVIDED, HOWEVER, that (a)
such new Lien shall be limited to all or part of the same Property (including
future improvements thereon and accessions thereto) subject to the original Lien
and (b) the Indebtedness secured by such Lien at such time is not increased to
any amount greater than the sum of (1) the outstanding principal amount or, if
greater, the committed amount of the Indebtedness secured by such original Lien
immediately prior to such extension, renewal, refinancing, refunding or exchange
and (2) an amount necessary to pay any fees and expenses, including premiums,
related to such refinancing, refunding, extension, renewal or replacement; (xiv)
Liens in favor of the Company, the Issuer, or a Restricted Subsidiary; and (xv)
Liens not otherwise permitted by clauses (i) through (xiv) above incurred in the
ordinary course of business of the Company and its Restricted Subsidiaries and
encumbering Property having an aggregate Fair Market Value not in excess of $5.0
million at any one time. Notwithstanding anything in this paragraph to the
contrary, the term "Permitted Liens" shall not include Liens resulting from the
creation, incurrence, issuance, assumption or Guarantee of any Production
Payments and Reserve Sales other than (a) any such Liens existing as of the
Issue Date, (b) Production Payments and Reserve Sales in connection with the
acquisition of any Property after the Issue Date, PROVIDED that any such Lien
created in connection therewith is created, incurred, issued, assumed or
Guaranteed in connection with the financing of, and within 60 days after the
acquisition of, such Property and (c) Production Payments and Reserve Sales,
other than those described in clauses (a) and (b) of this sentence, to the
extent such Production Payments and Reserve Sales constitute Asset Sales made
pursuant to and in compliance with the provisions of the Indenture described
under "-- Limitation on Asset Sales" and (d) incentive compensation programs for
geologists, geophysicists and other providers of technical services to the
Company and any Restricted Subsidiary; PROVIDED, HOWEVER, that, in the case of
the immediately foregoing clauses (a), (b), (c) and (d), any Lien created in
connection with any such Production Payments and Reserve Sales shall be limited
to the Property that is the subject of such Production Payments and Reserve
Sales.
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"PERMITTED REFINANCING INDEBTEDNESS" means Indebtedness ("new Indebtedness")
Incurred in exchange for, or proceeds of which are used to refinance, other
Indebtedness ("old Indebtedness"); PROVIDED, HOWEVER, that (i) such new
Indebtedness is in an aggregate principal amount not in excess of the sum of (a)
the aggregate principal amount then outstanding of the old Indebtedness (or, if
such old Indebtedness provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration thereof, such
lesser amount as of the date of determination), and (b) an amount necessary to
pay any fees and expenses, including premiums, related to such exchange or
refinancing, (ii) such new Indebtedness has a Stated Maturity no earlier than
the Stated Maturity of the old Indebtedness, (iii) such new Indebtedness has an
Average Life at the time such new Indebtedness is Incurred that is equal to or
greater than the Average Life of the old Indebtedness at such time, (iv) such
new Indebtedness is subordinated in right of payment to the Notes (or, if
applicable, the Company Guarantee or the relevant Subsidiary Guarantee) to at
least the same extent, if any, as the old Indebtedness and (v) if such old
Indebtedness is Non-recourse Purchase Money Indebtedness or Indebtedness that
refinanced Non-recourse Purchase Money Indebtedness, such new Indebtedness
satisfies clauses (i) and (ii) of the definition of "Non-recourse Purchase Money
Indebtedness."
"PERMITTED SHORT-TERM INVESTMENTS" means (i) Investments in Government
Obligations maturing within one year of the date of acquisition thereof, (ii)
Investments in demand accounts, time deposit accounts, certificates of deposit,
bankers' acceptances and money market deposits maturing within one year of the
date of acquisition thereof issued by a bank or trust company which is organized
under the laws of the United States of America or any State thereof or the
District of Columbia or Canada or any province thereof that is a member of the
Federal Reserve System or comparable Canadian system and has capital, surplus
and undivided profits aggregating in excess of $500.0 million and whose
long-term Indebtedness is rated "A" (or such similar equivalent rating), or
higher, according to Moody's or Dominion Bond Rating Service Limited or Canadian
Bond Rating Service, Inc., (iii) Investments in deposits available for
withdrawal on demand with any commercial bank that is organized under the laws
of any country in which the Company or any Restricted Subsidiary maintains an
office or is engaged in the Oil and Gas Business, PROVIDED that (a) all such
deposits have been made in such accounts in the ordinary course of business and
(b) such deposits do not at any one time exceed $20.0 million in the aggregate,
(iv) repurchase and reverse repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i)
entered into with a bank meeting the qualifications described in clause (ii),
(v) Investments in commercial paper or notes, maturing not more than one year
after the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United States
of America or any State thereof or the District of Columbia, or Canada or any
Province thereof, with a short-term rating at the time as of which any
Investment therein is made of "P-1" (or higher) according to Moody's or "A-1"
(or higher) according to S&P or "R-1" (or higher) by Dominion Bond Rating
Service Limited or Canadian Bond Rating Service, Inc. (in the case of a Canadian
issuer) or a long-term rating at the time as of which any Investment therein is
made of "A3" (or higher) according to Moody's or "A-" (or higher) according to
S&P or such similar equivalent rating (or higher) by Dominion Bond Rating
Service Limited or Canadian Bond Rating Service, Inc. (in the case of a Canadian
issuer), (vi) Investments in any money market mutual fund having assets in
excess of $250.0 million all of which consist of other obligations of the types
described in clauses (i), (ii), (iv) and (v) hereof and (vii) Investments in
asset-backed securities maturing within one year of the date of acquisition
thereof with a long-term rating at the time as of which any Investment therein
is made of "A3" (or higher) according to Moody's or "A-1" (or higher) according
to S&P or such similar equivalent rating (or higher) by Dominion Bond Rating
Service Limited or Canadian Bond Rating Service, Inc. (in the case of a Canadian
issuer).
"PERSON" means any individual, corporation, partnership, joint venture,
limited liability company, unlimited liability company, trust, estate,
unincorporated organization or government or any agency or political subdivision
thereof.
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"PREFERRED STOCK" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person; PROVIDED, HOWEVER, that "Preferred
Stock" shall not include Redeemable Stock.
"PRINCIPAL" of any Indebtedness (including the Notes) means the principal
amount of such Indebtedness plus the premium, if any, on such Indebtedness.
"PRODUCTION PAYMENTS AND RESERVE SALES" means the grant or transfer by the
Company or a Restricted Subsidiary to any Person of a royalty, overriding
royalty, net profits interest, production payment (whether volumetric or dollar
denominated), partnership or other interest in oil and gas properties, reserves
or the right to receive all or a portion of the production or the proceeds from
the sale of production attributable to such properties where the holder of such
interest has recourse solely to such production or proceeds of production,
subject to the obligation of the grantor or transferor to operate and maintain,
or cause the subject interests to be operated and maintained, in a reasonably
prudent manner or other customary standard or subject to the obligation of the
grantor or transferor to indemnify for environmental, title or other matters
customary in the Oil and Gas Business, including any such grants or transfers
pursuant to incentive compensation programs on terms that are reasonably
customary in the Oil and Gas Business for geologists, geophysicists and other
providers of technical services to the Company or a Restricted Subsidiary.
"PROPERTY" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, including Capital Stock and other securities issued by any other
Person (but excluding Capital Stock or other securities issued by such first
mentioned Person).
"REDEEMABLE STOCK" of any Person means any equity security of such Person
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable), or otherwise (including on the happening of an
event), is or could become required to be redeemed for cash or other Property or
is or could become redeemable for cash or other Property at the option of the
holder thereof, in whole or in part, on or prior to the first anniversary of the
Stated Maturity of the Notes; or is or could become exchangeable at the option
of the holder thereof for Indebtedness at any time in whole or in part, on or
prior to the first anniversary of the Stated Maturity of the Notes; PROVIDED,
HOWEVER, that Redeemable Stock shall not include any security by virtue of the
fact that it may be exchanged or converted at the option of the holder for
Capital Stock of the Company having no preference as to dividends or liquidation
over any other Capital Stock of the Company.
"REPRESENTATIVE" means the trustee, agent or representative expressly
authorized to act in such capacity, if any, for an issue of Senior Indebtedness
of the Issuer or the Company.
"RESTRICTED PAYMENT" means (i) a dividend or other distribution declared or
paid on the Capital Stock or Redeemable Stock of the Company or to the Company's
shareholders (other than dividends, distributions or payments made solely in
Capital Stock of the Company or in options, warrants or other rights to purchase
or acquire Capital Stock), or declared and paid to any Person other than the
Company or any of its Restricted Subsidiaries (and, if such Restricted
Subsidiary is not a Wholly Owned Subsidiary, to the other shareholders of such
Restricted Subsidiary on a pro rata basis) on the Capital Stock or Redeemable
Stock of any Restricted Subsidiary, (ii) a payment made by the Company or any of
its Restricted Subsidiaries (other than to the Company or any Restricted
Subsidiary) to purchase, redeem, acquire or retire any Capital Stock or
Redeemable Stock, or any options, warrants or other rights to acquire Capital
Stock or Redeemable Stock, of the Company or of a Restricted Subsidiary, (iii) a
payment made by the Company or any of its Restricted Subsidiaries to redeem,
repurchase, legally defease or otherwise acquire or retire for value (including
pursuant to mandatory repurchase covenants), prior to any scheduled maturity,
scheduled sinking fund or scheduled mandatory redemption, any Indebtedness of
the Company or a Restricted Subsidiary which is subordinate (whether pursuant to
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its terms or by operation of law) in right of payment to the Notes, the Company
Guarantee or the relevant Subsidiary Guarantee, as the case may be, PROVIDED
that this clause (iii) shall not include any such payment with respect to (a)
any such subordinated Indebtedness to the extent of Excess Proceeds remaining
after compliance with the provisions of the Indenture described under "--
Certain Covenants -- Limitation on Asset Sales" and to the extent required by
the indenture or other agreement or instrument pursuant to which such
subordinated Indebtedness was issued or (b) the purchase, repurchase or other
acquisition of any such subordinated Indebtedness purchased in anticipation of
satisfying a scheduled maturity, scheduled sinking fund or scheduled mandatory
redemption, in each case due within one year of the date of acquisition, or (iv)
an Investment (other than a Permitted Investment) by the Company or a Restricted
Subsidiary in any Person.
"RESTRICTED SUBSIDIARY" means (i) Canadian Forest Oil Ltd. and (ii) any
other Subsidiary of the Company that has not been designated an Unrestricted
Subsidiary pursuant to the provision of the Indenture described under "--
Certain Covenants -- Restricted and Unrestricted Subsidiaries."
"S&P" means Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc., and its successors.
"SALE AND LEASEBACK TRANSACTION" means, with respect to any Person, any
direct or indirect arrangement (excluding, however, any such arrangement between
such Person and a Wholly Owned Subsidiary of such Person or between one or more
Wholly Owned Subsidiaries of such Person) pursuant to which Property is sold or
transferred by such Person or a Restricted Subsidiary of such Person and is
thereafter leased back from the purchaser or transferee thereof by such Person
or one of its Restricted Subsidiaries.
"SENIOR INDEBTEDNESS OF THE COMPANY" means the obligations of the Company
with respect to Indebtedness of the Company, whether outstanding on the date of
the Indenture or thereafter created, Incurred or assumed, and any renewal,
refunding, refinancing, replacement or extension thereof, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Company Guarantee;
provided, however, that Senior Indebtedness of the Company shall not include (i)
Indebtedness of the Company to a Subsidiary of the Company (but only so long as
such Indebtedness is held by such Subsidiary), (ii) amounts owed for goods,
materials or services purchased in the ordinary course of business, (iii)
Indebtedness Incurred in violation of the Indenture, (iv) amounts payable or any
other Indebtedness to employees of the Company or any Subsidiary of the Company,
(v) any liability for federal, state, local or other taxes owed or owing by the
Company, (vi) any Indebtedness of the Company that, when Incurred and without
regard to any election under Section 1111(b) of the United States Bankruptcy
Code, was without recourse to the Company, (vii) Pari Passu or Subordinated
Indebtedness of the Company, (viii) Indebtedness of the Company that is
represented by Redeemable Stock, (ix) Indebtedness evidenced by the Company
Guarantee and (x) in-kind obligations relating to net oil and gas balancing
positions. "SENIOR INDEBTEDNESS OF ANY SUBSIDIARY GUARANTOR" has a correlative
meaning; provided that clause (i) above shall be deemed to refer to Indebtedness
of any Subsidiary Guarantor to the Company or any Subsidiary of the Company
(other than as described in the proviso to clause (i) of the definition of
"Senior Indebtedness of the Issuer").
"SENIOR INDEBTEDNESS OF THE ISSUER" means the obligations of the Issuer with
respect to Indebtedness of the Issuer, whether outstanding on the date of the
Indenture or thereafter created, Incurred or assumed, and any renewal,
refunding, refinancing, replacement or extension thereof, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes; PROVIDED,
HOWEVER, that Senior Indebtedness of the Issuer shall not include (i)
Indebtedness of the Issuer to the Company or any Subsidiary of the Company or
the Issuer; provided, that Indebtedness of the Issuer to 611852 Saskatchewan
Ltd. in an amount equal to the amount of Indebtedness outstanding at any time
under the Canadian Credit Facility shall constitute Senior Indebtedness of the
Issuer to the extent that such outstanding Indebtedness under the Canadian
Credit Facility is not
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guaranteed by the Issuer, (ii) amounts owed for goods, materials or services
purchased in the ordinary course of business, (iii) Indebtedness Incurred in
violation of the Indenture, (iv) amounts payable or any other Indebtedness to
employees of the Issuer or any Subsidiary of the Issuer, (v) any liability for
United States federal, state, local, or Canadian federal or provincial, or other
taxes owed or owing by the Issuer, (vi) any Indebtedness of the Issuer that,
when Incurred and without regard to any election under Section 1111(b) of the
United States Bankruptcy Code or corresponding provisions of the Bankruptcy and
Insolvency Act (Canada) and the Companies' Creditors Arrangements Act (Canada),
was without recourse to the Issuer, (vii) Pari Passu or Subordinated
Indebtedness of the Issuer, (viii) Indebtedness of the Issuer that is
represented by Redeemable Stock, (ix) Indebtedness evidenced by the Notes and
(x) in-kind obligations relating to net oil and gas balancing positions.
"SIGNIFICANT SUBSIDIARY," means, at any date of determination, (a) the
Issuer and (b) any other Restricted Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X
promulgated by the Commission.
"STATED MATURITY," when used with respect to any security or any installment
of principal thereof or interest thereon, means the date specified in such
security as the fixed date on which the principal of such security or such
installment of principal or interest is due and payable, including pursuant to
any mandatory redemption provision (but excluding any provision providing for
the repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Issuer, the Company or
a Subsidiary Guarantor that is subordinated or junior in right of payment to the
Notes, the Company Guarantee or the relevant Subsidiary Guarantee, as
applicable, pursuant to a written agreement to that effect.
"SUBSIDIARY" of a Person means (i) another Person which is a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned or
controlled by (a) the first Person, (b) the first Person and one or more of its
Subsidiaries or (c) one or more of the first Person's Subsidiaries or (ii)
another Person which is not a corporation (x) at least 50% of the ownership
interest of which and (y) the power to elect or direct the election of a
majority of the directors or other governing body of which are controlled by
Persons referred to in clause (a), (b) or (c) above.
"SUBSIDIARY GUARANTOR" means, unless released from its Subsidiary Guarantee
as permitted by the Indenture, any Restricted Subsidiary that becomes a
Guarantor of the Notes in compliance with the provisions of the Indenture and
executes a supplemental indenture agreeing to be bound by the terms of the
Indenture, until a successor replaces such Restricted Subsidiary pursuant to the
applicable provisions of the Indenture and, thereafter, means the successor.
"SUBSIDIARY GUARANTEE" means an unconditional, unsecured senior subordinated
Guarantee of the Notes given by any Restricted Subsidiary pursuant to the terms
of the Indenture.
"TRADE ACCOUNTS PAYABLE" means accounts payable or other obligations of the
Company or any Restricted Subsidiary to trade creditors created or assumed by
the Company or such Restricted Subsidiary in the ordinary course of business in
connection with the obtaining of goods or services.
"UNRESTRICTED SUBSIDIARY" means (i) each Subsidiary of the Company that the
Company has designated pursuant to the provision of the Indenture described
under "-- Certain Covenants -- Restricted and Unrestricted Subsidiaries" as an
Unrestricted Subsidiary and (ii) any Subsidiary of an Unrestricted Subsidiary.
"VOLUMETRIC PRODUCTION PAYMENTS" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"VOTING STOCK" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
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"WHOLLY OWNED SUBSIDIARY" means, at any time, a Restricted Subsidiary of the
Company all the Voting Stock of which (other than directors' qualifying shares)
is at such time owned, directly or indirectly, by the Company and its other
Wholly Owned Subsidiaries.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Issuer, the Company and the Subsidiary
Guarantors will be discharged from all their obligations with respect to the
Notes (except for certain obligations to exchange or register the transfer of
Notes, to replace stolen, lost or mutilated Notes, to maintain paying agencies
and to hold moneys for payment in trust and its obligations described under
"Additional Amounts") upon the deposit in trust for the benefit of the Holders
of the Notes of money or U.S. Government Obligations, or a combination thereof,
which, through the payment of principal, premium, if any, and interest in
respect thereof in accordance with their terms, will provide money in an amount
sufficient to pay the principal of and any premium and interest on the Notes at
Stated Maturity thereof or on earlier redemption in accordance with the terms of
the Indenture and the Notes. Such defeasance or discharge may occur only if,
among other things, the Issuer or the Company has delivered to the Trustee an
Opinion of United States or Canadian Counsel, as appropriate, to the effect that
(i) the Company or the Issuer has received from, or there has been published by,
the United States Internal Revenue Service a ruling or since the date of the
Indenture there has been a change in the applicable federal income tax law, in
either case to the effect that Holders of the Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such deposit,
defeasance and discharge and will be subject to federal income tax on the same
amount, in the same manner and at the same times as would have been the case if
such deposit, defeasance and discharge were not to occur; (ii) Holders of the
Notes will not recognize income, gain or loss for Canadian federal, provincial
or territorial income or other tax purposes and will be subject to Canadian
federal, provincial or territorial income or other tax on the same amounts, in
the same manner and at the same times as would have been the case had such
deposit, defeasance and discharge not occurred; and (iii) the resulting trust
will not be an "Investment Company" within the meaning of the Investment Company
Act of 1940 unless such trust is qualified thereunder or exempt from regulation
thereunder.
The Indenture provides that if the Issuer takes the actions described below,
it and the Company may omit to comply with certain covenants, including those
described under "-- Repurchase at the Option of Holders Upon a Change of
Control," "-- Certain Covenants" and in clauses (vi) and (vii) under the first
paragraph and clauses (vii) and (viii) under the third paragraph of "-- Merger,
Consolidation and Sale of Substantially All Assets," and the occurrence of the
Events of Default described below in clauses (iii) and (iv) (with respect to
such covenants) and clauses (v), (vi), (vii) (with respect to Significant
Subsidiaries) and (viii)), under "-- Events of Default and Notice" will be
deemed not to be or result in an Event of Default. In order to exercise such
option, the Issuer or the Company will be required to deposit, in trust for the
benefit of the Holders of the Notes, money or U.S. Government Obligations, or a
combination thereof, which, through the payment of principal, premium, if any,
and interest in respect thereof in accordance with their terms, will provide
money in an amount sufficient to pay the principal of and any premium and
interest on the Notes at Stated Maturity thereof or on earlier redemption in
accordance with the terms of the Indenture and the Notes. The Issuer will also
be required, among other things, to deliver to the Trustee an Opinion of United
States or Canadian Counsel, as appropriate, to the effect that (i) Holders of
the Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and defeasance of certain obligations and
will be subject to federal income tax on the same amount, in the same manner and
at the same times as would have been the case if such deposit and defeasance
were not to occur; (ii) Holders of the Notes will not recognize income, gain or
loss for Canadian federal, provincial or territorial income or other tax
purposes and will be subject to Canadian federal, provincial or territorial
income or other tax on the same amounts, in the same manner and at the same
times as would have been the case had such deposit and defeasance not occurred;
and (iii) that the resulting trust will not be an "Investment Company" within
the meaning of the Investment Company Act of 1940 unless such trust is qualified
thereunder or exempt from regulation thereunder. If the Issuer
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were to exercise this option and the Notes were declared due and payable because
of the occurrence of any Event of Default, the amount of money and U.S.
Government Obligations so deposited in trust would be sufficient to pay amounts
due on the Notes at the time of their Stated Maturity but may not be sufficient
to pay amounts due on the Notes upon any acceleration resulting from such Event
of Default. In such case, the Issuer would remain liable for such payments.
If the Issuer exercises either of the options described above, each
Subsidiary Guarantor will be released from all its obligations under its
Subsidiary Guarantee.
EVENTS OF DEFAULT AND NOTICE
The following are summaries of Events of Default under the Indenture with
respect to the Notes: (i) failure to pay any interest on the Notes when due,
continued for 30 days; (ii) failure to pay principal of (or premium, if any, on)
the Notes when due; (iii) failure to comply with the provisions of the Indenture
described under "Merger, Consolidation and Sale of Substantially All Assets;"
(iv) failure to perform any other covenant of the Issuer, the Company or any
Subsidiary Guarantor in the Indenture, continued for 60 days after written
notice to the Issuer from the Trustee or the Holders of at least 25% in
aggregate principal amount of the outstanding Notes; (v) a default by the
Company or any Restricted Subsidiary under any Indebtedness for borrowed money
(other than Non-recourse Purchase Money Indebtedness) which results in
acceleration of the maturity of such Indebtedness, or failure to pay any such
Indebtedness at maturity, in an amount greater than $5.0 million if such
Indebtedness is not discharged or such acceleration is not rescinded or annulled
within 10 days after written notice as provided in the Indenture; (vi) one or
more final judgments or orders by a court of competent jurisdiction are entered
against the Company or any Restricted Subsidiary in an uninsured or
unindemnified aggregate amount outstanding at any time in excess of $5.0 million
and such judgments or orders are not discharged, waived, stayed, satisfied or
bonded for a period of 60 consecutive days; (vii) certain events of bankruptcy,
insolvency or reorganization with respect to the Company or any Significant
Subsidiary; (viii) the Company Guarantee ceases to be in full force and effect
(other than in accordance with the terms of the Indenture and the Company
Guarantee) or the Company denies or disaffirms its obligations under the Company
Guarantee; or (ix) a Subsidiary Guarantee ceases to be in full force and effect
(other than in accordance with the terms of the Indenture and such Subsidiary
Guarantee) or a Subsidiary Guarantor denies or disaffirms its obligations under
its Subsidiary Guarantee.
The Indenture provides that if an Event of Default (other than an Event of
Default described in clause (vii) above) with respect to the Notes at the time
outstanding shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the outstanding Notes by notice as
provided in the Indenture may declare the principal amount of the Notes to be
due and payable immediately. If an Event of Default described in clause (vii)
above with respect to the Notes at the time outstanding shall occur, the
principal amount of all the Notes will automatically, and without any action by
the Trustee or any Holder, become immediately due and payable. After any such
acceleration, but before a judgment or decree based on acceleration, the Holders
of at least a majority in aggregate principal amount of the outstanding Notes
may, under certain circumstances, rescind and annul such acceleration if all
Events of Default, other than the nonpayment of accelerated principal (or other
specified amount), have been cured or waived as provided in the Indenture.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders of the Notes, unless
such Holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for the indemnification of the Trustee, the Holders of at least
a majority in aggregate principal amount of the outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes.
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No Holder of Notes will have any right to institute any proceeding with
respect to the Indenture, or for the appointment of a receiver or a trustee, or
for any other remedy thereunder, unless (i) such Holder has previously given to
the Trustee written notice of a continuing Event of Default with respect to the
Notes, (ii) the Holders of at least 25% in aggregate principal amount of the
outstanding Notes have made written request, and such Holder or Holders have
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee and (iii) the Trustee has failed to institute such proceeding and has
not received from the Holders of at least a majority in aggregate principal
amount of the outstanding Notes a direction inconsistent with such request,
within 60 days after such notice, request and offer. However, such limitations
do not apply to a suit instituted by a Holder of Notes for the enforcement of
payment of the principal of or any premium or interest on such Notes on or after
the applicable due date specified in such Notes.
MODIFICATION OF THE INDENTURE; WAIVER
The Indenture provides that modifications and amendments of the Indenture
may be made by the Issuer, the Company, the Subsidiary Guarantors, if any, and
the Trustee without the consent of any Holders of Notes in certain limited
circumstances, including (i) to cure any ambiguity, omission, defect or
inconsistency, (ii) to provide for the assumption of the obligations of the
Company under the Indenture upon the merger, consolidation or sale or other
disposition of all or substantially all the assets of the Company and the
Restricted Subsidiaries taken as a whole and certain other events specified in
the provisions of the Indenture described under "-- Merger, Consolidation and
Sale of Substantially All Assets," (iii) to provide for uncertificated Notes in
addition to or in place of certificated Notes, (iv) to comply with any
requirement of the Commission in order to effect or maintain the qualification
of the Indenture under the 1939 Act, (v) to make any change that does not
adversely affect the rights of any Holder of Notes in any material respect, (vi)
to add or remove Subsidiary Guarantors pursuant to the procedure set forth in
the Indenture and (vii) certain other modifications and amendments as set forth
in the Indenture.
The Indenture contains provisions permitting the Issuer, Company, the
Subsidiary Guarantors and the Trustee, with the written consent of the Holders
of not less than a majority in aggregate principal amount of the outstanding
Notes, to execute supplemental indentures or amendments adding any provisions to
or changing or eliminating any of the provisions of the Indenture or modifying
the rights of the Holders of the Notes, except that no such supplemental
indenture, amendment or waiver may, without the consent of all the Holders of
outstanding Notes, among other things, (i) reduce the principal amount of Notes
whose Holders must consent to an amendment or waiver, (ii) reduce the rate of or
change the time for payment of interest on any Notes, (iii) change the currency
in which any amount due in respect of the Notes is payable, (iv) reduce the
principal of or any premium on or change the Stated Maturity of any Notes or
alter the redemption or repurchase provisions with respect thereto, (v) reduce
the relative ranking of any Notes, (vi) release any security that may have been
granted to the Trustee in respect of the Notes, (vii) at any time after a Change
of Control or an Asset Sale has occurred, change the time at which the Change of
Control Offer or Prepayment Offer relating thereto must be made or at which the
Notes must be repurchased pursuant to such Change of Control Offer or Prepayment
Offer, (viii) cause the Company, the Issuer or any Subsidiary Guarantor to be
required to make any deduction or withholding from payments made under or with
respect to the Notes, (ix) make any modification to the provisions of the
Indenture described under "-- Additional Amounts" that would adversely affect
the rights of the Holders to receive Additional Amounts as described thereunder,
or (x) make certain other significant amendments or modifications as specified
in the Indenture.
The Holders of at least a majority in principal amount of the outstanding
Notes may waive compliance by the Company with certain restrictive provisions of
the Indenture. The Holders of at least a majority in principal amount of the
outstanding Notes may waive any past default under the Indenture, except a
default in the payment of principal, premium or interest and certain covenants
and provisions of the Indenture which cannot be amended without the consent of
the Holders of each outstanding Note.
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NOTICES
Notices to Holders of the Notes will be given by mail to the addresses of
such Holders as they may appear in the Security Register.
GOVERNING LAW
The Indenture and the Notes are governed by and construed in accordance with
the internal laws of the State of New York without reference to principles of
conflicts of law.
CONSENT TO JURISDICTION AND SERVICE
The Indenture provides that each of the Issuer, the Company and each
Subsidiary Guarantor will irrevocably appoint CT Corporation System, 1633
Broadway, New York, New York 10019 as its agent for service of process in any
suit, action or proceeding with respect to the Indenture or the Notes and for
actions brought under federal or state securities laws brought in any federal or
state court located in the Borough of Manhattan in The City of New York and
submits to such jurisdiction.
TRUSTEE
State Street Bank & Trust Company is the Trustee under the Indenture. The
Trustee maintains normal banking relationships with the Company and its
Subsidiaries and may perform certain services for and transact other business
with the Company and its Subsidiaries from time to time in the ordinary course
of business.
CERTAIN UNITED STATES AND CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The information included in this Prospectus with respect to United States
Federal income tax considerations has been passed on for the Company by Ernst &
Young LLP, independent certified public accountants and with respect to Canadian
Federal income tax considerations has been passed on for the Company by Ernst &
Young Chartered Accountants.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the principal United States Federal
income tax consequences of the receipt, ownership and disposition of the
Exchange Notes to original purchasers thereof that, except as noted below, are
United States Holders (as defined below) and that receive the Exchange Notes by
tendering Old Notes and receiving Exchange Notes pursuant to the Exchange Offer.
This discussion is based on currently existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing, temporary and proposed
Treasury regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and all
of which are subject to change, possibly with retroactive effect, or different
interpretations. This discussion does not address the tax consequences to
subsequent purchasers of Exchange Notes and is limited to initial purchasers who
hold the Exchange Notes as capital assets, within the meaning of section 1221 of
the Code. Moreover, this discussion is for general information only and does not
address all of the tax consequences that may be relevant to particular initial
purchasers in light of their personal circumstances or to certain types of
initial purchasers (such as certain financial institutions, insurance companies,
tax-exempt entities or dealers in securities) and also does not discuss Exchange
Notes held as a hedge against currency risks or as part of a straddle, as part
of a "synthetic security" or other integrated investment (including a
"conversion transaction") comprised of an Exchange Note and one or more other
investments, or held by a holder whose functional currency is not the US dollar.
INITIAL PURCHASERS OF OLD NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE EXCHANGE OF THE OLD NOTES
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AND THE RECEIPT, OWNERSHIP AND DISPOSITION OF THE EXCHANGE NOTES, INCLUDING THE
APPLICABILITY OF ANY UNITED STATES FEDERAL TAX LAWS OR ANY STATE, LOCAL OR
FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN APPLICABLE TAX LAWS
OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a holder of an
Exchange Note who is an initial purchaser that is, for United States Federal
income tax purposes, (i) an individual who is a citizen or resident of the
United States, (ii) a corporation or other entity taxable as a corporation
created or organized in the United States or under the laws of the United States
or of any state thereof (including the District of Columbia), (iii) an estate
the income of which is includable in gross income for United States Federal
income tax purposes regardless of its source, or (iv) a trust if a United States
court is able to exercise primary supervision over the trust's administration
and one or more United States persons have authority to control all substantial
decisions of such trust.
TAXATION OF INTEREST. Interest paid or accrued on an Exchange Note,
including any Additional Amounts paid as a result of the imposition of Canadian
withholding taxes (see "Description of the Notes--Canadian Withholding Taxes"),
will be taxable to a United States Holder as ordinary interest income, generally
at the time it is received or accrued, in accordance with such United States
Holder's regular method of accounting for United States Federal income tax
purposes.
EXCHANGE OFFER. The exchange of Old Notes for Exchange Notes pursuant to
the Exchange Offer should not be a taxable exchange. Consequently, a United
States Holder should not recognize taxable income or loss as a result of
exchanging an Old Note for an Exchange Note pursuant to the Exchange Offer. The
holding period of an Exchange Note will include the holding period of the Old
Note and the basis of the Exchange Note will be the same as the basis of the Old
Note immediately before the exchange.
The Issuer will be required to pay additional cash interest on the Old Notes
and the Exchange Notes if it fails to comply with certain of its Obligations
under the Registration Agreement (see "Registered Exchange Offer; Registration
Rights"). Such additional interest should be taxable to a United States Holder
as ordinary income at the time it accrues or is received, in accordance with
each such United States Holder's method of tax accounting. It is possible,
however, that the Internal Revenue Service (the "IRS") may take a different
position, in which case United States Holders might be required to include such
additional interest in income prior to its receipt (regardless of their usual
method of tax accounting).
SALE, EXCHANGE OR RETIREMENT OF THE EXCHANGE NOTES. Upon the sale,
exchange, redemption, retirement at maturity or other taxable disposition of an
Exchange Note, a United States Holder generally will recognize gain or loss
equal to the difference between the sum of cash plus the fair market value of
all other property received on such disposition (except to the extent such cash
or property is attributable to accrued but unpaid interest, which will be
taxable as ordinary income) and such United States Holder's tax basis in the
Exchange Note.
Gain or loss recognized on the disposition of an Exchange Note generally
will be capital gain or loss. In the case of a United States Holder who is an
individual, such capital gain generally will be subject to tax at a 28% rate if
the Exchange Note (including the time period the Old Note was held) has been
held for more than 12 months but not more than 18 months, and a maximum capital
gains rate of 20% will apply if the Exchange Note (including the time period the
Old Note was held) has been held for more than 18 months.
FOREIGN TAX CREDIT CONSIDERATIONS. Interest (including Additional Amounts)
will constitute income from sources without the United States for United States
foreign tax credit purposes. Payment of interest on the Exchange Notes to a
United States Holder with whom the Issuer deals at arm's length will
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not be subject to Canadian withholding taxes (see "Certain Canadian Income Tax
Considerations"). If, however, the cash interest payments on the Exchange Notes
become subject to Canadian withholding taxes, United States Holders will be
treated as having actually received the amount of such taxes withheld and as
having paid such amount to the Canadian taxing authorities. As a result, the
amount of interest income included in gross income by a United States Holder
will generally be greater than the amount of cash actually received by the
United States Holder from the Issuer with respect to such interest income. A
United States Holder may be able, subject to generally applicable limitations,
to claim a foreign tax credit or take a deduction for Canadian withholding taxes
imposed on interest payments (including Additional Amounts). Interest income
(including Additional Amounts) generally will constitute "passive income" or
"financial services income" for foreign tax credit purposes. If, however,
Canadian withholding tax is imposed at a rate of 5% or more, such income will
constitute "high withholding tax interest."
Gain on the sale, redemption or other taxable disposition of an Exchange
Note will generally constitute United States source income for United States
foreign tax credit purposes. Present law is unclear regarding the allocation of
a loss recognized by a United States Holder on such a sale, redemption or other
taxable disposition. Under proposed Treasury regulations, any capital loss
recognized by a United States Holder would be allocated against foreign source
income and may thus reduce the United States Holder's ability to claim foreign
tax credits.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Backup withholding and
information reporting requirements may apply to certain payments of principal,
premium, if any, and interest on an Exchange Note and to proceeds from the sale
or other disposition of an Exchange Note before maturity. The Issuer, its agent
or a broker, as the case may be, will be required to withhold from any payment
that is subject to backup withholding a tax equal to 31% of such payment if a
United States Holder fails to furnish its taxpayer identification number (social
security or employer identification number), certify that such number is
correct, certify that such United States Holder is not subject to backup
withholding or otherwise comply with the applicable requirements of the backup
withholding rules. Certain United States Holders, including all corporations,
are not subject to backup withholding and information reporting requirements.
Any amounts withheld under the backup withholding rules from a payment to a
United States Holder will be allowed as a credit against such United States
Holder's United States Federal income tax and may entitle the United States
Holder to a refund, provided that the required information is furnished to the
IRS.
UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
The following discussion is limited to the United States Federal income tax
consequences relevant to a holder of an Exchange Note that is not a United
States Holder (a "Non-U.S. Holder").
PAYMENT OF INTEREST ON EXCHANGE NOTES. Payment of interest (including
Additional Amounts) by the Issuer on the Exchange Notes will be exempt from
United States Federal income and withholding tax if paid to a Non-U.S. Holder
unless such Non-U.S. Holder has an office or other fixed place of business in
the United States to which the interest income is attributable and such income
is either derived in the active conduct of a banking, financing or similar
business within the United States or received by a corporation, the principal
business of which is the trading in stock or securities for its own account.
SALE, EXCHANGE OR RETIREMENT OF EXCHANGE NOTES. A Non-U.S. Holder generally
will not be subject to United States Federal income tax (and generally no tax
will be withheld) with respect to gain realized on the sale, exchange,
redemption, retirement at maturity or other disposition of an Exchange Note
unless (i) the gain is treated as effectively connected with a U.S. trade or
business conducted by the Non-U.S. Holder or (ii) the Non-U.S. Holder is an
individual who is present in the United States for 183 or more days in the
taxable year of the sale, redemption, retirement at maturity or other
disposition of the Exchange Note and certain other conditions are met.
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CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is, as of the date hereof, a summary of the principal Canadian
federal income tax consequences to a holder (other than an Initial Purchaser) of
Exchange Notes who acquires such Exchange Notes pursuant to the Exchange Offer
and who, for purposes of the INCOME TAX ACT (Canada)(the "ITA") and at all
relevant times, is not resident in Canada. This summary is based on the current
provisions of the ITA and the regulations thereunder, the current published
administrative practices of Revenue Canada, and all specific proposals to amend
the ITA and the regulations announced by or on behalf of the Minister of Finance
prior to the date hereof. This summary does not otherwise take into account or
anticipate changes in the law, whether by judicial, governmental or legislative
decision or action, nor does it take into account tax legislation or
considerations of any province or territory of Canada or any jurisdiction other
than Canada. The provisions of provincial income tax legislation vary from
province to province in Canada and in some cases differ from federal income tax
legislation.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE INTERPRETED AS, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF
EXCHANGE NOTES. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS
TO THE TAX CONSEQUENCES TO THEM OF THE ACQUISITION, HOLDING AND DISPOSITION OF
THE EXCHANGE NOTES, INCLUDING THE APPLICATION AND EFFECT OF CANADIAN FEDERAL,
PROVINCIAL, TERRITORIAL, AND LOCAL TAX LAWS.
The payment by the Issuer of interest, principal or premium, if any, on the
Exchange Notes to a holder who is not resident in Canada and with whom the
Issuer deals at arm's length within the meaning of the ITA will be exempt from
Canadian withholding tax. For the purposes of the ITA, related persons (as
therein defined) are deemed not to deal at arm's length, and it is a question of
fact whether persons not related to each other deal at arm's length.
No other taxes on income (including taxable capital gains) will be payable
under the ITA in respect of the holding, redemption or disposition of the
Exchange Notes by holders who are neither residents nor deemed to be residents
of Canada for the purposes of ITA and who do not use or hold and are not deemed
by such laws to use or hold the Exchange Notes in carrying on business in Canada
for the purposes of the ITA, except that in certain circumstances holders who
are non-resident insurers carrying on an insurance business in Canada and
elsewhere may be subject to such taxes.
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company and the Issuer have agreed pursuant to a Registration Agreement
(the "Registration Agreement") with the Initial Purchasers, for the benefit of
the Holders of the Old Notes, that the Company and the Issuer will, at the
Company's cost, use their reasonable best efforts to (i) file a registration
statement (the "Exchange Offer Registration Statement") within 60 days after the
date of the original issuance of the Old Notes with the Commission with respect
to a registered offer to exchange the Old Notes for the Exchange Notes having
terms substantially identical in all material respects to the Old Notes (except
that the Exchange Notes will not contain terms with respect to transfer
restrictions) and (ii) cause the Exchange Offer Registration Statement to be
declared effective under the Securities Act within 120 days after the date of
the original issuance of the Old Notes. Upon the effectiveness of the Exchange
Offer Registration Statement, the Issuer will offer the Exchange Notes in the
Exchange Offer. The Company and the Issuer will use their reasonable best
efforts to keep the Registered Exchange Offer open for not less than 30 days (or
longer if required by applicable law) after the date notice of the Exchange
Offer is mailed to the Holders of the Old Notes. For each Old Note surrendered
to the Issuer pursuant to the Registered Exchange Offer, the Holder of such Old
Note will receive an Exchange Note having a principal amount equal to that of
the surrendered Old Note. Interest on each Exchange Note will accrue from the
last interest payment date on which interest was paid on the Old Note
surrendered in exchange thereof or, if no interest has been paid on such Old
Note, from the date of its original issue.
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Under existing Commission interpretations, the Exchange Notes would be freely
transferable by Holders other than affiliates of the Issuer after the Registered
Exchange Offer without further registration under the Securities Act if the
Holder of the Exchange Notes represents that it is acquiring the Exchange Notes
in the ordinary course of its business, that it has no arrangement or
understanding with any person to participate in the distribution of the Exchange
Notes and that it is not an affiliate of the Issuer, as such terms are
interpreted by the Commission; PROVIDED that broker-dealers ("Participating
Broker-Dealers") receiving Exchange Notes in the Exchange Offer will have a
prospectus delivery requirement with respect to resales of such Exchange Notes.
The Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to Exchange Notes
(other than a resale of an unsold allotment from the original sale of the Old
Notes) with the prospectus contained in the Exchange Offer Registration
Statement. Under the Registration Agreement, the Company and the Issuer are
required to allow Participating Broker-Dealers and other persons, if any, with
similar prospectus delivery requirements to use the prospectus contained in the
Exchange Offer Registration Statement in connection with the resale of such
Exchange Notes.
A Holder of Old Notes (other than certain specified Holders) who wishes to
exchange such Notes for Exchange Notes in the Registered Exchange Offer will be
required to represent that any Exchange Notes to be received by it will be
acquired in the ordinary course of its business and that at the time of the
commencement of the Registered Exchange Offer it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and that it is not an
"affiliate" of the Issuer, as defined in Rule 405 of the Securities Act, or if
it is an affiliate, that it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
In the event that (i) applicable interpretations of the staff of the
Commission do not permit the Company and the Issuer to effect such a Registered
Exchange Offer, (ii) for any other reason the Exchange Offer Registration
Statement is not declared effective within 120 days after the date of the
original issuance of the Old Notes or the Registered Exchange Offer is not
consummated within 150 days after the date of the original issuance of the Old
Notes, (iii) the Initial Purchasers so request with respect to Old Notes not
eligible to be exchanged for Exchange Notes in the Registered Exchange Offer or
the Initial Purchasers do not receive freely tradeable Exchange Notes in the
Registered Exchange Offer or (iv) any Holder (other than an Initial Purchaser)
is not eligible to participate in the Registered Exchange Offer or such Holder
does not receive freely tradeable Exchange Notes in the Registered Exchange
Offer other than by reason of such Holder being an affiliate of the Issuer (it
being understood that the requirement that a Participating Broker-Dealer deliver
the prospectus contained in the Exchange Offer Registration Statement in
connection with sales of Exchange Notes shall not result in such Exchange Notes
being not "freely tradeable"), the Company and the Issuer will, at the Company's
cost, use their reasonable best efforts to (a) as promptly as practicable, file
a Shelf Registration Statement covering resales of the Old Notes or the Exchange
Notes, as the case may be, (b) cause the Shelf Registration Statement to be
declared effective under the Securities Act and (c) keep the Shelf Registration
Statement effective until two years after its effective date (or until one year
after such effective date if such Shelf Registration Statement is filed at the
request of an Initial Purchaser). The Company and the Issuer will, in the event
a Shelf Registration Statement is filed, among other things, provide to each
Holder for whom such Shelf Registration Statement was filed copies of the
prospectus which is a part of the Shelf Registration Statement, notify each such
Holder when the Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the Old
Notes or the Exchange Notes, as the case may be. A Holder selling such Old Notes
or Exchange Notes pursuant to the Shelf Registration Statement generally would
be required to be named as a selling security Holder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to certain of the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the Registration Agreement which
are applicable to such Holder (including certain indemnification obligations).
123
<PAGE>
In the event that (a) neither the Exchange Offer Registration Statement nor
the Shelf Registration Statement has been filed with the Commission on or prior
to the 60th day following the date of the original issuance of the Old Notes,
(b) neither the Exchange Offer Registration Statement nor the Shelf Registration
Statement has been declared effective on or prior to the 120th day following the
date of the original issuance of the Old Notes, (c) either the Exchange Offer
has not been consummated or a Shelf Registration Statement has not been declared
effective on or prior to the 150th day following the date of the original
issuance of the Old Notes or (d) after either the Exchange Offer Registration
Statement or the Shelf Registration Statement is declared effective, such
Registration Statement thereafter ceases to be effective or usable (subject to
certain exceptions) in connection with resales of Old Notes or Exchange Notes in
accordance with and during the periods specified in the Registration Agreement
(each such event referred to in clauses (a) through (d) a "Registration
Default"), interest ("Special Interest") will accrue on the Old Notes and the
Exchange Notes (in addition to the stated interest on the Old Notes and the
Exchange Notes) from and including the date on which any such Registration
Default shall occur to but excluding the date on which all Registration Defaults
have been cured. The Special Interest will accrue at a rate of 0.5% per annum
during the 90-day period immediately following the occurrence of any
Registration Default and shall increase by 0.25% per annum at the end of each
subsequent 90-day period, but in no event shall such rate exceed 1.5% per annum.
All accrued Special Interest shall be paid to Holders of the Old Notes in
the same manner in which payments of other interest are made pursuant to the
Indenture. See "Description of the Notes -- General."
The summary herein of certain provisions of the Registration Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Agreement, a copy of
which is available upon request to the Company.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. The Issuer and the Company have agreed that, starting
on the Expiration Date and ending on the close of business 180 days after the
Expiration Date, they will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. A
broker-dealer that delivers such a prospectus to purchasers in connection with
such resales will be subject to certain of the civil liability provisions under
the Securities Act and will be bound by the provisions of the Registration
Agreement (including certain indemnification rights and obligations).
Neither the Issuer nor the Company will receive any proceeds from any sale
of Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by
124
<PAGE>
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus to any broker-dealer that
requests such documents in the Letter of Transmittal. The Company has agreed in
the Registration Agreement to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers and to indemnify
the holders of the Old Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
TRANSFER RESTRICTIONS ON OLD NOTES
OFFERS AND SALES BY THE INITIAL PURCHASERS
The Old Notes were not registered under the Securities Act and may not be
offered or sold in the United States or to, or for the account or benefit of,
U.S. persons except in accordance with an applicable exemption from the
registration requirements thereof. Accordingly, the Old Notes were offered and
sold only (i) in the United States to "Qualified Institutional Buyers" as
defined in Rule 144A under the Securities Act and (ii) outside the United States
to non-U.S. persons in reliance upon Regulation S under the Securities Act.
Each purchaser of the Old Notes was deemed to have represented and agreed as
follows:
(1) it is acquiring the Old Notes for its own account or for an account
with respect to which it exercises sole investment discretion, and that it
or such account is a QIB or a foreign purchaser outside the United States;
(2) it acknowledges that the Old Notes have not been registered under
the Securities Act and that a prospectus has not been and will not be filed
in any province or territory of Canada to qualify the sale of Old Notes in
such jurisdictions, and may not be sold, pledged or otherwise transferred
except as permitted below;
(3) it understands and agrees (x) that such Old Notes are being offered
only in a transaction not involving any public offering within the meaning
of the Securities Act, and (y) that (A) if within two years after the date
of original issuance of the Old Notes or if within three months after it
ceases to be an affiliate (within the meaning of Rule 144 under the
Securities Act) of the Issuer, it decides to resell, pledge or otherwise
transfer such Old Notes on which the legend set forth below appears, such
Old Notes may be resold, pledged or transferred only (i) to the Issuer, (ii)
so long as such security is eligible for resale pursuant to Rule 144A, to a
person whom the seller reasonably believes is a QIB that purchases for its
own account or for the account of a QIB to whom notice is given that the
resale, pledge or transfer is being made in reliance on Rule 144A (as
indicated by the box checked by the transferor on the Certificate of
Transfer on the reverse of the Old Note if such Old Note is not in
book-entry form), (iii) in an offshore transaction in accordance with
Regulation S (as indicated by the box checked by the transferor on the
Certificate of Transfer on the reverse of the Old Note if such Old Note is
not in book-entry form), other than in Canada or to or for the benefit of a
resident of Canada prior to 40 days following the original issue of the Old
Notes except pursuant to a prospectus qualifying the Old Notes for sale
under the securities law in any province or territory of Canada in which
such purchaser resides or an exemption from the prospectus requirements of
such laws, and, if such transfer is being effected by an Initial Foreign
Purchaser or any foreign purchaser who has purchased Old Notes from an
Initial Foreign Purchaser or from any person other than a QIB or an
institutional "accredited investor," as defined under Rule 501(a)(1), (2),
(3) or (7) under the Securities Act (an "Institutional Accredited Investor")
pursuant to this clause (iii) prior to the expiration of the "40-day
restricted period" (within the meaning of Rule 903(c)(3) of Regulation S
under the Securities Act), the transferee shall have certified to the Issuer
and the Trustee for the Old Notes that such transferee is a non-U.S. person
(within the meaning of Regulation S) and that such transferee is acquiring
the Old Notes in an offshore transaction, (iv) to an Institutional
Accredited
125
<PAGE>
Investor (as indicated by the box checked by the transferor on the
Certificate of Transfer on the reverse of the Old Note if such Old Note is
not in book-entry form) who has certified to the Issuer and the Trustee for
the Old Notes that such transferee is an Institutional Accredited Investor
and is acquiring the Old Notes for investment purposes and not for
distribution in violation of the Securities Act or applicable Canadian
securities laws or any other applicable securities laws (provided that no
Initial Foreign Purchaser or any foreign purchaser who has purchased Old
Notes from an Initial Foreign Purchaser or from any person other than a QIB
or an Institutional Accredited Investor pursuant to clause (iii) shall be
permitted to transfer any Old Notes so purchased by it to an Institutional
Accredited Investor pursuant to this clause (iv) prior to the expiration of
the "40-day restricted period" (within the meaning of Rule 903(c)(3) of
Regulation S under the Securities Act), (v) pursuant to an exemption from
the registration requirements of the Securities Act provided by Rule 144 (if
applicable) under the Securities Act or (vi) pursuant to an effective
registration statement under the Securities Act, in each case in accordance
with any applicable securities laws of any state of the United States, (B)
the purchaser will, and each subsequent holder is required to, notify any
purchaser of Old Notes from it of the resale restrictions referred to in (A)
above, if then applicable, and (C) with respect to any transfer of Old Notes
by an Institutional Accredited Investor, such holder will deliver to the
Issuer and the Trustee such certificates and other information as they may
reasonably require to confirm that the transfer by it complies with the
foregoing restrictions.
(4) it understands that the notification requirement referred to in (3)
above will be satisfied, in the case only of transfer by physical delivery
of certificated Old Notes other than a Global Security, by virtue of the
fact that the following legend will be placed on the Old Notes unless
otherwise agreed by the Issuer:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY
PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE ISSUER AND
THE INITIAL PURCHASERS OF THIS SECURITY THAT THIS SECURITY MAY NOT BE
RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND
ANNIVERSARY OF THE ISSUANCE HEREOF (OR A PREDECESSOR SECURITY HERETO)
OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE ISSUER AT ANY TIME
DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN
EITHER CASE OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS
SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE
SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY
BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE
144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE
CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), (3) IN AN
OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE
SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON
THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), OTHER
THAN IN CANADA OR TO OR FOR THE BENEFIT OF A RESIDENT OF CANADA PRIOR
TO 40 DAYS FOLLOWING THE ORIGINAL ISSUE OF THE OFFERED NOTES EXCEPT
PURSUANT TO A PROSPECTUS QUALIFYING THE OFFERED NOTES FOR SALE UNDER
THE SECURITIES LAWS OF ANY PROVINCE OR TERRITORY OF CANADA OR AN
EXEMPTION FROM THE PROSPECTUS REQUIREMENTS OF SUCH LAWS, AND, IF SUCH
TRANSFER IS BEING EFFECTED BY CERTAIN TRANSFERORS SPECIFIED IN THE
INDENTURE (AS DEFINED BELOW) PRIOR TO THE EXPIRATION OF THE "40-DAY
RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(c)(3) OF
REGULATION S UNDER THE SECURITIES ACT), A CERTIFICATE WHICH MAY BE
OBTAINED FROM THE ISSUER OR THE
126
<PAGE>
TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE ISSUER AND THE TRUSTEE,
(4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN
RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS
INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF
TRANSFER ON THE REVERSE OF THIS SECURITY) THAT IS ACQUIRING THIS
SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN
VIOLATION OF THE SECURITIES ACT OR APPLICABLE CANADIAN SECURITIES
LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS, AND A CERTIFICATE IN
THE FORM ATTACHED TO THIS SECURITY IS DELIVERED BY THE TRANSFEREE TO
THE ISSUER AND THE TRUSTEE (PROVIDED THAT CERTAIN HOLDERS SPECIFIED
IN THE INDENTURE MAY NOT TRANSFER THE SECURITY PURSUANT TO THIS
CLAUSE (4) PRIOR TO THE EXPIRATION OF "40-DAY RESTRICTED PERIOD"
(WITHIN THE MEANING OF RULE 903(c)(3) OF REGULATION S OF THE
SECURITIES ACT)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER
THE SECURITIES ACT, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH
ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITES STATES. AN
INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS SECURITY AGREES IT
WILL FURNISH TO THE ISSUER AND THE TRUSTEE SUCH CERTIFICATES AND
OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY
TRANSFER BY IT OF THIS SECURITY COMPLIES WITH THE FOREGOING
RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY,
REPRESENTS AND AGREES FOR THE BENEFIT OF THE ISSUER THAT IT IS (1) A
QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2)
AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS
HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR
DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES
WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF
PARAGRAPH (o)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES
ACT."
(5) it (i) is able to fend for itself in the transactions contemplated
by this Offering Memorandum; (ii) has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of its prospective investment in the Old Notes; and (iii) has the
ability to bear the economic risks of its prospective investment and can
afford the complete loss of such investment;
(6) it has received a copy of this Offering Memorandum and acknowledges
that it has had access to such financial and other information, and has been
afforded the opportunity to ask questions of the Company and the Issuer and
receive answers thereto, as it deemed necessary in connection with its
decision to purchase the Old Notes; and
(7) it understands that the Issuer, the Initial Purchasers and others
will rely upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and agrees that if any of the
acknowledgments, representations and agreements deemed to have been made by
its purchase of the Old Notes are no longer accurate, it shall promptly
notify the Issuer and the Initial Purchasers; and if it is acquiring the Old
Notes as a fiduciary or agent for one or more investor accounts, it
represents that it has sole investment discretion with respect to each such
account and it has full power to make the foregoing acknowledgments,
representations and agreements on behalf of such account.
Any Old Notes not exchanged in the Exchange Offer for Exchange Notes will
continue to be subject to the transfer restrictions described above.
127
<PAGE>
LEGAL MATTERS
The validity of the issuance of the Exchange Notes offered hereby will be
passed on for the Company by Vinson & Elkins L.L.P., Houston, Texas and for the
Issuer by Bennett Jones Vechere, Calgary, Alberta.
EXPERTS
The consolidated financial statements of Forest Oil Corporation as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, which appear in the December 31, 1996 Annual Report on
Form 10-K of the Company, have been incorporated by reference and included
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing. The report of KPMG
Peat Marwick LLP refers to a change in the method of accounting for oil and gas
sales in 1994.
The consolidated financial statements of ATCOR Resources Ltd., which appear
in the Current Report of Form 8-K/A of Forest Oil Corporation dated January 28,
1997, have been incorporated by reference herein in reliance upon the report
dated February 1, 1996 of Price Waterhouse, independent auditors, incorporated
by reference herein, and upon the authority of said firm as experts in
accounting and auditing. Price Waterhouse is a Canadian partnership, resident in
Canada.
Forest's U.S. reserve estimates set forth in this Prospectus have been
reviewed by Ryder Scott Company and are included herein in reliance upon the
authority of said firm as experts in petroleum engineering.
The reserve estimates of Canadian Forest Oil Ltd. set forth in this
Prospectus have been prepared by McDaniel & Associates Ltd. and are included
herein in reliance upon the authority of said firm as experts in petroleum
engineering.
The reserve estimates of Saxon set forth in this Prospectus have been
prepared by Fekete & Associates, Inc. and are included herein in reliance upon
the authority of said firm as experts in petroleum engineering.
CERTAIN DEFINITIONS
Unless otherwise indicated in this Prospectus, natural gas volumes are
stated at the legal pressure base of the state or area in which the reserves are
located at 60 Fahrenheit. Natural gas equivalents are determined using the ratio
of six MCF of natural gas to one barrel of crude oil, condensate or natural gas
liquids to that one barrel of oil is referred to as six MCF of natural gas
equivalent or "MCFE".
As used in this Prospectus, the following terms have the following specific
meanings: "MCF" means thousand cubic feet, "MMCF" means million cubic feet,
"BCF" means billion cubic feet, "MCFE" means thousand cubic feet equivalent,
"MMCFE" means million cubic feet equivalent, "BCFE" means billion cubic feet
equivalent, "MMBTU" means million British thermal units and "BBTU" means billion
British Thermal Units. "MCF/D" means thousand cubic feet per day, "MMCF/D" means
million cubic feet per day and "MMCFE/D" means million cubic feet equivalent per
day.
"BBLS" means barrels, "MBBLS" means thousand barrels and "MMBBLS" means
million barrels. "BBLS/D" means barrels per day.
The term "spot market" as used herein refers to natural gas sold under
contracts with a term of six months or less or contracts which call for a
redetermination of sales prices every six months or earlier.
With respect to information concerning the Company's working interests in
wells or drilling locations, "gross" oil and gas wells or "gross" acres is the
number of wells or acres in which the Company has an interest, and "net" oil and
gas wells or "net" acres are determined by multiplying "gross" wells or acres by
the Company's working interest in those wells or acres. A working interest in an
oil and gas
128
<PAGE>
lease is an interest that gives the owner the right to drill, produce, and
conduct operating activities on the property and to receive a share of
production of any hydrocarbons covered by the lease. A working interest in an
oil and gas lease also entitles its owner to a proportionate interest in any
well located on the lands covered by the lease, subject to all royalties,
overriding royalties and other burdens, to all costs and expenses of
exploration, development and operation of any well located on the lease, and to
all risks in connection therewith.
"Capital expenditures" means costs associated with exploratory and
development drilling (including exploratory dry holes); leasehold acquisitions;
seismic data acquisitions; geological, geophysical and land related overhead
expenditures; delay rentals; controlling interests in other independent oil and
natural gas companies; producing property acquisitions; and other miscellaneous
capital expenditures.
A "development well" is a well drilled as an additional well to the same
horizon or horizons as other producing wells on a prospect, or a well drilled on
a spacing unit adjacent to a spacing unit with an existing well capable of
commercial production and which is intended to extend the proven limits of a
prospect. An "exploratory well" is a well drilled to find commercially
productive hydrocarbons in a unproved area, or to extend significantly a known
prospect.
A "farmout" is an assignment to another party of an interest in a drilling
location and related acreage conditional upon performing future exploratory
efforts including the drilling of a well on that location.
"Reserves" means natural gas and crude oil, condensate and natural gas
liquids on a net revenue interest basis, found to be commercially recoverable.
"Proved developed reserves" includes proved developed producing reserves.
"Proved developed producing reserves" includes only those reserves expected to
be recovered from existing completion intervals in existing wells. "Proved
undeveloped reserves" includes those reserves expected to be recovered from new
wells on proved undrilled acreage or from existing wells where a relatively
major expenditure is required for recompletion.
129
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 (Unaudited).............. F-2
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 1997 and 1996
(Unaudited)............................................................................................ F-3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996
(Unaudited)............................................................................................ F-4
Notes to Condensed Consolidated Financial Statements (Unaudited)......................................... F-5
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................. F-10
Consolidated Balance Sheets as of December 31, 1996 and 1995............................................. F-11
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994............... F-12
Consolidated Statements of Shareholders' Equity.......................................................... F-13
Consolidated Statements of Cash Flows for the Years Ended December 1996, 1995 and 1994................... F-14
Notes to Consolidated Financial Statements............................................................... F-15
</TABLE>
F-1
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 5,615 8,626
Accounts receivable............................................................... 48,944 55,462
Other current assets.............................................................. 4,678 4,996
------------ --------------
Total current assets............................................................ 59,237 69,084
Net property and equipment, at cost................................................. 497,030 458,242
Goodwill and other intangible assets, net........................................... 28,196 29,439
Other assets........................................................................ 7,549 6,693
------------ --------------
$ 592,012 563,458
------------ --------------
------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft.................................................................... $ 903 4,682
Current portion of long-term debt................................................. -- 2,091
Accounts payable.................................................................. 51,174 64,811
Accrued interest.................................................................. 4,801 4,584
Other current liabilities......................................................... 3,601 5,565
------------ --------------
Total current liabilities....................................................... 60,479 81,733
Long-term debt...................................................................... 223,884 168,859
Other liabilities................................................................... 17,921 19,844
Deferred revenue.................................................................... -- 7,591
Deferred income taxes............................................................... 35,097 33,716
Minority interest................................................................... 12,985 9,272
Shareholders' equity:
Preferred stock................................................................... -- 15,827
Common stock...................................................................... 3,279 3,053
Capital surplus................................................................... 456,617 438,556
Accumulated deficit............................................................... (212,861) (214,190)
Foreign currency translation...................................................... (2,572) (803)
Treasury stock at cost............................................................ (2,817) --
------------ --------------
Total shareholders' equity...................................................... 241,646 242,443
------------ --------------
$ 592,012 563,458
------------ --------------
------------ --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF PRODUCTION AND OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
JUNE 30, JUNE 30,
1997 1996
----------- ---------
(IN THOUSANDS EXCEPT
PRODUCTION AND PER
SHARE AMOUNTS)
<S> <C> <C>
PRODUCTION
Natural gas (mmcf)................................................................... 23,033 19,444
----------- ---------
----------- ---------
Oil, condensate and natural gas liquids (thousands of barrels)....................... 1,491 1,233
----------- ---------
----------- ---------
STATEMENTS OF CONSOLIDATED OPERATIONS
Revenue:
Marketing and processing........................................................... $ 98,209 83,589
Oil and gas sales:
Gas.............................................................................. 45,700 35,467
Oil, condensate and natural gas liquids.......................................... 26,809 21,055
----------- ---------
Total oil and gas sales........................................................ 72,509 56,522
Miscellaneous, net................................................................... 1,650 303
----------- ---------
Total revenue.................................................................. 172,368 140,414
Expenses:
Marketing and processing........................................................... 93,906 79,165
Oil and gas production............................................................. 18,671 15,856
General and administrative......................................................... 8,547 6,337
Interest........................................................................... 10,033 12,220
Depreciation and depletion......................................................... 36,756 26,989
Minority interest in earnings (loss) of subsidiary................................. 161 (171)
----------- ---------
Total expenses................................................................. 168,074 140,396
----------- ---------
Earnings (loss) before income taxes.................................................... 4,294 18
Income tax expense (benefit):
Current.............................................................................. 1,273 2,567
Deferred............................................................................. 1,695 738
----------- ---------
2,968 3,305
----------- ---------
Net earnings (loss).................................................................... $ 1,326 (3,287)
----------- ---------
----------- ---------
Weighted average number of common and common equivalent shares outstanding............. 33,353 22,477
----------- ---------
----------- ---------
Earnings (loss) attributable to common stock........................................... $ 1,137 (4,367)
----------- ---------
----------- ---------
Primary and fully diluted earnings (loss) per common and common equivalent share....... $ .03 (.19)
----------- ---------
----------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................................................... $ 1,326 (3,287)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and depletion.............................................................. 36,756 26,989
Amortization of deferred debt costs..................................................... 349 481
Deferred income tax expense............................................................. 1,695 738
Minority interest in earnings (loss) of subsidiary...................................... 161 (171)
Other, net.............................................................................. (63) 1,075
(Increase) decrease in accounts receivable.............................................. 6,871 (5,771)
Decrease in other current assets........................................................ 103 488
Increase (decrease) in accounts payable................................................. (6,020) 5,764
Increase (decrease) in accrued interest and other current liabilities................... (8,532) 799
Settlement of volumetric production payment obligation.................................. (6,832) --
Amortization of deferred revenue........................................................ (1,524) (5,152)
--------- ---------
Net cash provided by operating activities........................................... 24,290 21,953
Cash flows from investing activities:
Acquisition of subsidiaries:
Current assets.......................................................................... -- (22,304)
Property and equipment.................................................................. -- (144,099)
Goodwill and other intangible assets.................................................... -- (31,163)
Current liabilities..................................................................... -- 23,562
Long-term debt.......................................................................... -- 696
Other liabilities....................................................................... -- 1,542
Deferred taxes.......................................................................... -- 35,575
--------- ---------
Cash paid for acquisitions of subsidiaries............................................ -- (136,191)
Capital expenditures for property and equipment........................................... (81,877) (27,490)
Proceeds from sales of assets............................................................. 8,096 2,965
Increase in other assets, net............................................................. (51) (511)
--------- ---------
Net cash used by investing activities............................................... (73,832) (161,227)
Cash flows from financing activities:
Proceeds from bank borrowings............................................................. 101,136 118,704
Repayments of bank borrowings............................................................. (46,464) (111,814)
Repayments of production payment obligation............................................... (1,716) (1,589)
Proceeds from common stock offering, net of offering costs................................ -- 136,591
Proceeds from the exercise of options..................................................... 1,589 --
Costs of preferred stock conversion....................................................... (800) --
Deferred debt costs....................................................................... (326) --
Payment of preferred stock dividends...................................................... (540) --
Decrease in cash overdraft................................................................ (3,779) (1,045)
Decrease in other liabilities, net........................................................ (2,517) (647)
--------- ---------
Net cash provided by financing activities........................................... 46,583 140,200
Effect of exchange rate changes on cash..................................................... (52) (37)
--------- ---------
Net increase (decrease) in cash and cash equivalents........................................ (3,011) 889
Cash and cash equivalents at beginning of period............................................ 8,626 3,287
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 5,615 4,176
--------- ---------
--------- ---------
Cash paid during the period for:
Interest.................................................................................. $ 9,406 10,352
--------- ---------
--------- ---------
Income taxes.............................................................................. $ 4,288 1,492
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(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 June 30, 1997 and the results of
operations for the six month periods ended June 30, 1997 and 1996. Interim
results are not necessarily indicative of expected annual results because of the
impact of fluctuations in prices received for liquids 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 for the year ended December 31, 1996, included elsewhere herein.
(2) ACQUISITIONS
On December 20, 1995 the Company purchased a 56% economic (49% voting)
interest in Saxon Petroleum Inc. (Saxon) for approximately $22,000,000. Saxon is
a Canadian exploration and production company with headquarters in Calgary,
Alberta and operations concentrated in western Alberta. In the transaction,
Forest received from Saxon 40,800,000 voting common shares, 12,300,000 nonvoting
common shares which are convertible to voting common shares at any time,
15,500,000 convertible preferred shares and warrants to purchase 5,300,000
common shares. In exchange, Forest transferred to Saxon its preferred shares of
Archean Energy Ltd., issued to Saxon 1,060,000 common shares of Forest and paid
Saxon $1,500,000 CDN. The preferred shares of Archean Energy, Ltd. were recorded
at their historical carrying value of $11,301,000. The Forest common shares
issued to Saxon were recorded at their estimated fair value determined by
reference to the quoted market price of the shares immediately preceding the
announcement of the acquisition. In January 1996, Saxon sold these shares in a
public offering of Forest Common Stock and used the proceeds to reduce its bank
debt.
Since Forest has majority voting control over Saxon as a result of the
voting common shares that it owns and proxies that it holds, it has accounted
for Saxon as a consolidated subsidiary from the date of its acquisition.
In September 1996, the preferred shares of Archean were redeemed for cash at
their approximate carrying value.
On January 31, 1996 the Company acquired ATCOR Resources Ltd. of Calgary,
Alberta for approximately $136,000,000 including acquisition costs of
approximately $1,000,000. The purchase was funded by the net proceeds of a
Common Stock offering and approximately $8,300,000 drawn under the Company's
bank credit facility. The exploration and production business of ATCOR was
renamed Canadian Forest Oil Ltd. (Canadian Forest).
As part of the Canadian Forest acquisition, Forest also acquired ATCOR's
natural gas marketing business, which was renamed Producers Marketing Ltd.
(ProMark). ProMark is a wholly owned subsidiary of Canadian Forest. Goodwill and
other intangibles recorded in the acquisition included approximately $15,000,000
associated with certain natural gas marketing contracts, which is being
amortized over the average life of the contracts of 12 years and approximately
$17,000,000 of goodwill associated with the gas marketing business acquired
which is being amortized over 20 years.
F-5
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(2) ACQUISITIONS (CONTINUED)
On January 21, 1997 Forest converted its preferred shares of Saxon into
27,192,983 nonvoting common shares. On March 13, 1997 Forest acquired 3,158,142
voting common shares and 2,380,608 nonvoting common shares of Saxon in exchange
for 131,489 common shares of Forest pursuant to an equity participation
agreement. These transactions increased Forest's economic interest in Saxon to
66%.
The consolidated balance sheet of Forest includes the accounts of Saxon and
Canadian Forest at December 31, 1996 and June 30, 1997. The consolidated
statements of operations include the results of operations of Saxon effective
January 1, 1996 and the results of operations of Canadian Forest effective
February 1, 1996. The following pro forma consolidated statement of operations
information for the six months ended June 30, 1996 assumes that the Common Stock
offering and the acquisition of Canadian Forest occurred as of January 1, 1996.
<TABLE>
<CAPTION>
Pro Forma Six Months
Ended June 30, 1996
----------------------
<S> <C> <C>
(In thousands, except
per share amounts)
Revenue:
Marketing and processing..................................................... $ 96,930
Oil and gas sales............................................................ 60,232
Miscellaneous, net........................................................... 303
-
----------
Total revenue.............................................................. $ 157,465
-
-
----------
----------
Net loss....................................................................... $ (2,905)
-
-
----------
----------
Primary and fully diluted loss per common share................................ $ (.18)
-
-
----------
----------
</TABLE>
Summarized consolidated financial information for Canadian Forest Oil Ltd.
as of June 30, 1997 and for the six months ended June 30, 1997 is as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
SUMMARIZED CONSOLIDATED BALANCE SHEET INFORMATION:
ASSETS
Current assets................................................................. $ 20,458
Net property and equipment..................................................... 120,642
Intercompany receivable........................................................ 20,999
Goodwill and other intangible assets, net...................................... 28,196
-----------
$ 190,295
-----------
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities............................................................ $ 22,480
Intercompany payable........................................................... 32,948
Other liabilities.............................................................. 356
Deferred income taxes.......................................................... 37,383
Shareholders' equity........................................................... 97,128
-----------
$ 190,295
-----------
-----------
SUMMARIZED CONSOLIDATED STATEMENTS OF OPERATIONS:
Revenue........................................................................ $ 114,556
-----------
-----------
Earnings before income taxes................................................... $ 2,208
-----------
-----------
Net earnings................................................................... $ 106
-----------
-----------
</TABLE>
The Company prepares full cost ceiling test computations on a
country-by-country basis and, accordingly, has not prepared such computation for
Canadian Forest Oil Ltd. on a stand-alone basis.
F-6
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(3) COMMON STOCK
On January 31, 1996, 13,200,000 shares of Common Stock were sold for $11.00
per share in a public offering. Of this amount 1,060,000 shares were sold by
Saxon and 12,140,000 shares were sold by Forest. The net proceeds to Forest and
Saxon from the issuance of shares totaled approximately $136,000,000 after
deducting issuance costs and underwriting fees.
On August 1, 1996 The Anschutz Corporation (Anschutz) exercised its option
to purchase 2,250,000 shares of Forest's Common Stock for $26,200,000 or
approximately $11.64 per share.
On November 5, 1996 the Company exchanged 2,000,000 shares of Common Stock
plus approximately $13,500,000 in cash to extinguish approximately $43,000,000
of nonrecourse secured debt owed to Joint Energy Development Investments Limited
Partnership (JEDI), a Delaware limited partnership whose general partner is an
affiliate of Enron Corp. (Enron). In connection with this transaction, Anschutz
acquired 1,628,888 shares of Common Stock by exercising warrants to purchase
388,888 shares of Common Stock at $10.50 per share and by converting 620,000
shares of Forest's Second Series Preferred Stock into 1,240,000 shares of Common
Stock.
On November 14, 1996 the Company filed a shelf registration with the
Securities and Exchange Commission to issue up to $250,000,000 in one or more
forms of debt or equity securities. Except as otherwise provided in an
applicable prospectus supplement, the net proceeds from the sale of the
securities will be used for the acquisition of oil and gas properties, capital
expenditures, the repayment of subordinated debentures or other debt, repayments
of borrowings under revolving credit agreements, or for other general corporate
purposes.
On February 7, 1997 the Company called for redemption all 2,877,673 shares
of its $.75 Convertible Preferred Stock. This conversion eliminated all
outstanding preferred stock from Forest's capital structure. In response to its
call for redemption, 2,783,945 shares or 96.7% of the shares outstanding were
tendered for conversion into Common Stock on or before the February 21, 1996
deadline. The remaining 93,728 preferred shares were redeemed by the Company at
the redemption price of $10.06 per share (at a total cost of $942,904) on
February 28, 1997. Lehman Brothers Inc. purchased 65,616 shares of Common Stock
to fund the cash requirement of the redemption in accordance with the terms of
its standby purchase agreement with Forest. Redemption of the $.75 Convertible
Preferred Stock eliminated approximately $2,200,000 of annual preferred dividend
payments.
F-7
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(4) NET PROPERTY AND EQUIPMENT
The components of net property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, 1997 1996
------------- --------------
<S> <C> <C>
(IN THOUSANDS)
Oil and gas properties................................................... $ 1,532,501 1,457,212
Buildings, transportation and other equipment............................ 10,008 10,993
------------- --------------
1,542,509 1,468,205
Less accumulated depreciation, depletion and valuation allowance......... 1,045,479 1,009,963
------------- --------------
$ 497,030 458,242
------------- --------------
------------- --------------
</TABLE>
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets recorded in the acquisition of ProMark
consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- --------------
<S> <C> <C>
(IN THOUSANDS)
Goodwill.................................................................... $ 16,599 16,728
Gas marketing contracts..................................................... 14,482 14,594
--------- -------
31,081 31,322
Less accumulated amortization............................................... 2,885 1,883
--------- -------
$ 28,196 29,439
--------- -------
--------- -------
</TABLE>
Goodwill is being amortized on a straight line basis over twenty years. The
amount attributed to the value of gas marketing contracts acquired is being
amortized on a straight line basis over the average life of such contracts of
twelve years.
F-8
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(6) LONG-TERM DEBT
The components of long-term debt are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- --------------
<S> <C> <C>
(IN THOUSANDS)
Credit Facility............................................................ $ 58,500 26,400
Canadian Credit Facility................................................... 32,948 32,500
Saxon Credit Facility...................................................... 22,104 --
Production payment obligation.............................................. 10,880 12,596
11 1/4% Senior Subordinated Notes.......................................... 99,452 99,421
----------- --------------
223,884 170,917
Less current portion....................................................... -- 2,058
----------- --------------
Long-term debt........................................................... $ 223,884 168,859
----------- --------------
----------- --------------
</TABLE>
(7) DEFERRED REVENUE
From 1991 to 1994, the Company sold volumetric production payments to Enron
to fund capital expenditures and property acquisitions. On June 30, 1997 the
Company purchased from Enron the obligation related to its last remaining
volumetric production payment. The purchase price of approximately $6,832,000
plus expenses was funded by the Company's bank credit facility. Reserves of
approximately 3.5 BCFE, which were dedicated to repayment of this volumetric
production payment, reverted to the Company's interest.
(8) 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 and warrants using
the treasury stock method.
Fully diluted earnings (loss) per share assumes, in addition to the above,
(i) that convertible preferred stock was converted at the beginning of each
period or date of issuance, if later, and (ii) any additional dilutive effect of
stock options and warrants. The assumed exercises and conversions were
antidilutive for the six months ended June 30, 1997 and 1996.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Forest Oil Corporation:
We have audited the accompanying consolidated balance sheets of Forest Oil
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Forest Oil
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for oil and gas sales from the sales method to
the entitlements method effective January 1, 1994.
KPMG Peat Marwick LLP
Denver, Colorado
February 12, 1997
F-10
<PAGE>
FOREST OIL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 8,626 3,287
Accounts receivable................................................................... 55,462 17,395
Other current assets.................................................................. 4,996 2,557
----------- ----------
Total current assets.............................................................. 69,084 23,239
Net property and equipment, at cost, full cost method (Notes 5 and 6)................... 458,242 277,599
Investment in affiliate (Note 4)........................................................ -- 11,301
Goodwill and other intangible assets, net............................................... 29,439 --
Other assets............................................................................ 6,693 8,904
----------- ----------
$ 563,458 321,043
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft........................................................................ $ 4,682 2,055
Current portion of long-term debt (Note 5)............................................ 2,091 2,263
Accounts payable...................................................................... 64,811 17,456
Accrued interest...................................................................... 4,584 4,029
Other current liabilities............................................................. 5,565 6,617
----------- ----------
Total current liabilities......................................................... 81,733 32,420
Long-term debt (Notes 3 and 5).......................................................... 168,859 193,879
Other liabilities....................................................................... 19,844 27,139
Deferred revenue (Note 6)............................................................... 7,591 15,137
Deferred income taxes................................................................... 33,716 --
Commitments and contingencies (Notes 10, 12 and 13)
Minority interest (Note 2).............................................................. 9,272 8,171
Shareholders' equity (Notes 2, 3, 5, 8 and 9):
Preferred stock....................................................................... 15,827 24,359
Common stock, 30,541,105 shares in 1996 (10,660,291 shares in 1995)................... 3,053 1,066
Capital surplus....................................................................... 438,556 241,241
Common shares to be issued in debt restructuring...................................... -- 6,073
Accumulated deficit................................................................... (214,190) (217,495)
Foreign currency translation.......................................................... (803) (1,407)
Treasury stock, at cost, none in 1996 and 1,060,000 shares in 1995.................... -- (9,540)
----------- ----------
Total shareholders' equity........................................................ 242,443 44,297
----------- ----------
$ 563,458 321,043
----------- ----------
----------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-11
<PAGE>
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
----------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenue:
Marketing and processing................................................... $ 187,374 -- --
Oil and gas sales:
Gas...................................................................... 80,111 59,084 91,309
Gas contract settlement (Note 15)........................................ -- 4,263 --
Oil, condensate and natural gas liquids.................................. 48,602 18,928 23,232
----------- --------- ---------
Total oil and gas sales................................................ 128,713 82,275 114,541
Miscellaneous, net......................................................... 1,387 181 1,406
----------- --------- ---------
Total revenue.......................................................... 317,474 82,456 115,947
Expenses:
Marketing and processing................................................... 178,706 -- --
Oil and gas production..................................................... 32,199 22,463 22,384
General and administrative................................................. 13,623 9,081 11,166
Interest................................................................... 23,307 25,323 26,773
Depreciation and depletion................................................. 63,068 43,592 65,468
Minority interest in loss of subsidiary.................................... (19) -- --
Provision for impairment of oil and gas properties......................... -- -- 58,000
----------- --------- ---------
Total expenses......................................................... 310,884 100,459 183,791
----------- --------- ---------
Earnings (loss) before income taxes, cumulative effect of change in
accounting principle and extraordinary item................................ 6,590 (18,003) (67,844)
Income tax expense (benefit) (Note 7):
Current.................................................................... 3,943 (7) 9
Deferred................................................................... 1,508 -- --
----------- --------- ---------
5,451 (7) 9
----------- --------- ---------
Earnings (loss) before cumulative effect of change in accounting principle
and extraordinary item..................................................... 1,139 (17,996) (67,853)
Cumulative effect of change in accounting principle for oil and gas sales
(Note 1)................................................................... -- -- (13,990)
----------- --------- ---------
Earnings (loss) before extraordinary item.................................... 1,139 (17,996) (81,843)
Extraordinary item -- gain on extinguishment of debt (Note 3)................ 2,166 -- --
----------- --------- ---------
Net earnings (loss).......................................................... $ 3,305 (17,996) (81,843)
----------- --------- ---------
----------- --------- ---------
Weighted average number of common shares outstanding......................... 27,163 7,360 5,619
----------- --------- ---------
----------- --------- ---------
Earnings (loss) attributable to common stock................................. $ 1,147 (20,156) (84,004)
----------- --------- ---------
----------- --------- ---------
Primary and fully diluted earnings (loss) per common share:
Loss attributable to common stock before cumulative effect of change in
accounting principle and extraordinary item.............................. $ (.04) (2.74) (12.46)
Cumulative effect of change in accounting principle........................ -- -- (2.49)
----------- --------- ---------
Loss attributable to common stock before extraordinary item................ (.04) (2.74) (14.95)
Extraordinary item -- gain on extinguishment of debt....................... .08 -- --
----------- --------- ---------
Earnings (loss) attributable to common stock............................... $ .04 (2.74) (14.95)
----------- --------- ---------
----------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-12
<PAGE>
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON SHARES TO ACCUMU-
PREFERRED COMMON CAPITAL BE ISSUED IN DEBT LATED
STOCK STOCK SURPLUS RESTRUCTURING DEFICIT
----------- ----------- ----------- ----------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance December 31, 1993......................... $ 15,845 565 195,977 -- (117,656)
Net loss........................................ -- -- -- -- (81,843)
Exercise of employee stock options (Note 9)..... -- 1 104 -- --
$.75 Convertible Preferred Stock dividends paid
in cash (Note 8).............................. -- -- (2,161) -- --
Treasury stock contributed to the Retirement
Savings Plan and other (Note 10).............. -- -- (1,583) -- --
Foreign currency translation.................... -- -- -- -- --
----------- ----------- ----------- ------ -----------
Balance December 31, 1994......................... 15,845 566 192,337 -- (199,499)
Net loss........................................ -- -- -- -- (17,996)
Issuance of Common Stock to Anschutz (Note 3)... -- 376 27,796 -- --
Issuance of Second Series Convertible Preferred
Stock to Anschutz (Notes 3 and 8)............. 8,518 -- -- -- --
Issuance of warrants to Anschutz (Notes 3 and
9)............................................ -- -- 8,310 -- --
Issuance of warrants to JEDI (Note 3)........... -- -- 12,117 -- --
Costs associated with equity issued to Anschutz
and JEDI (Note 3)............................. -- -- (3,940) -- --
Common Stock issued in acquisition of Saxon
(Notes 2 and 9)............................... -- 106 9,434 -- --
Common Stock issued and treasury stock
contributed to the Retirement Savings Plan
(Note 10)..................................... -- 2 (1,425) -- --
$.75 Convertible Preferred Stock dividends paid
in cash (Note 8).............................. -- -- (540) -- --
$.75 Convertible Preferred Stock dividends paid
in Common Stock (Note 8)...................... -- 16 (16) -- --
Conversion of $.75 Convertible Preferred Stock
to Common Stock (Note 8)...................... (4) -- 4 -- --
Common shares to be issued in JEDI Exchange
(Note 3)...................................... -- -- -- 6,073 --
Unfunded pension liability (Note 10)............ -- -- (2,836) -- --
Foreign currency translation.................... -- -- -- -- --
----------- ----------- ----------- ------ -----------
Balance December 31, 1995......................... 24,359 1,066 241,241 6,073 (217,495)
Net earnings.................................... -- -- -- -- 3,305
Issuance of Common Stock, net of offering costs
and minority interest effect of $706,000 (Note
9)............................................ -- 1,214 124,613 -- --
Common shares issued in JEDI Exchange (Note 3).. -- 168 5,905 (6,073) --
Exercise of Anschutz Option (Notes 3 and 9)..... -- 225 25,962 -- --
Exercise of Anschutz A Warrant (Notes 3 and
9)............................................ -- 39 4,044 -- --
Issuance of Common Stock to JEDI (Note 3)....... -- 200 26,736 -- --
Exercise of Public Warrants (Note 9)............ -- 2 334 -- --
Conversion of Second Series Preferred Stock to
Common Stock (Note 8)......................... (8,518) 124 8,394 -- --
Exercise of employee stock options (Note 9)..... -- 3 398 -- --
Common Stock issued and treasury stock
contributed to the Retirement Savings Plan and
other (Note 10)............................... -- 3 398 -- --
$.75 Convertible Preferred Stock dividends paid
in cash (Note 8).............................. -- -- (1,619) -- --
$.75 Convertible Preferred Stock dividends paid
in Common Stock (Note 8)...................... -- 9 (9) -- --
Conversion of $.75 Convertible Preferred Stock
to Common Stock (Note 8)...................... (14) -- 14 -- --
Unfunded pension liability (Note 10)............ -- -- 2,145 -- --
Foreign currency translation.................... -- -- -- -- --
----------- ----------- ----------- ------ -----------
Balance December 31, 1996......................... $ 15,827 3,053 438,556 -- (214,190)
----------- ----------- ----------- ------ -----------
----------- ----------- ----------- ------ -----------
<CAPTION>
FOREIGN
CURRENCY TREASURY
TRANSLATION STOCK
------------- -----------
<S> <C> <C>
Balance December 31, 1993......................... (785) (5,790)
Net loss........................................ -- --
Exercise of employee stock options (Note 9)..... -- --
$.75 Convertible Preferred Stock dividends paid
in cash (Note 8).............................. -- --
Treasury stock contributed to the Retirement
Savings Plan and other (Note 10).............. -- 3,964
Foreign currency translation.................... (552) --
------ -----------
Balance December 31, 1994......................... (1,337) (1,826)
Net loss........................................ -- --
Issuance of Common Stock to Anschutz (Note 3)... -- --
Issuance of Second Series Convertible Preferred
Stock to Anschutz (Notes 3 and 8)............. -- --
Issuance of warrants to Anschutz (Notes 3 and
9)............................................ -- --
Issuance of warrants to JEDI (Note 3)........... -- --
Costs associated with equity issued to Anschutz
and JEDI (Note 3)............................. -- --
Common Stock issued in acquisition of Saxon
(Notes 2 and 9)............................... -- (9,540)
Common Stock issued and treasury stock
contributed to the Retirement Savings Plan
(Note 10)..................................... -- 1,826
$.75 Convertible Preferred Stock dividends paid
in cash (Note 8).............................. -- --
$.75 Convertible Preferred Stock dividends paid
in Common Stock (Note 8)...................... -- --
Conversion of $.75 Convertible Preferred Stock
to Common Stock (Note 8)...................... -- --
Common shares to be issued in JEDI Exchange
(Note 3)...................................... -- --
Unfunded pension liability (Note 10)............ -- --
Foreign currency translation.................... (70) --
------ -----------
Balance December 31, 1995......................... (1,407) (9,540)
Net earnings.................................... -- --
Issuance of Common Stock, net of offering costs
and minority interest effect of $706,000 (Note
9)............................................ -- 9,540
Common shares issued in JEDI Exchange (Note 3).. -- --
Exercise of Anschutz Option (Notes 3 and 9)..... -- --
Exercise of Anschutz A Warrant (Notes 3 and
9)............................................ -- --
Issuance of Common Stock to JEDI (Note 3)....... -- --
Exercise of Public Warrants (Note 9)............ -- --
Conversion of Second Series Preferred Stock to
Common Stock (Note 8)......................... -- --
Exercise of employee stock options (Note 9)..... -- --
Common Stock issued and treasury stock
contributed to the Retirement Savings Plan and
other (Note 10)............................... -- --
$.75 Convertible Preferred Stock dividends paid
in cash (Note 8).............................. -- --
$.75 Convertible Preferred Stock dividends paid
in Common Stock (Note 8)...................... -- --
Conversion of $.75 Convertible Preferred Stock
to Common Stock (Note 8)...................... -- --
Unfunded pension liability (Note 10)............ -- --
Foreign currency translation.................... 604 --
------ -----------
Balance December 31, 1996......................... (803) --
------ -----------
------ -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-13
<PAGE>
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Earnings (loss) before cumulative effect of change in accounting principle and
extraordinary item............................................................. $ 1,139 (17,996) (67,853)
Adjustments to reconcile loss before cumulative effect of change in accounting
principle and extraordinary item to net cash provided (used) by operating
activities:
Depreciation and depletion..................................................... 63,068 43,592 65,468
Amortization of deferred debt costs............................................ 1,253 1,015 1,029
Provision for impairment of oil and gas properties............................. -- -- 58,000
Deferred income tax expense.................................................... 1,508 -- --
Interest added to principal.................................................... 3,059 574 2,205
Minority interest in net loss of subsidiary.................................... (19) -- --
Other, net..................................................................... 792 1,714 2,033
(Increase) decrease in accounts receivable..................................... (17,441) 4,285 4,839
(Increase) decrease in other current assets.................................... (921) (152) 1,078
Increase (decrease) in accounts payable........................................ 19,417 (11,458) 4,021
Increase (decrease) in accrued interest and other current liabilities.......... 3,506 (3,865) 2,941
Proceeds from volumetric production payments................................... -- -- 4,353
Amortization of deferred revenue............................................... (7,546) (20,771) (35,673)
--------- --------- ---------
Net cash provided (used) by operating activities........................... 67,815 (3,062) 42,441
Cash flows from investing activities:
Acquisition of subsidiaries:
Current assets................................................................. (22,304) (1,437) --
Property and equipment......................................................... (144,099) (26,530) --
Goodwill and other intangible assets........................................... (31,163) -- --
Current liabilities............................................................ 23,562 2,139 --
Long-term debt................................................................. 701 16,183 --
Other liabilities.............................................................. 1,376 -- --
Deferred taxes................................................................. 35,575 353 --
Minority interest.............................................................. -- 8,171 --
--------- --------- ---------
Cash paid for acquisitions of subsidiaries................................. (136,352) (1,121) --
Capital expenditures for property and equipment.................................. (108,332) (27,098) (42,780)
Proceeds from sales of assets.................................................... 17,875 8,715 12,941
Increase (decrease) in other assets, net......................................... (58) 2,285 (2,468)
--------- --------- ---------
Net cash used by investing activities...................................... (226,867) (17,219) (32,307)
Cash flows from financing activities:
Proceeds from bank borrowings.................................................... 194,018 82,600 31,500
Repayments of bank borrowings.................................................... (176,641) (91,800) (23,500)
Proceeds from nonrecourse secured loan........................................... -- -- 1,400
Repayments of nonrecourse secured loan........................................... (13,881) (1,143) --
Repayments of production payment obligation...................................... (3,622) (2,316) (2,771)
Redemptions and repurchases of subordinated debentures and secured notes......... -- -- (7,171)
Proceeds from common stock offering, net of offering costs....................... 136,073 -- --
Proceeds from exercise of warrants and options................................... 31,945 -- 105
Proceeds from capital stock and warrants issued, net............................. -- 41,060 --
Payment of preferred stock dividends............................................. (1,079) (540) (2,161)
Debt issuance costs.............................................................. (3) (491) (772)
Increase (decrease) in cash overdraft............................................ 2,627 (2,390) 551
Decrease in other liabilities, net............................................... (4,937) (4,282) (11,307)
--------- --------- ---------
Net cash provided (used) by financing activities........................... 164,500 20,698 (14,126)
Effect of exchange rate changes on cash............................................ (109) 1 (88)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................... 5,339 418 (4,080)
Cash and cash equivalents at beginning of year..................................... 3,287 2,869 6,949
--------- --------- ---------
Cash and cash equivalents at end of year........................................... $ 8,626 3,287 2,869
--------- --------- ---------
--------- --------- ---------
Cash paid during the year for:
Interest......................................................................... $ 15,040 22,138 23,989
--------- --------- ---------
--------- --------- ---------
Income taxes..................................................................... $ 3,428 -- 9
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-14
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION -- Forest Oil
Corporation is engaged in the acquisition, exploration, development, production
and marketing of natural gas and crude oil in North America. The Company was
incorporated in New York in 1924, the successor to a company formed in 1916, and
has been publicly held since 1969. The Company is active in several of the major
exploration and producing areas in and offshore the United States and in Canada.
The consolidated financial statements include the accounts of Forest Oil
Corporation and its consolidated subsidiaries (Forest or the Company).
Significant intercompany balances and transactions are eliminated. The Company
generally consolidates all subsidiaries in which it controls over 50% of the
voting interests. Entities in which the Company does not have a direct or
indirect majority voting interest are generally accounted for using the equity
method.
In the course of preparing the consolidated financial statements, management
makes various assumptions and estimates to determine the reported amounts of
assets, liabilities, revenue and expenses, and in the disclosures of commitments
and contingencies. Changes in these assumptions and estimates will occur as a
result of the passage of time and the occurrence of future events and,
accordingly, actual results could differ from amounts estimated.
Unless otherwise indicated, all share amounts, share prices and per share
amounts have been adjusted to give effect to a 5 to 1 reverse stock split that
was effective on January 8, 1996.
CASH EQUIVALENTS -- For purposes of the statements of cash flows, the
Company considers all debt instruments with original maturities of three months
or less to be cash equivalents.
PROPERTY AND EQUIPMENT -- The Company uses the full cost method of
accounting for oil and gas properties. Separate cost centers are maintained for
each country in which the Company has operations. During 1996, the Company's oil
and gas operations were conducted in the United States and in Canada. During
1995 and 1994, the Company's oil and gas operations were conducted solely in the
United States. All costs incurred in the acquisition, exploration and
development of properties (including costs of surrendered and abandoned
leaseholds, delay lease rentals, dry holes and overhead related to exploration
and development activities) are capitalized. Capitalized costs applicable to
each cost center are depleted using the units of production method. A reserve is
provided for estimated future costs of site restoration, dismantlement and
abandonment activities as a component of depletion. Unusually significant
investments in unproved properties, including related capitalized interest
costs, are not depleted pending the determination of the existence of proved
reserves. As of December 31, 1996, 1995 and 1994, there were undeveloped
property costs of $30,046,000, $28,380,000 and $30,441,000, respectively, which
were not being depleted in the United States and costs of $13,870,000 which were
not being depleted in Canada. Of the undeveloped costs in the United States not
being depleted at December 31, 1996, approximately 46% were incurred in 1996, 9%
in 1995, 3% in 1994, 40% in 1993 and 2% in 1992. All of the undeveloped
properties in Canada not being depleted at December 31, 1996 were acquired in
1996.
F-15
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Depletion per unit of production was determined based on conversion to
common units of measure using one barrel of oil as an equivalent to six thousand
cubic feet (MCF) of natural gas. Depletion per unit of production (MCFE) for
each of the Company's cost centers was as follows:
<TABLE>
<CAPTION>
UNITED STATES CANADA
--------------- -----------
<S> <C> <C>
1994.......................................................................... $ 1.13 --
1995.......................................................................... 1.06 --
1996.......................................................................... 1.12 .85
</TABLE>
Pursuant to full cost accounting rules, capitalized costs less related
accumulated depletion and deferred income taxes for each cost center may not
exceed the sum of (1) the present value of future net revenue from estimated
production of proved oil and gas reserves; plus (2) the cost of properties not
being amortized, if any; plus (3) the lower of cost or estimated fair value of
unproved properties included in the costs being amortized, if any; less (4)
income tax effects related to differences in the book and tax basis of oil and
gas properties. As a result of this limitation on capitalized costs, the
accompanying financial statements include a provision for impairment of oil and
gas property costs of $58,000,000 in the United States in 1994.
Gain or loss is recognized only on the sale of oil and gas properties
involving significant reserves.
Buildings, transportation and other equipment are depreciated on the
straight-line method based upon estimated useful lives of the assets ranging
from five to forty-five years.
Net property and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
(IN THOUSANDS)
Oil and gas properties..................................................... $ 1,457,212 1,216,027
Buildings, transportation and other equipment.............................. 10,993 10,502
------------- -----------
1,468,205 1,226,529
Less accumulated depreciation, depletion and valuation allowance........... 1,009,963 948,930
------------- -----------
$ 458,242 277,599
------------- -----------
------------- -----------
</TABLE>
GOODWILL AND OTHER INTANGIBLE ASSETS -- Goodwill and other intangible assets
recorded in the acquisition of the Company's gas marketing subsidiary consist of
the following at December 31, 1996:
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
(IN THOUSANDS)
Goodwill................................................................................ $ 16,728
Gas marketing contracts................................................................. 14,594
--------------
31,322
Less accumulated amortization........................................................... 1,883
--------------
$ 29,439
--------------
--------------
</TABLE>
F-16
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Goodwill is being amortized on a straight line basis over twenty years. The
amount attributed to the value of gas marketing contracts acquired is being
amortized on a straight line basis over the average life of such contracts of
twelve years.
GAS MARKETING -- The Company's gas marketing subsidiary, ProMark, enters
into fixed price agreements to purchase and sell natural gas. ProMark's general
strategy for this business is to enter into offsetting purchase and sales
contracts. Net open positions relating to these contracts do occur, but have not
been significant to date. Revenue from the sale of the gas is recorded as
marketing revenue and the cost of the gas sold is recorded as marketing expense.
ProMark also provides natural gas marketing aggregation services for third
parties. Fees earned for such services are recorded as marketing revenue as the
services are performed.
OIL AND GAS SALES -- The Company changed its method of accounting for oil
and gas sales from the sales method to the entitlements method effective January
1, 1994. Under the sales method previously used by the Company, all proceeds
from production credited to the Company were recorded as revenue until such time
as the Company had produced its share of 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 1994 was an
increase in earnings from operations of $3,584,000 and an increase in production
volumes of 1,555,000 MCF. There were no related income tax effects in 1994.
As of December 31, 1996 the Company had produced approximately 2.6 BCF more
than its entitled share of production. The estimated value of this imbalance of
approximately $4,355,000 is included in the accompanying consolidated balance
sheet as a short-term liability of $1,650,000 and a long-term liability of
$2,705,000.
HEDGING TRANSACTIONS -- In order to minimize exposure to fluctuations in oil
and natural gas prices, the Company hedges the price of future oil and natural
gas production by entering into certain contracts and financial arrangements.
These instruments are accounted for as hedges when the instrument is designated
as a hedge of the related production and there exists a high degree of
correlation between the fair value of the instrument and the fair value of the
hedged production. The degree of correlation is assessed periodically. Gains and
losses related to these hedging transactions are recognized as adjustments to
therevenue recorded for the related production. Costs associated with the
purchase of certain hedging instruments are deferred and amortized against
revenue related to the hedged production.
F-17
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES -- The Company uses the asset and liability method of
accounting for income taxes which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between financial accounting bases and tax bases of assets and
liabilities.
FOREIGN CURRENCY TRANSLATION -- The functional currency of the Company's
Canadian operations is the Canadian dollar. Assets and liabilities related to
the Company's Canadian operations are generally translated at current exchange
rates, and related translation adjustments are reported as a component of
shareholders' equity. Income statement accounts are translated at the average
rates during the period.
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 of $2,158,000 in 1996, $2,160,000 in 1995 and $2,161,000 in 1994.
Common share equivalents include, when applicable, dilutive stock options and
warrants using the treasury stock method.
Fully diluted earnings (loss) per share is computed assuming, in addition to
the above, (i) that convertible preferred stock was converted at the beginning
of each period or date of issuance, if later, and (ii) any additional dilutive
effect of stock options and warrants. The effects of these assumptions were
anti-dilutive in 1996, 1995 and 1994.
RECLASSIFICATIONS -- Certain amounts in prior years' financial statements
have been reclassified to conform to the 1996 financial statement presentation.
(2) ACQUISITIONS:
During 1995, the Company completed acquisitions totaling $26,807,000. The
most significant of these was the purchase on December 20, 1995 of a 56%
economic (49% voting) interest in Saxon Petroleum Inc. (Saxon) for approximately
$22,000,000. Saxon is a Canadian exploration and production company with
headquarters in Calgary, Alberta and operations concentrated in western Alberta.
In the transaction, Forest received from Saxon 40,800,000 voting common shares,
12,300,000 nonvoting common shares, 15,500,000 convertible preferred shares and
warrants to purchase 5,300,000 common shares. The preferred shares and the
nonvoting common shares of Saxon are convertible into voting common shares at
any time. In exchange, Forest transferred to Saxon its preferred shares of
Archean Energy, Ltd., issued to Saxon 1,060,000 common shares of Forest and paid
Saxon $1,500,000 CDN. The preferred shares of Archean Energy, Ltd. were recorded
at their historical carrying value of $11,301,000. The Forest common shares
issued to Saxon were recorded at their estimated fair value determined by
reference to the quoted market price of the shares immediately preceding the
announcement of the acquisition.
Since Forest has majority voting control over Saxon as a result of the
voting common shares that it owns and proxies that it holds, it has accounted
for Saxon as a consolidated subsidiary from the date of its acquisition. The
Company did not record any production or results of operations of Saxon for the
period from December 20 to December 31, 1995 as the results of operations for
such period were not significant.
F-18
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(2) ACQUISITIONS: (CONTINUED)
The Forest common shares held by Saxon were recorded as treasury stock on
Forest's consolidated balance sheet at December 31, 1995. In January 1996, Saxon
sold these shares in a public offering of Forest Common Stock and used the
proceeds to reduce its bank debt.
In September 1996, the preferred shares of Archean were redeemed for cash at
their approximate carrying value.
Subsequent to December 31, 1996 Forest converted its preferred shares of
Saxon into 27,192,983 nonvoting common shares and purchased 3,158,142 voting
common shares and 2,380,608 nonvoting common shares of Saxon pursuant to an
equity participation agreement. These transactions increased Forest's economic
interest in Saxon to 66%.
On January 31, 1996 the Company completed the acquisition of ATCOR Resources
Ltd. of Calgary, Alberta for approximately $136,000,000, including acquisition
costs of approximately $1,000,000. The purchase was funded by the net proceeds
of a Common Stock offering and approximately $8,300,000 drawn under the
Company's bank credit facility. The exploration and production business of ATCOR
was renamed Canadian Forest Oil Ltd. (Canadian Forest). Canadian Forest's
principal reserves and producing properties are located in Alberta and British
Columbia, Canada. As part of the Canadian Forest acquisition, Forest also
acquired ATCOR's natural gas marketing business which was renamed Producers
Marketing Ltd. (ProMark). ProMark is a wholly owned subsidiary of Canadian
Forest.
The consolidated balance sheet of Forest includes the accounts of Saxon and
Canadian Forest at December 31, 1996. The consolidated statements of operations
include the results of operations of Saxon effective January 1, 1996 and the
results of operations of Canadian Forest effective February 1, 1996.
The following unaudited pro forma consolidated statements of operations
information assumes that the Common Stock offering and the acquisitions of Saxon
and Canadian Forest occurred as of January 1, 1995:
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED
DECEMBER 31,
----------------------
1996 1995
----------- ---------
<S> <C> <C>
(IN THOUSANDS
EXCLUDING PER SHARE
AMOUNTS)
Revenue:
Marketing and processing..................................................... $ 200,715 139,444
Oil and gas sales............................................................ 132,423 129,326
Miscellaneous, net........................................................... 1,387 132
----------- ---------
Total revenue.............................................................. $ 334,525 268,902
----------- ---------
----------- ---------
Earnings (loss) before income taxes, and extraordinary item.................... $ 7,512 (9,680)
----------- ---------
----------- ---------
Net earnings (loss)............................................................ $ 3,687 (15,972)
----------- ---------
----------- ---------
Primary earnings (loss) per share.............................................. $ .06 (.81)
----------- ---------
----------- ---------
Fully diluted earnings (loss) per share........................................ $ .05 (.81)
----------- ---------
----------- ---------
</TABLE>
F-19
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(2) ACQUISITIONS: (CONTINUED)
Summarized consolidated financial information for Canadian Forest Oil Ltd.
as of December 31, 1996 and for the period from January 31, 1996 (acquisition
date) to December 31, 1996 is as follows:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
SUMMARIZED CONSOLIDATED BALANCE SHEET INFORMATION:
ASSETS
Current assets........................................................................... $ 29,511
Net property and equipment............................................................... 137,278
Goodwill and other intangible assets, net................................................ 29,439
-----------
$ 196,228
-----------
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities...................................................................... $ 29,880
Intercompany payable..................................................................... 32,500
Other liabilities........................................................................ 805
Deferred income taxes.................................................................... 32,912
Shareholders' equity..................................................................... 100,131
-----------
Total liabilities and equity........................................................... $ 196,228
-----------
-----------
SUMMARIZED CONSOLIDATED STATEMENTS OF OPERATIONS:
Revenue.................................................................................. $ 224,757
-----------
-----------
Earnings before income taxes............................................................. $ 9,685
-----------
-----------
Net earnings............................................................................. $ 4,739
-----------
-----------
</TABLE>
The Company prepares full cost ceiling test computations on a
country-by-country basis and, accordingly, has not prepared such computation for
Canadian Forest Oil Ltd. on a stand-alone basis.
F-20
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(3) ANSCHUTZ AND JEDI TRANSACTIONS:
During 1995 and 1996, the Company consummated transactions 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. (Enron).
Pursuant to a purchase agreement between the Company and Anschutz, Anschutz
purchased 3,760,000 shares of the Company's Common Stock and 620,000 shares of a
new series of preferred stock which were convertible into 1,240,000 additional
shares of Common Stock for a total consideration of $45,000,000. The preferred
stock had a liquidation preference of $18.00 per share and received dividends
ratably with the Common Stock. In addition, Anschutz received a warrant that
entitled it to purchase 3,888,888 shares of the Company's Common Stock for
$10.50 per share (the A Warrant). The A Warrant was scheduled to expire July 27,
1998.
The Anschutz investment was made in two closings. At the first closing,
which occurred on May 19, 1995, Anschutz loaned the Company $9,900,000. The loan
carried interest at 8% per annum. The loan was nonrecourse to the Company and
was 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. At the second closing, which occurred in July 1995, Anschutz
converted the loan into 1,100,000 shares of Common Stock and the shares issued
were recorded at the carrying amount of the loan ($9,900,000). At the second
closing, Anschutz purchased an additional 2,660,000 shares of Common Stock, the
convertible preferred stock and the A Warrant for $35,100,000. The total
proceeds received by the Company at the second closing were allocated based on
the relative fair market values of the Common Stock ($18,272,000), convertible
preferred stock ($8,518,000) and the A Warrant ($8,310,000) issued. The Company
also entered into a shareholders agreement with Anschutz pursuant to which
Anschutz agreed to certain voting, acquisition, and transfer limitations
regarding its shares of Common Stock for five years after the second closing.
At the second closing on July 27, 1995, Forest and JEDI restructured JEDI's
existing loan which had a principal balance of approximately $62,368,000 before
unamortized discount of $4,984,000. As a part of the restructuring, the existing
JEDI loan balance was divided into two tranches: a $40,000,000 tranche, which
bore interest at the rate of 12.5% per annum and was due and payable in full on
December 31, 2000; and an approximately $22,400,000 tranche, which did not bear
interest and was due and payable in full on December 31, 2002. JEDI also
relinquished the net profits interest that it held in certain properties of the
Company. In consideration, JEDI received a warrant (the B Warrant) that entitled
it to purchase 2,250,000 shares of the Company's Common Stock for $10.00 per
share. The B Warrant was recorded at its estimated fair value. The fair value of
the B warrant was estimated to be approximately $12,100,000, representing the
amount determined using the Black-Scholes Option Pricing Model, based on the
market value of the stock at the date of the transaction, less a discount of 10%
to reflect the size of the block of shares to be issued and the estimated
brokerage fees on the ultimate disposition of the shares.
Also at the second closing, JEDI granted an option to Anschutz (the Anschutz
Option), pursuant to which Anschutz was entitled to purchase from JEDI up to
2,250,000 shares of the Company's Common Stock at a purchase price per share
equal to the lesser of (a) $10.00 plus 18% per annum from July 27, 1995 to the
date of exercise of the option, or (b) $15.50. The Anschutz Option was scheduled
to terminate on July 27, 1998. JEDI was to satisfy its obligations under the
Anschutz Option by exercising
F-21
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(3) ANSCHUTZ AND JEDI TRANSACTIONS: (CONTINUED)
the B Warrant. The Company also agreed to use the proceeds from the exercise of
the A Warrant to pay principal and interest on the $40,000,000 tranche of the
JEDI loan.
As a result of the loan restructuring and the issuance of the B Warrant, the
Company reduced the recorded amount of the related liability to approximately
$45,493,000. No gain or loss was recorded on the loan restructuring since the
estimated fair value of the restructured loan and the B warrant was
approximately equal to the original loan balance.
In December 1995, JEDI exchanged the $22,400,000 tranche and the B Warrant
for 1,680,000 shares of Common Stock (the JEDI Exchange). The fair value of the
1,680,000 shares of Common Stock was estimated to be $15,400,000 based on the
quoted market price of the Common Stock at the date of the transaction, less a
discount of 35% to reflect the shareholder agreement with JEDI that limited
JEDI's ability to vote the shares or to transfer the shares before July 27,
1998, the size of the block of stock and the estimated brokerage fees on the
ultimate disposition of the shares. No gain or loss was recorded on the exchange
since the estimated fair value of the Common Stock issued less the estimated
fair value of the B warrant reacquired was approximately equal to the carrying
amount of the $22,400,000 tranche.
Pursuant to the JEDI Exchange, the Company assumed JEDI's obligations under
the Anschutz Option. Under the Anschutz Option, the Company was then obligated
to issue shares directly to Anschutz that previously would have been issued to
JEDI pursuant to the B Warrant.
On August 1, 1996 The Anschutz Corporation exercised the Anschutz Option to
purchase 2,250,000 shares of Common Stock for $26,200,000 or approximately
$11.64 per share. Proceeds received by Forest were used primarily to fund a
portion of 1996 capital expenditures.
On November 5, 1996 the Company exchanged 2,000,000 shares of Common Stock
plus approximately $13,500,000 cash to extinguish approximately $43,000,000 of
nonrecourse secured debt then owed to JEDI. In connection with this transaction,
Anschutz acquired 1,628,888 shares of Common Stock by exercising a portion of
the A Warrant to purchase 388,888 shares of common stock at $10.50 per share and
by converting 620,000 shares of Forest's Second Series Preferred Stock into
1,240,000 shares of Common Stock. The term of the remaining 3,500,000 warrants
held by Anschutz was extended to July 27, 1999. The fair value of the shares of
Common Stock issued to JEDI was estimated based on the quoted market price of
the Common Stock at the date of the transaction, less a discount of 7 1/2% to
reflect the lock-up agreement with JEDI that limited JEDI's ability to transfer
the shares before May 31, 1997, the size of the block of shares to be issued and
the estimated brokerage fees on the ultimate disposition of the shares. The fair
value of the Common Stock issued and the cash paid to JEDI, including related
expenses of the transaction, was less than the carrying amount of the debt
extinguished. Accordingly, the Company recorded an extraordinary gain on
extinguishment of debt in the fourth quarter of 1996 of approximately
$2,166,000.
(4) INVESTMENT IN AFFILIATE:
In 1992, the Company sold its Canadian assets and related operations to
CanEagle Resources Corporation (CanEagle) for approximately $51,250,000 in
Canadian funds ($41,000,000 U.S.). In the transaction, the Company received cash
of approximately $28,000,000 CDN ($22,400,000 U.S.), net of expenses, and
provided financing in the aggregate principal amount of $22,000,000 CDN
($17,600,000 U.S.). On June 24, 1994 CanEagle sold a significant portion of its
oil and gas properties to a third party. In
F-22
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(4) INVESTMENT IN AFFILIATE: (CONTINUED)
conjunction with this transaction, the Company received $6,124,000 CDN
($4,400,000 U.S.) and exchanged its investment in CanEagle for shares of
preferred stock of a newly formed entity, Archean Energy, Ltd. (Archean). The
Company accounted for the proceeds from the 1992 and 1994 transactions as
reductions in the carrying value of its investment in CanEagle. The preferred
shares of Archean were recorded at an amount equal to the remaining carrying
value of the Company's investment in CanEagle.
The Company accounted for its investment in Archean (and CanEagle prior to
June 24, 1994) in a manner analagous to equity accounting. Losses were
recognized to the extent that losses were attributable to the Company's
interest. Earnings were recognized only if realization was assured. Under this
method, no earnings or losses were recognized in 1996, 1995 or 1994.
In December 1995, in connection with the Saxon acquisition, the Company
transferred its Archean preferred stock to Saxon and the Company continued to
account for the investment in Archean at its historical carrying value. In
September 1996, the preferred shares of Archean were redeemed for cash at their
approximate carrying value.
(5) LONG-TERM DEBT:
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Credit facility................................................................ $ 26,400 23,800
Canadian Forest credit facility................................................ 32,500 --
Saxon credit facility.......................................................... -- 16,437
Nonrecourse secured loan....................................................... -- 40,322
Production payment obligation.................................................. 12,596 16,218
11 1/4% Senior Subordinated Notes.............................................. 99,421 99,365
----------- ---------
170,917 196,142
Less current portion........................................................... (2,058) (2,263)
----------- ---------
Long-term debt................................................................. $ 168,859 193,879
----------- ---------
----------- ---------
</TABLE>
CREDIT FACILITY:
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, as amended, the Company may borrow up to $60,000,000 for
working capital and/or general corporate purposes. Advances under this facility
bear interest at rates ranging from the banks' prime rate to prime plus 3/4% or,
alternatively, the London interbank offered rate (LIBOR) plus 1.0% to LIBOR plus
1 3/4% depending on the ratio of debt to total capitalization for the Company.
The borrowing base is subject to formal redetermination semi-annually, but may
be changed at the banks' discretion at any time. The Credit Facility is secured
by a lien on, and a security interest in, a majority of the Company's domestic
proved oil and gas properties and related assets (subject to prior security
interests granted to holders of volumetric production payment agreements) and a
pledge of accounts receivable. The maturity date of the Credit Facility is
January 31, 2000. Under the terms of the Credit Facility, the Company is subject
to certain covenants and financial tests, including restrictions or requirements
with respect to working capital, cash flow, additional debt, liens,
F-23
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(5) LONG-TERM DEBT: (CONTINUED)
asset sales, investments, mergers, cash dividends on capital stock and reporting
responsibilities. At December 31, 1996 notes payable of $26,400,000 were
outstanding under the Credit Facility with interest at rates ranging from 7.00%
to 8.75% per annum. The Company has also used the Credit Facility for a
$1,500,000 letter of credit.
CANADIAN FOREST CREDIT FACILITY:
On February 8, 1996 a newly-formed Canadian subsidiary of Forest entered
into a credit agreement (the Canadian Credit Facility) with The Chase Manhattan
Bank of Canada for the benefit of Canadian Forest and ProMark. The borrowing
base under the Canadian Credit Facility is $60,000,000 CDN. The borrowing base
is subject to formal redeterminations semi-annually, but may be changed by the
bank at its discretion at any time. The maturity date of the Canadian Credit
Facility is February 7, 1999. The Canadian Credit Facility is indirectly secured
by substantially all the assets of Canadian Forest. Funds drawn under the
Canadian Credit Facility can be used for general corporate purposes. Under the
terms of the Canadian Credit Facility, the three Canadian subsidiaries are
subject to certain covenants and financial tests including restrictions or
requirements with respect to working capital, cash flow, additional debt, liens,
asset sales, investments, mergers, cash dividends and reporting
responsibilities. At December 31, 1996 the outstanding balance under this
facility was $32,500,000 (US) with interest at rates ranging from 7.25% to
7.3125% per annum. Canadian Forest has entered into interest rate swaps which
fix the interest rate on approximately $22,000,000 of long-term debt at 10.055%
to 10.55% with terms expiring in 1998. The Company has also used this facility
for a letter of credit in the amount of $3,081,000 CDN.
SAXON CREDIT FACILITY:
Saxon has a revolving credit facility with a borrowing base of $20,000,000
CDN. The loan is subject to semi-annual review and has demand features; however,
repayments are not required provided that borrowings are not in excess of the
borrowing base and Saxon complies with other existing covenants. At December 31,
1996 there was no outstanding balance under this facility.
NONRECOURSE SECURED LOAN:
On December 30, 1993, the Company entered into a nonrecourse secured loan
agreement with JEDI. The terms of the JEDI loan were restructured in 1995 as
described in Note 3. Under the terms of the restructured JEDI loan, the Company
was required to make payments based on the net proceeds, as defined, from
certain subject properties. Payments under the JEDI loan were due monthly and
were equal to 90% of total net operating income from the secured properties,
reduced by 80% of allowable capital expenditures, as defined. On November 5,
1996 the Company exchanged 2,000,000 shares of Common Stock plus approximately
$13,500,000 cash to extinguish the remaining balance of the nonrecourse secured
debt owed to JEDI of approximately $43,000,000. See Note 3.
PRODUCTION PAYMENT OBLIGATION:
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 of 15.5%. At
F-24
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(5) LONG-TERM DEBT: (CONTINUED)
December 31, 1996 the remaining principal amount was $16,981,000 and the
recorded liability was $12,596,000. 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 net proceeds from the subject properties located in the United
States, as defined, except that the amount required to be paid in any given
month shall not exceed 100% of the net proceeds from the subject properties. The
Company 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 1997 payments will reduce the
recorded liability by approximately $2,058,000, which amount is included in
current liabilities, increase the recorded liability by approximately $1,022,000
in 1998, and reduce the recorded liability by $975,000 in 1999, $2,433,000 in
2000 and $2,038,000 in 2001. Properties to which approximately 3% of the
Company's estimated proved reserves are attributable, on an MCFE basis, are
dedicated to this production payment financing.
11 1/4% SENIOR SUBORDINATED NOTES:
On September 8, 1993 the Company completed a public offering of $100,000,000
aggregate principal amount of 11 1/4% Senior Subordinated Notes due September 1,
2003. The Senior Subordinated Notes were issued at a price of 99.259% yielding
11.375% to the holders. The Senior Subordinated Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after September 1,
1998 initially at a redemption price of 105.688%, plus accrued interest to the
date of redemption, declining at the rate of 1.896% per year to September 1,
2000 and at 100% thereafter.
Under the terms of the Senior Subordinated Notes, the Company must meet
certain tests before it is able to pay cash dividends or make other restricted
payments, incur additional indebtedness, engage in transactions with its
affiliates, incur liens and engage in certain sale and leaseback arrangements.
The terms of the Senior Subordinated Notes also limit the Company's ability to
undertake a consolidation, merger or transfer of all or substantially all of its
assets. In addition, the Company is, subject to certain conditions, obligated to
offer to repurchase Senior Subordinated Notes at par value plus accrued and
unpaid interest to the date of repurchase, with the net cash proceeds of certain
sales or dispositions of assets. Upon a change of control, as defined, the
Company will be required to make an offer to purchase the Senior Subordinated
Notes at 101% of the principal amount thereof, plus accrued interest to the date
of purchase.
(6) DEFERRED REVENUE:
From April 1991 through July 1994, the Company entered into various
volumetric production payments with entities affiliated with Enron for net
proceeds of $139,058,000. Under the terms of these production payments, the
Company was required to deliver 80.1 BCF of natural gas and 770,000 barrels of
oil over periods ranging from three to eight years.
The Company is required to deliver the scheduled volumes from the subject
properties or to make a cash payment for volumes produced but not delivered, in
combination not to exceed a specified percentage of monthly production. If
production levels are not sufficient to meet scheduled delivery commitments, the
Company must account for and make up such shortages, at market-based prices,
from future production. The Company is responsible for royalties and for
production costs associated
F-25
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(6) DEFERRED REVENUE: (CONTINUED)
with operating the properties subject to the production payment agreements. The
Company may grant liens on properties subject to the production payment
agreements, but it must notify prospective lienholders that their rights are
subject to the prior rights of the production payment owner.
Amounts received under the production payments were recorded as deferred
revenue. Volumes associated with amortization of deferred revenue for the years
ended December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
NET SALES VOLUMES
ATTRIBUTABLE TO PRODUCTION
VOLUMES DELIVERED (1) PAYMENT DELIVERIES (2)
--------------------------- ---------------------------
NATURAL GAS NATURAL GAS
(MMCF) OIL (MBBLS) (MMCF) OIL (MBBLS)
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
1996................................................. 3,721 87 3,168 74
1995................................................. 11,045 173 9,120 145
1994................................................. 19,985 218 16,005 182
</TABLE>
- ------------------------
(1) Amounts settled in cash in lieu of volumes were $1,641,000, $2,433,000 and
$5,742,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
(2) Represents volumes required to be delivered to Enron affiliates net of
estimated royalty volumes.
Future amortization of deferred revenue, based on the scheduled deliveries
under the production payment agreements, is as follows:
<TABLE>
<CAPTION>
NET SALES VOLUMES
VOLUMES REQUIRED TO BE ATTRIBUTABLE TO PRODUCTION
DELIVERED TO ENRON PAYMENT DELIVERIES (1)
ANNUAL ------------------------- ---------------------------
AMORTIZATION NATURAL GAS (MMCF) NATURAL GAS (MMCF)
--------------- ------------------------- ---------------------------
<S> <C> <C> <C>
(IN THOUSANDS)
1997.............................. $ 2,439 1,410 1,008
1998.............................. 1,592 892 637
1999.............................. 1,352 757 541
Thereafter........................ 2,208 1,237 884
------- ----- -----
$ 7,591 4,296 3,070
------- ----- -----
------- ----- -----
</TABLE>
- ------------------------
(1) Represents volumes required to be delivered to Enron net of estimated
royalty volumes.
F-26
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(7) INCOME TAXES:
The income tax expense (benefit) is different from amounts computed by
applying the statutory Federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Tax expense (benefit) at 35% of income (loss) before income taxes, cumulative
effects of changes in accounting principles and extraordinary item.............. $ 2,300 (6,367) (23,749)
Change in the valuation allowance for deferred tax assets attributable to income
(loss) before income taxes, cumulative effects of changes in accounting
principles and extraordinary item............................................... (367) 5,732 23,220
Canadian earnings taxed at a higher effective rate................................ 1,068 -- --
Canadian Crown payments (net of Alberta Royalty Tax Credit) not deductible for tax
purposes........................................................................ 2,799 -- --
Canadian resource allowance....................................................... (3,005) -- --
Non-deductible depletion and amortization......................................... 1,694 -- --
Expiration of tax carryforwards................................................... 643 535 455
Other............................................................................. 319 93 83
--------- --------- ---------
Total income tax expense (benefit)................................................ $ 5,451 (7) 9
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes generally result from recognizing income and expenses
at different times for financial and tax reporting. In the U.S., differences
result in part from capitalization of certain development, exploration and other
costs under the full cost method of accounting, recording proceeds from the sale
of properties in the full cost pool, and the provision for impairment of oil and
gas properties for financial accounting purposes. In Canada, differences result
in part from accelerated cost recovery of oil and gas capital expenditures for
tax purposes.
F-27
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(7) INCOME TAXES: (CONTINUED)
The components of the net deferred tax liability at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Allowance for doubtful accounts........................................................ $ 296 283
Accrual for retirement benefits........................................................ 1,128 1,223
Accrual for medical benefits........................................................... 2,220 2,220
Accrual for sales recorded on the entitlement method................................... 1,499 2,920
Accrual for interest rate swaps........................................................ 509 --
Net operating loss carryforward........................................................ 46,828 39,264
Depletion carryforward................................................................. 6,958 6,958
Investment tax credit carryforward..................................................... 2,576 3,219
Alternative minimum tax credit carryforward............................................ 2,187 2,187
Other.................................................................................. 613 243
---------- ----------
Total gross deferred tax assets...................................................... 64,814 58,517
Less valuation allowance............................................................. (43,999) (45,124)
---------- ----------
Net deferred tax assets.............................................................. 20,815 13,393
Deferred tax liabilities:
Property and equipment................................................................. (48,475) (13,393)
Deferred income on long term contracts................................................. (6,014) --
Other.................................................................................. (42) --
---------- ----------
Total gross deferred tax liabilities................................................. (54,531) (13,393)
---------- ----------
Net deferred tax liability........................................................... $ (33,716) --
---------- ----------
---------- ----------
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1996 was a decrease of $1,125,000, which includes a decrease in the
valuation allowance of $758,000 attributable to the extraordinary gain.
The Alternative Minimum Tax (AMT) credit carryforward available to reduce
future U.S. Federal regular taxes aggregated $2,187,000 at December 31, 1996.
This amount may be carried forward
F-28
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(7) INCOME TAXES: (CONTINUED)
indefinitely. U.S. Federal regular and AMT net operating loss carryforwards at
December 31, 1996 were $133,795,000 and $130,142,000, respectively, and will
expire in the years indicated below:
<TABLE>
<CAPTION>
REGULAR AMT
----------- ---------
<S> <C> <C>
(IN THOUSANDS)
2000........................................................................... $ 3,590 4,975
2005........................................................................... 8,307 --
2008........................................................................... 28,999 31,799
2009........................................................................... 22,817 22,964
2010........................................................................... 45,736 46,058
2011........................................................................... 24,346 24,346
----------- ---------
$ 133,795 130,142
----------- ---------
----------- ---------
</TABLE>
AMT net operating loss carryforwards can be used to offset 90% of AMT income
in future years.
Investment tax credit carryforwards available to reduce future U.S. Federal
income taxes aggregated $2,576,000 at December 31, 1996 and expire at various
dates through the year 2001. Percentage depletion carryforwards available to
reduce future U.S. Federal taxable income aggregated $19,879,000 at December 31,
1996. This amount may be carried forward indefinitely.
Canadian tax pools available to reduce future Canadian Federal income taxes
aggregated approximately $78,000,000 at December 31, 1996. These tax pool
balances are deductible on a declining balance basis ranging from ten to one
hundred percent of the balance annually. These amounts may be carried forward
indefinitely.
The availability of some of these U.S. Federal tax attributes to reduce
current and future U.S. taxable income of the Company is subject to various
limitations under the Internal Revenue Code. In particular, the Company's
ability to utilize such tax attributes could be limited due to the occurrence of
an "ownership change" within the meaning of Section 382 of the Internal Revenue
Code resulting from the Anschutz transaction in 1995 and the public stock
issuance in 1996. Under the general provisions of Section 382 of the Code, the
Company's net operating loss carryforwards will be subject to an annual
limitation as to their use of approximately $5,700,000. Even though the Company
is limited in its ability to use the net operating loss carryovers under these
provisions of Section 382, it may be entitled to use these net operating loss
carryovers to offset (a) gains recognized in the five years following the
ownership change on the disposition of certain assets, to the extent that the
value of the assets disposed of exceeds their tax basis on the date of the
ownership change or (b) any item of income which is properly taken into account
in the five years following the ownership change but which is attributable to
periods before the ownership change ("built-in gain"). The ability of the
Company to use these net operating loss carryovers to offset built-in gain first
requires that the Company have total built-in gains at the time of the ownership
change which are greater than a threshold amount. In addition, the use of these
net operating loss carryforwards to offset built-in gain cannot exceed the
amount of the total built-in gain. The Company has not finalized its calculation
of the amount of built-in gains at the date of the ownership change, but
estimates that its ability to fully utilize its net operating loss carryforwards
may be limited by these provisions.
F-29
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(7) INCOME TAXES: (CONTINUED)
Due to limitations in the Internal Revenue Code, other than the Section 382
limitations discussed above, the Company believes it is unlikely that it will be
able to use any significant portion of its investment tax credit carryforwards
before they expire.
(8) PREFERRED STOCK:
$.75 CONVERTIBLE PREFERRED STOCK:
The Company had 10,000,000 shares of $.75 Convertible Preferred Stock
authorized, par value $.01 per share, of which there were 2,877,673 shares
outstanding at December 31, 1996 and 2,880,173 shares outstanding at December
31, 1995, with an aggregate liquidation preference of $28,776,730 at December
31, 1996 and $28,801,730 at December 31, 1995. This stock was convertible at any
time, at the option of the holder, at the rate of .7 shares of Common Stock for
each share of $.75 Convertible Preferred Stock, subject to adjustment upon
occurrence of certain events. During 1996, 2,500 shares of $.75 Convertible
Preferred Stock were converted into 1,750 shares of Common Stock; during 1995,
800 shares of $.75 Convertible Preferred Stock were converted into 560 shares of
Common Stock; there were no conversions in 1994. The $.75 Convertible Preferred
Stock was redeemable, in whole or in part, at the option of the Company, after
July 1, 1996 at $10.00 per share plus accumulated and unpaid dividends.
Cumulative annual dividends of $.75 per share were payable quarterly, in
arrears, on the first day of February, May, August and November, when and as
declared. Until December 31, 1993, the Company was required to pay such
dividends in shares of Common Stock. After such date, dividends could be paid in
cash or, at the Company's election, in shares of Common Stock or in a
combination of cash and Common Stock; however, the Company was prohibited from
paying cash dividends on its $.75 Convertible Preferred Stock from the February
1, 1995 dividend through the March 8, 1996 dividend due to restrictions
contained in the Credit Facility with its lending banks. After such date,
dividends could be paid in cash or at the Company's election, in shares of
Common Stock or in a combination of cash and Common Stock. Under the terms of
the $.75 Convertible Preferred stock, Common Stock delivered in payment of
dividends was valued for dividend payment purposes at between 75% and 90%,
depending on trading volume, of the average last reported sales price of the
Common Stock during a specified period prior to the record date for the dividend
payment. During any period in which dividends on preferred stock were in
arrears, no dividends or distributions, except for dividends paid in shares of
Common Stock, could be paid or declared on the Common Stock, nor could any
shares of Common Stock be acquired by the Company.
The Company called for redemption on February 28, 1997 all 2,877,673 shares
of its $.75 Convertible Preferred Stock. The redemption price was $10.00 per
share plus accumulated and unpaid dividends to and including the date of
redemption (for an aggregate redemption price of $10.06 per share). In lieu of
cash redemption, prior to the close of business on February 21, 1997 the holders
of the preferred shares had the right to convert each share into 0.7 share of
Forest's Common Stock. As of February 21, 1997 2,783,945 shares or 96.7% of the
shares outstanding were tendered for conversion into Common Stock. The remaining
93,728 shares that were not tendered for conversion were redeemed by the Company
at the redemption price of $10.06 per share on February 28, 1997.
F-30
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(8) PREFERRED STOCK: (CONTINUED)
SECOND SERIES PREFERRED STOCK:
At December 31, 1995 the Company had 620,000 shares of Second Series
Preferred Stock authorized, par value $.01 per share, of which there were
620,000 shares outstanding, with an aggregate liquidation preference of
$11,160,000. Each share of Second Series Preferred Stock (1) was convertible
into 2 shares of Common Stock, (2) had no right to vote, (3) had the right to
receive dividends on the dates and in the form that dividends were payable on
the Common Stock, and (4) had 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 $9.00, had the right to receive
distributions on the dates and in the form that distributions are payable on the
Common Stock. On November 5, 1996 all 620,000 shares of the Company's Second
Series Preferred Stock were converted into 1,240,000 shares of Common Stock.
(9) COMMON STOCK:
COMMON STOCK:
The Company has 200,000,000 shares of Common Stock authorized, par value
$.10 per share. On January 5, 1996 a 5-to-1 reverse stock split was approved by
the Company's shareholders. The reverse split became effective on January 8,
1996. Unless otherwise indicated, all share amounts have been adjusted to give
effect to the 5-to-1 reverse stock split.
On January 31, 1996 13,200,000 shares of Common Stock were sold for $11.00
per share in a public offering. Of this amount 1,060,000 shares were sold by
Saxon and 12,140,000 were sold by Forest. The net proceeds to Forest and Saxon
from the issuance of shares totaled approximately $136,000,000 after deducting
issuance costs and underwriting fees.
In October 1993, the Board of Directors adopted a shareholders' rights plan
(the Plan) and entered into the Rights Agreement. The Company paid a dividend
distribution of one Preferred Share Purchase Right (the Rights) on each
outstanding share of the Company's Common Stock. The Rights are exercisable only
if a person or group acquires 20% or more of the Company's Common Stock or
announces a tender offer which would result in ownership by a person or group of
20% or more of the Common Stock. Each Right initially entitles each shareholder
to buy 1/100th of a share of a new series of Preferred Stock at an exercise
price of $30.00, subject to adjustment upon certain occurrences. Each 1/100th of
a share of such new Preferred Stock that can be purchased upon exercise of a
Right has economic terms designed to approximate the value of one share of
Common Stock. The Rights will expire on October 29, 2003, unless extended or
terminated earlier. In connection with the Anschutz transaction, the Company
amended the Rights Agreement to exempt from the provisions of the Rights
Agreement shares of Common Stock acquired by Anschutz and JEDI in the Anschutz
and JEDI transactions, including shares later acquired pursuant to the
conversion of the Second Series Preferred Stock or the exercise of the A Warrant
and the Anschutz Option. The amendment to the Rights Agreement did not exempt
other shares of Common Stock acquired by Anschutz or JEDI from the provisions of
the Rights Agreement.
F-31
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(9) COMMON STOCK: (CONTINUED)
WARRANTS:
At December 31, 1995 the Company had outstanding 1,244,715 warrants to
purchase shares of its Common Stock (the Public Warrants). Each Public warrant
entitled the holder to purchase one-fifth share of Common Stock at a price of
$3.00 and was noncallable. During 1996, 112,185 warrants were exercised to
purchase 22,437 shares of Common Stock. On October 1, 1996 the remaining Public
Warrants expired.
In December 1995, the Company assumed JEDI's obligations under the Anschutz
Option. On August 1, 1996 Anschutz exercised the Anschutz Option for $26,200,000
or approximately $11.64 per share and Anschutz received 2,250,000 shares of
Common Stock.
At December 31, 1996 the Company has outstanding the A Warrant that is held
by Anschutz. At that date, the A Warrant entitled the holder to purchase
3,500,000 shares of Common Stock at a price of $10.50 per share. The Warrant
expires on July 27, 1999. On November 5, 1996 Anschutz exercised a portion of
the A Warrant and purchased 388,888 shares of Common Stock at $10.50 per share.
STOCK OPTIONS:
In March 1992, the Company adopted the 1992 Stock Option Plan under which
non-qualified stock options may be granted to key employees and non-employee
directors. The aggregate number of shares of Common Stock which the Company may
issue under options granted pursuant to this plan may not exceed 10% of the
total number of shares outstanding or issuable at the date of grant pursuant to
outstanding rights, warrants, convertible or exchangeable securities or other
options. The exercise price of an option may not be less than 85% of the fair
market value of one share of the Company's Common Stock on the date of grant.
The options vest 20% on the date of grant and an additional 20% on each grant
anniversary date thereafter.
The following table summarizes the activity in the Company's stock-based
compensation plan for the years ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER OF
NUMBER OF EXERCISE SHARES
SHARES PRICE EXERCISABLE
----------- ----------- ------------
<S> <C> <C> <C>
Outstanding at December 31, 1993................................. 610,800 $ 19.99 155,320
Granted at fair value.......................................... 62,000 25.00
Exercised...................................................... (7,000) 15.00
Cancelled...................................................... (7,000) 25.00
----------- -----------
Outstanding at December 31, 1994................................. 658,800 20.46 372,080
Cancelled...................................................... (30,800) 20.52
----------- -----------
Outstanding at December 31, 1995................................. 628,000 20.46 461,200
Granted at fair value.......................................... 1,383,900 12.74
Exercised...................................................... (35,120) 11.42
Cancelled...................................................... (515,200) 20.47
----------- -----------
Outstanding at December 31, 1996................................. 1,461,580 $ 13.37 362,460
----------- -----------
----------- -----------
</TABLE>
F-32
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(9) COMMON STOCK: (CONTINUED)
The fair value of each option granted in 1996 was estimated using the
Black-Scholes option pricing model with the following assumptions: expected
option life of 5 years; risk free interest rates ranging from 5.261% to 6.022%;
estimated volatility of 59.95%; and dividend yield of zero percent. The weighted
average fair market value of options granted during 1996 was estimated to be
$7.22 per share based on these assumptions.
The following table summarizes information about options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
- --------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 11.25-12.63 666,080 9.23 $ 11.53 107,360 $ 11.59
$ 14.00-15.00 737,500 9.45 14.17 197,100 14.34
$ 25.00 58,000 5.75 25.00 58,000 25.00
- --------------- ----------- --- ----------- ----------- -----------
$ 11.25-25.00 1,461,580 9.20 $ 13.37 362,460 $ 15.23
- --------------- ----------- --- ----------- ----------- -----------
- --------------- ----------- --- ----------- ----------- -----------
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost is recognized for options
granted at a price equal to the fair market value of the common stock. Had
compensation cost for the Company's stock-based compensation plan been
determined using the fair value of the options at the grant date, the Company's
net income for the year ended December 31, 1996 would have been $2,230,000 and
net earnings per share would have been less than $.01 per share. There were no
stock options granted in 1995; accordingly, no compensation cost would have been
recognized in that year.
(10) EMPLOYEE BENEFITS:
PENSION PLANS:
The Company has a qualified defined benefit pension plan which covers its
U.S. employees (Pension Plan). The Pension Plan has been curtailed and all
benefit accruals were suspended effective May 31, 1991.
The benefits under the Pension Plan are based on years of service and the
employee's average compensation during the highest consecutive sixty-month
period in the fifteen years prior to retirement. No contribution was made to the
Plan in 1996, 1995 or 1994.
F-33
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(10) EMPLOYEE BENEFITS: (CONTINUED)
The following table sets forth the Pension Plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation (all benefits are
vested)....................................................................... $ (25,959) (27,485)
---------- ---------
---------- ---------
Projected benefit obligation for service rendered to date....................... $ (25,959) (27,485)
Plan assets at fair market value, consisting primarily of listed stocks, bonds
and other fixed income obligations............................................ 24,897 24,270
---------- ---------
Unfunded pension liability...................................................... (1,062) (3,215)
Unrecognized net loss from past experience different from that assumed and
effects of changes in assumptions............................................. 2,012 4,133
---------- ---------
Pension asset recognized in the balance sheet................................... $ 950 918
---------- ---------
---------- ---------
</TABLE>
For 1996, the discount rate used in determining the actuarial present value
of the projected benefit obligation was 7.75% and the expected long-term rate of
return on assets was 9%. For 1995, the discount rate used in determining the
actuarial present value of the projected benefit obligation was 7.25% and the
expected long-term rate of return on assets was 9%. For 1994 the discount rate
used in determining the actuarial present value of the projected benefit
obligation was 9% and the expected long-term rate of return on assets was 9%.
The components of net pension expense (benefit) for the years ended December
31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net pension expense (benefit) included the following components:
Interest cost on projected benefit obligation.......................... $ 1,926 2,049 1,976
Actual return on plan assets........................................... (3,056) (3,243) (245)
Net amortization and deferral.......................................... 1,098 1,234 (1,955)
--------- --------- ---------
Net pension expense (benefit)............................................ $ (32) 40 (224)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has a non-qualified unfunded supplementary retirement plan that
provides certain officers with defined retirement benefits in excess of
qualified plan limits imposed by Federal tax law. Benefit accruals under this
plan were suspended effective May 31, 1991 in connection with suspension of
benefit accruals under the Pension Plan. At December 31, 1996 the projected
benefit obligation under this plan totaled $604,000, which amount is included in
other liabilities in the accompanying balance sheet. The projected benefit
obligation is determined using the same discount rate as is used for
calculations for the Pension Plan.
F-34
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(10) EMPLOYEE BENEFITS: (CONTINUED)
In 1993, as a result of the change in the discount rate for the Pension Plan
and the supplementary retirement plan, the Company recorded a liability of
$3,038,000, representing the unfunded pension liability, and a corresponding
decrease in capital surplus. As a result of changes in the discount rate for the
Pension Plan and the supplementary retirement plan, the Company records
corresponding changes in the liability and capital surplus. In 1994, the Company
reduced the liability representing the unfunded pension liability by
approximately $1,570,000, with a corresponding increase in capital surplus. In
1995, the Company increased the unfunded pension liability by approximately
$2,836,000, with a corresponding decrease in capital surplus. In 1996, the
Company reduced the unfunded pension liability by approximately $2,145,000, with
a corresponding increase in capital surplus.
Canadian Forest's employees are members of a non-contributory defined
benefit pension plan (Canadian Pension Plan). The benefits under the Canadian
Pension Plan are based on years of service, the employee's average annual
compensation during the highest consecutive sixty month period of pensionable
service and the employee's age at retirement. Canadian Forest's contribution to
the Canadian Pension Plan was $47,000 in 1996.
The following table sets forth the Canadian Pension Plan's funded status and
amounts recognized in the Company's consolidated financial statements at
December 31:
<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
Actuarial present value of accumulated benefit obligation (all benefits are vested)..... $ (4,119)
-------
-------
Projected benefit obligation for service rendered to date............................... $ (4,119)
Plan assets at fair market value, consisting primarily of listed stocks, bonds and other
fixed income obligations.............................................................. 4,922
-------
Pension surplus......................................................................... 803
Unrecognized net gain from past experience different from that assumed and effects of
changes in assumptions................................................................ (915)
-------
Pension liability recognized in the balance sheet....................................... $ (112)
-------
-------
</TABLE>
For 1996, the discount rate used in determining the actuarial present value
of the projected benefit obligation was 7% and the expected long-term rate of
return on assets was 7%.
The components of net pension expense for the year ended December 31 is as
follows:
<TABLE>
<CAPTION>
1996
---------------
(IN THOUSANDS)
<S> <C>
Net pension expense included the following components:
Interest cost on projected benefit obligation......................................... $ 456
Actual return on plan assets.......................................................... (310)
Net amortization and deferral......................................................... (69)
------
Net pension expense..................................................................... $ 77
------
------
</TABLE>
F-35
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(10) EMPLOYEE BENEFITS: (CONTINUED)
RETIREMENT SAVINGS PLANS:
The Company sponsors a qualified tax deferred savings plan in accordance
with the provisions of Section 401(k) of the Internal Revenue Code for its U.S.
employees. Employees may defer up to 10% of their compensation, subject to
certain limitations. The Company matches the employee contributions up to 5% of
employee compensation. In the first six months of 1995 and in 1994, Company
contributions were made using treasury stock. In the last six months of 1995 and
in the first nine months of 1996, Company contributions were made by issuing
authorized but unissued shares of Common Stock. In the last three months of
1996, Company contributions were made in cash. The expense associated with the
Company's contribution was $399,000 in 1996, $423,000 in 1995 and $516,000 in
1994.
Canadian Forest also provides a savings plan which is available to all of
its employees. Employees may contribute up to 4% of their salary, subject to
certain limitations, with Canadian Forest matching the employee contribution in
full. Certain limitations are in effect with respect to withdrawals from the
plan. Canadian Forest's contribution to the plan was $95,000 in 1996.
EXECUTIVE RETIREMENT AGREEMENTS:
The Company entered into agreements in December 1990 (the Agreements) with
certain former executives and directors (the Retirees) whereby each executive
retired from the employ of the Company as of December 28, 1990. Pursuant to the
terms of the Agreements, the Retirees are entitled to receive supplemental
retirement payments from the Company 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 also
continued 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.
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 each year
from 1993 through 1996 at approximately $190,000 per year with the balance of
$149,000 payable in May 1997. The Agreements for the other six Retirees provide
for supplemental retirement payments totaling approximately $970,000 per year
through 1998 and approximately $770,000 per year in 1999 and 2000.
The $2,881,000 present value of the amounts due under the agreements,
discounted at 13%, is included in other current and long-term liabilities.
LIFE INSURANCE:
The Company provides life insurance benefits for certain key employees and
retirees under split dollar life insurance plans. The premiums for the life
insurance policies were $921,000, $921,000 and $916,000 in 1996, 1995 and 1994,
respectively, including $831,000 in each of the years 1996, 1995 and 1994 for
policies for retired executives. Under the life insurance plans, the Company is
assigned a portion of the benefits which is designed to recover the premiums
paid.
F-36
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(10) EMPLOYEE BENEFITS: (CONTINUED)
POSTRETIREMENT BENEFITS:
The Company accrues expected costs of providing postretirement benefits to
employees, their beneficiaries and covered dependents in accordance with
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," (SFAS No. 106).
The following table sets forth the status of the postretirement benefit plan
and the amounts recognized in the Company's consolidated financial statements at
December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Retired participants................................................................. $ 4,522 4,803
Active participants fully eligible for benefits...................................... 256 201
Other active participants............................................................ 1,101 1,026
--------- ---------
Accumulated postretirement benefit obligation (APBO)................................. 5,879 6,030
Plan assets at fair market value..................................................... -- --
--------- ---------
APBO in excess of plan assets........................................................ 5,879 6,030
Unrecognized loss.................................................................... (166) (595)
--------- ---------
Accrued postretirement benefit liability............................................. $ 5,713 5,435
--------- ---------
--------- ---------
</TABLE>
The discount rates used in determining the actuarial present value of the
APBO at December 31, 1996, 1995 and 1994 were 7.75%, 7.25% and 9%, respectively.
The components of postretirement benefit expense for the years ended
December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost..................................................................... $ 131 83 103
Interest cost on APBO............................................................ 418 421 407
--------- --- ---
Postretirement benefit cost...................................................... $ 549 504 510
--------- --- ---
--------- --- ---
</TABLE>
For 1996, a 1% increase in health care cost trends would have increased the
APBO by $723,000 and the service and interest cost by $84,000.
(11) RELATED PARTY TRANSACTIONS:
Prior to 1995, the Company used a real estate complex owned directly or
indirectly by certain stockholders and members of the Board of Directors for
Company-sponsored seminars, the accommodation of business guests, the housing of
personnel attending corporate meetings and for other general business purposes.
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.
John F. Dorn resigned as an executive officer and director of the Company in
1993. The Company agreed to pay Mr. Dorn his salary at the time of his
resignation through September 30, 1996. In addition,
F-37
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(11) RELATED PARTY TRANSACTIONS: (CONTINUED)
the Company provided certain other benefits and services to Mr. Dorn. The
present value of the severance package was estimated at $500,000, which amount
was recorded as an expense and a liability at December 31, 1993. In March 1994,
the Company sold certain non-strategic oil and gas properties to an entity
controlled by Mr. Dorn and another former executive officer of the Company for
net proceeds, after costs of sale and purchase price adjustments, of $3,661,000.
The Company established the sales price based upon an opinion from an
independent third party.
(12) COMMITMENTS AND CONTINGENCIES:
Future rental payments for office facilities and equipment under the
remaining terms of noncancelable leases are $1,810,000, $1,810,000, $1,773,000,
$1,615,000 and $1,090,000 for the years ending December 31, 1997 through 2001,
respectively.
Net rental payments applicable to exploration and development activities and
capitalized in the oil and gas property accounts aggregated $1,050,000 in 1996,
$972,000 in 1995 and $851,000 in 1994. Net rental payments charged to expense
amounted to $3,336,000 in 1996, $3,529,000 in 1995 and $3,512,000 in 1994.
Rental payments include the short-term lease of vehicles. None of the leases are
accounted for as capital leases.
A significant portion of Canadian Forest's natural gas production is sold
through the ProMark Netback Pool. At December 31, 1996 the ProMark Netback Pool
had entered into fixed price contracts to sell approximately 10.7 BCF of natural
gas in 1997 at an average price of $1.66 per MCF and approximately 5.4 BCF of
natural gas in 1998 at an average price of approximately $1.88 per MCF. Canadian
Forest is obligated to deliver approximately 25% of the volumes of natural gas
subject to these contracts.
As part of ProMark's gas marketing activities, ProMark has entered into
fixed price contracts to purchase and to resell natural gas through 1998.
ProMark has commitments to purchase and commitments to resell approximately
300,000 MCF per day through October 31, 1997 and approximately 35,000 MCF per
day thereafter through October 31, 1998. The Company could be exposed to loss in
the event that a counterparty to these agreements failed to perform in
accordance with the terms of the agreements.
The Company, in the ordinary course of business, is a party to various legal
actions. In the opinion of management, none of these actions, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
(13) FINANCIAL INSTRUMENTS:
ENERGY SWAPS AND COLLARS:
In order to hedge against the effects on the Company's future oil and gas
production of declines in oil and natural gas prices, the Company enters into
energy swap agreements with third parties and accounts for the agreements as
hedges based on analogy to the criteria set forth in Statement of Financial
Accounting Standards No. 80, "Accounting for Futures Contracts". 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. For the
F-38
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(13) FINANCIAL INSTRUMENTS: (CONTINUED)
years ended December 31, 1996, 1995 and 1994, the Company's gains (losses) under
its swap agreements were $(10,422,000), $3,536,000 and $1,810,000, respectively.
The Company also enters into collar agreements with third parties that are
accounted for as hedges. A collar agreement is similar to a swap agreement,
except that the Company receives the difference between the floor price and the
index price only if the index price is below the floor price, and the Company
pays the difference between the ceiling price and the index price only if the
index price is above the ceiling price.
The following table indicates outstanding energy swaps at December 31, 1996:
<TABLE>
<CAPTION>
PRODUCT VOLUME FIXED PRICE DURATION
- --------------------------- ------------------------------- --------------------- --------------
<S> <C> <C> <C>
Natural Gas 441 to 5,671MMBTU/day $2.300 to $2.535 1/97 - 12/99
Natural Gas 100 to 250 MMBTU/day $2.2505 to $3.003 1/97 - 12/02
Natural Gas 5,000 MMBTU/day $1.9225 1/97 - 12/97
Natural Gas 3,000 MMBTU/day $2.42 1/97 - 12/97
Natural Gas 10,000 MMBTU/day $2.728 1/97 - 2/97
Natural Gas (1) 1,200 to 1,500 MMBTU/day $1.159 (2) 1/97 - 6/98
Oil 250 BBLS/day $18.85 1/97 - 12/97
Oil 332 BBLS/day $17.90 1/97 - 6/97
Oil 250 BBLS/day $20.05 1/97 - 12/97
Oil 250 BBLS/day $21.05 1/97 - 12/97
Oil (1) 350 BBLS/day $18.65 1/97 - 12/97
Oil (1) 350 BBLS/day $20.05 1/97 - 12/97
Oil (1) 350 BBLS/day $21.04 1/97 - 12/97
</TABLE>
- ------------------------
(1) Energy swaps related to the oil and gas operations of Canadian Forest and
Saxon.
(2) Based on Alberta Energy Company "C" (AECO "C", U.S. $) basis. All other
swaps are settled on the basis of New York Mercantile Exchange (NYMEX)
prices.
Subsequent to December 31, 1996 the Company entered into two additional oil
swaps. The first oil swap hedges 200 barrels of oil per day from February 1997
to July 1997 at a fixed price of $23.67 per barrel (NYMEX basis). The second oil
swap hedges 247 barrels of oil per day from January 1998 to December 1998 at a
fixed price of $20.00 per barrel (NYMEX basis).
The Company also uses basis swaps in connection with energy swaps to fix the
differential between the NYMEX price and the index price at which the hedged gas
is to be sold. At December 31, 1996 there are six basis swaps in place through
April 1998, for a weighted average volume of 22,000 MMBTU/day. Subsequent to
December 31, 1996, the Company entered into six additional basis swaps through
December 1997, for a weighted average volume of 18,000 MMBTU/day.
At December 31, 1996 the Company has an outstanding collar to hedge 10,000
MMBTU of natural gas per day from January 1997 through December 1997. The floor
and ceiling price of the collar are $2.00 and $2.37 per MMBTU (NYMEX basis),
respectively. Subsequent to December 31, 1996 the
F-39
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(13) FINANCIAL INSTRUMENTS: (CONTINUED)
Company entered into a collar to hedge 7,000 MMBTU of gas per day from April
1997 to September 1997. The floor and ceiling price of the collar are $2.10 and
$2.50 per MMBTU (NYMEX basis), respectively.
At December 31, 1996 the Company has an outstanding call which covers 10,000
MMBTU of natural gas per day from January 1997 through December 1997. In this
arrangement, the Company has effectively set a ceiling price of $2.00 per MMBTU
(NYMEX basis) in exchange for a premium of $.086 per MMBTU.
The Company is exposed to off-balance-sheet risks associated with swap or
collar agreements arising from movements in the prices of oil and natural gas
and from the unlikely event of non-performance by the counterparty to the swap
or collar agreements.
Set forth below is the estimated fair value of certain on- and off-balance
sheet financial instruments, along with the methods and assumptions used to
estimate such fair values as of December 31, 1996:
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: The
carrying amount of these instruments approximates fair value due to their short
maturity.
PRODUCTION PAYMENT OBLIGATION:
The fair value of the Company's production payment obligation has been
estimated as approximately $11,188,000 by discounting the projected future cash
payments required under the agreement by 9.7%.
11 1/4% SENIOR SUBORDINATED NOTES:
The fair value of the Company's 11 1/4% Senior Subordinated Notes was
approximately $107,500,000, based upon quoted market prices of the Notes.
INTEREST RATE SWAP AGREEMENTS:
The fair value of the Company's interest rate swap agreements was a loss of
approximately $1,751,000, of which approximately $1,168,000 has been recorded as
a liability at December 31, 1996.
ENERGY SWAP AGREEMENTS:
The fair value of the Company's energy swap agreements was a loss of
approximately $5,615,000, based upon the estimated net amount the Company would
have to pay to terminate the agreements.
BASIS SWAP AGREEMENTS:
The fair value of the Company's basis swap agreements was a gain of
approximately $173,000, based upon the estimated net amount the Company would
receive to terminate the agreements.
ENERGY COLLAR AGREEMENTS:
The fair value of the Company's energy collar agreements was a loss of
approximately $109,000, based upon the estimated net amount the Company would
have to pay to terminate the agreements.
F-40
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(14) MAJOR CUSTOMERS:
The Company's sales to individual customers which exceeded 10% of the
Company's total revenue in 1995 and 1994 (exclusive of the effects of energy
swaps and hedges) are shown below. No single customer accounted for more than
10% of total revenue in 1996.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Enron Affiliates.................................................................. $ 30,916 58,805
Chevron USA Production Company.................................................... 11,893 12,829
</TABLE>
The amount shown for Enron Affiliates includes oil and natural gas sales to
Enron Gas Marketing Inc., Enron Oil & Gas Company, EOTT Energy Corporation,
Cactus Funding Corporation, Cactus Hydrocarbon III Limited Partnership, Enron
Gas Services Corporation and Enron Reserve Acquisition. Approximately
$6,272,000, $17,217,000 and $29,046,000 represent sales recorded for deliveries
under volumetric production payments in the years ended December 31, 1996, 1995
and 1994, respectively.
(15) GAS CONTRACT SETTLEMENT:
The Company had gas sales contracts with Columbia Gas Transmission
(Columbia) which were rejected by Columbia in 1991 in connection with its
bankruptcy proceedings. The Company had a secured claim of approximately
$1,600,000 relating to Columbia's failure to pay the contract price for a period
of time prior to the rejection of the contracts. This amount was recorded as
natural gas sales when the gas was delivered in 1991. The Company also had an
unsecured claim relating to the rejection of the gas purchase contracts.
The Company established a reserve of approximately $750,000 against the
secured portion of the bankruptcy claim in 1991. This reserve was reversed in
1994 when it became apparent that the amount the Company would receive in the
Columbia settlement would exceed the amount of the secured claim. The reversal
of the reserve was recorded as miscellaneous revenue in 1994.
In 1995, the creditors reached agreement with Columbia regarding settlement
of the various claims. The Company recorded approximately $4,263,000 of revenue
as a result of the settlement. This amount represents the Company's portion of
the settlement amount related to its unsecured claim, net of a provision for
royalties payable.
F-41
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1996
Revenue................................................................ $ 60,870 79,544 83,969 93,091
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings from operations............................................... $ 20,010 18,743 23,058 29,748
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings (loss) before extraordinary item.............................. $ (386) (2,901) 879 3,547
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings (loss).................................................... $ (386) (2,901) 879 5,713
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings (loss) attributable to common stock....................... $ (926) (3,441) 340 5,174
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary and fully diluted loss per share before extraordinary item..... $ (.04) (.14) .01 .10
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary and fully diluted loss per share............................... $ (.04) (.14) .01 .17
--------- --------- --------- ---------
--------- --------- --------- ---------
1995
Revenue................................................................ $ 22,361 20,550 17,617 21,928
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings from operations............................................... $ 14,900 12,740 10,177 12,914
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss............................................................... $ (3,144) (4,815) (6,574) (3,463)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss attributable to common stock.................................. $ (3,684) (5,355) (7,114) (4,003)
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary and fully diluted loss per share............................... $ (.65) (.94) (.84) (.42)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-42
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(17) BUSINESS AND GEOGRAPHICAL SEGMENTS:
The Company operates in geographic segments in the United States and Canada,
and in two business segments as follows:
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
----------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
1996
Gas marketing and processing:
Revenue.................................................................. $ 927 186,447 187,374
----------- --------- ---------
----------- --------- ---------
Depreciation and depletion expense....................................... $ -- 2,263 2,263
----------- --------- ---------
----------- --------- ---------
Operating profit......................................................... $ 927 5,478 6,405
----------- --------- ---------
----------- --------- ---------
Identifiable assets...................................................... $ 54,215 54,215
----------- --------- ---------
----------- --------- ---------
Capital expenditures..................................................... $ -- 6,183 6,183
----------- --------- ---------
----------- --------- ---------
Oil and gas operations:
Revenue.................................................................. $ 80,811 47,902 128,713
----------- --------- ---------
----------- --------- ---------
Depreciation and depletion expense....................................... $ 39,880 20,925 60,805
----------- --------- ---------
----------- --------- ---------
Operating profit......................................................... $ 21,142 14,567 35,709
----------- --------- ---------
----------- --------- ---------
Identifiable assets...................................................... $ 326,399 182,844 509,243
----------- --------- ---------
----------- --------- ---------
Capital expenditures..................................................... $ 74,734 169,384 244,118
----------- --------- ---------
----------- --------- ---------
</TABLE>
In 1995 and 1994, the Company's only business segment was oil and gas
operations, which were conducted entirely in the United States.
F-43
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(18) SUPPLEMENTAL FINANCIAL DATA -- OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED):
The following information is presented in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosure about Oil and Gas Producing
Activities," (SFAS No. 69), except as noted.
(A) COSTS INCURRED IN OIL AND GAS EXPLORATION AND DEVELOPMENT ACTIVITIES --
The following costs were incurred in oil and gas exploration and development
activities during the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
--------- ------------ ---------
<S> <C> <C> <C>
(IN THOUSANDS)
1996
Property acquisition costs (undeveloped leases and proved properties)..... $ 16,122 142,833(1) 158,955
Exploration costs......................................................... 36,696 6,743 43,439
Development costs......................................................... 21,916 19,808 41,724
--------- ------------ ---------
Total................................................................... $ 74,734 169,384 244,118
--------- ------------ ---------
--------- ------------ ---------
1995
Property acquisition costs (undeveloped leases and proved properties)..... $ 844 25,963(2) 26,807
Exploration costs......................................................... 12,739 -- 12,739
Development costs......................................................... 13,198 -- 13,198
--------- ------------ ---------
Total................................................................... $ 26,781 25,963 52,744
--------- ------------ ---------
--------- ------------ ---------
1994
Property acquisition costs (undeveloped leases and proved properties)..... $ 9,762 -- 9,762
Exploration costs......................................................... 15,693 -- 15,693
Development costs......................................................... 17,089 -- 17,089
--------- ------------ ---------
Total..................................................................... $ 42,544 -- 42,544
--------- ------------ ---------
--------- ------------ ---------
</TABLE>
- ------------------------
(1) Consists primarily of the oil and gas properties acquired in the purchase of
Canadian Forest.
(2) Consists of the oil and gas properties acquired in the purchase of Saxon.
F-44
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(18) SUPPLEMENTAL FINANCIAL DATA -- OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
(B) AGGREGATE CAPITALIZED COSTS -- The aggregate capitalized costs relating
to oil and gas activities as of December 31 for the years indicated are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- --------------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Costs related to proved properties.................................. $ 1,381,289 1,169,636 1,109,158
Costs related to unproved properties:
Costs subject to depletion........................................ 32,007 18,011 32,288
Costs not subject to depletion.................................... 43,916 28,380 30,441
------------- --------------- -----------
1,457,212 1,216,027 1,171,887
Less accumulated depletion and valuation allowance.................. 1,001,604 941,482 895,335
------------- --------------- -----------
$ 455,608 274,545 276,552
------------- --------------- -----------
------------- --------------- -----------
</TABLE>
(C) RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES -- Results of
operations from producing activities for the years ended December 31, 1996, 1995
and 1994 are presented below. Income taxes are different from income taxes shown
in the Consolidated Statements of Operations because this table excludes general
and administrative and interest expense.
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
----------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
1996
Oil and gas sales............................................................ $ 80,811 47,902 128,713
Production expense........................................................... 19,789 12,410 32,199
Depletion expense............................................................ 39,331 20,297 59,628
Income tax expense........................................................... -- 6,864 6,864
----------- --------- ---------
59,120 39,571 98,691
----------- --------- ---------
Results of operations from producing activities.............................. $ 21,691 8,331 30,022
----------- --------- ---------
----------- --------- ---------
1995
Oil and gas sales............................................................ $ 82,275 -- 82,275
Production expense........................................................... 22,463 -- 22,463
Depletion expense............................................................ 42,973 -- 42,973
----------- --------- ---------
65,436 -- 65,436
----------- --------- ---------
Results of operations from producing activities.............................. $ 16,839 -- 16,839
----------- --------- ---------
----------- --------- ---------
</TABLE>
F-45
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(18) SUPPLEMENTAL FINANCIAL DATA -- OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
<TABLE>
<CAPTION>
UNITED
STATES CANADA TOTAL
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
1994
Oil and gas sales............................................................ $ 114,541 -- 114,541
Production expense........................................................... 22,384 -- 22,384
Depletion expense............................................................ 64,883 -- 64,883
Provision for impairment of oil and gas properties........................... 58,000 -- 58,000
----------- --------- ---------
145,267 -- 145,267
----------- --------- ---------
Results of operations from producing activities.............................. $ (30,726) -- (30,726)
----------- --------- ---------
----------- --------- ---------
</TABLE>
(D) ESTIMATED PROVED OIL AND GAS RESERVES -- The Company's estimate of its
proved and proved developed future net recoverable oil and gas reserves and
changes for 1994, 1995 and 1996 follows. The Canadian reserves at December 31,
1996 and 1995 include 100% of the reserves owned by Saxon, a consolidated
subsidiary in which the Company holds a majority interest.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions; i.e., prices
and costs as of the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual arrangement, including
energy swap agreements (see Note 13), but not on escalations based on future
conditions.
Proved developed oil and gas reserves are reserves that can be expected to
be recovered through existing wells with existing equipment and operating
methods. Additional oil and gas expected to be obtained through the application
of fluid injection or other improved mechanisms of primary recovery are included
as "proved developed reserves" only after testing by a pilot project or after
the operation of an installed program has confirmed through production response
that increased recovery will be achieved.
The Company's presentation of estimated proved oil and gas reserves
excludes, for each of the years presented, those quantities attributable to
future deliveries required under volumetric production payments (see Note 6). In
order to calculate such amounts, the Company has assumed that deliveries under
volumetric production payments are made as scheduled at expected BTU factors,
and that delivery commitments are satisfied through delivery of actual volumes
as opposed to cash settlements.
The Company has also presented, as additional information, proved oil and
gas reserves including quantities attributable to future deliveries required
under volumetric production payments. The Company believes that this information
is informative to readers of its financial statements as the related oil and gas
property costs and deferred revenue are included on the Company's balance sheets
for each of the years presented. This additional information is not presented in
accordance with SFAS No. 69; however, the Company believes this additional
information is useful in assessing its reserve acquisitions and financial
position on a comprehensive basis.
F-46
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(18) SUPPLEMENTAL FINANCIAL DATA -- OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
<TABLE>
<CAPTION>
LIQUIDS GAS
--------------------------------- -------------------------------
(MBBLS) (MMCF)
UNITED UNITED
STATES CANADA TOTAL STATES CANADA TOTAL
--------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993................................. 7,797 -- 7,797 244,096 -- 244,096
Revisions of previous estimates............................ 989 -- 989 7,848 -- 7,848
Extensions and discoveries................................. 41 -- 41 9,894 -- 9,894
Production................................................. (1,361) -- (1,361) (32,043) -- (32,043)
Sales of reserves in place................................. (170) -- (170) (6,377) -- (6,377)
Purchases of reserves in place............................. 17 -- 17 8,220 -- 8,220
--------- ----------- --------- --------- --------- ---------
Balance at December 31, 1994................................. 7,313 -- 7,313 231,638 -- 231,638
Additional disclosures:
Volumes attributable to volumetric production payments..... 219 -- 219 15,358 -- 15,358
--------- ----------- --------- --------- --------- ---------
Balance at December 31, 1994, including volumes
attributable to volumetric production payments........... 7,532 -- 7,532 246,996 -- 246,996
--------- ----------- --------- --------- --------- ---------
--------- ----------- --------- --------- --------- ---------
Balance at December 31, 1994................................. 7,313 -- 7,313 231,638 -- 231,638
Revisions of previous estimates............................ (227) -- (227) 2,398 -- 2,398
Extensions and discoveries................................. 18 -- 18 6,861 -- 6,861
Production................................................. (1,028) -- (1,028) (24,222) -- (24,222)
Sales of reserves in place................................. (6) -- (6) (2,438) -- (2,438)
Purchases of reserves in place............................. 59 4,338 4,397 1,435 16,218 17,653
--------- ----------- --------- --------- --------- ---------
Balance at December 31, 1995................................. 6,129 4,338 10,467 215,672 16,218 231,890
Volumes attributable to volumetric production payments..... 74 -- 74 6,238 -- 6,238
--------- ----------- --------- --------- --------- ---------
Balance at December 31, 1995, including volumes
attributable to volumetric production payments........... 6,203 4,338 10,541 221,910 16,218 238,128
--------- ----------- --------- --------- --------- ---------
--------- ----------- --------- --------- --------- ---------
Balance at December 31, 1995................................. 6,129 4,338 10,467 215,672 16,218 231,890
Revisions of previous estimates............................ 335 (431) (96) (4,989) (3,446) (8,435)
Extensions and discoveries................................. 357 4,440 4,797 32,507 7,779 40,286
Production................................................. (1,030) (1,645) (2,675) (25,456) (13,872) (39,328)
Sales of reserves in place................................. (16) (612) (628) (1,132) (326) (1,458)
Purchases of reserves in place............................. 23 12,126 12,149 14,653 96,572 111,225
--------- ----------- --------- --------- --------- ---------
Balance at December 31, 1996................................. 5,798 18,216 24,014 231,255 102,925 334,180
Additional disclosures:
Volumes attributable to volumetric production payments..... -- -- -- 3,070 -- 3,070
--------- ----------- --------- --------- --------- ---------
Balance at December 31, 1996, including volumes
attributable to volumetric production payments........... 5,798 18,216 24,014 234,325 102,925 337,250
--------- ----------- --------- --------- --------- ---------
--------- ----------- --------- --------- --------- ---------
</TABLE>
Purchases of reserves in place represent volumes recorded on the closing
dates of the acquisitions for financial accounting purposes. The revisions of
previous estimates for natural gas in 1994 include
F-47
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(18) SUPPLEMENTAL FINANCIAL DATA -- OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
5,833 MMCF for an adjustment related to the change in accounting for oil and gas
sales from the sales method to the entitlements method.
<TABLE>
<CAPTION>
OIL AND CONDENSATE GAS
------------------------------- -------------------------------
(MBBLS) (MMCF)
UNITED UNITED
STATES CANADA TOTAL STATES CANADA TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Proved developed reserves at:
December 31, 1993............................... 6,377 -- 6,377 187,534 -- 187,534
December 31, 1994............................... 6,775 -- 6,775 179,574 -- 179,574
December 31, 1995............................... 5,678 3,188 8,866 156,471 14,184 170,655
December 31, 1996............................... 5,311 13,260 18,571 165,629 70,856 236,485
</TABLE>
The Company's proved developed reserves, including amounts attributable to
volumetric production payments, are shown below. This disclosure is presented as
additional information and is not intended to represent required disclosure
pursuant to SFAS No. 69.
<TABLE>
<CAPTION>
OIL AND CONDENSATE GAS
------------------------------- -------------------------------
(MBBLS) (MMCF)
UNITED UNITED
STATES CANADA TOTAL STATES CANADA TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Proved developed reserves, including amounts
attributable to volumetric production payments
at:
December 31, 1993............................... 6,778 -- 6,778 216,820 -- 216,820
December 31, 1994............................... 6,994 -- 6,994 194,932 -- 194,932
December 31, 1995............................... 5,752 3,188 8,940 162,709 14,184 176,893
December 31, 1996............................... 5,311 13,260 18,571 168,699 70,856 239,555
</TABLE>
(E) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS -- Future oil
and gas sales and production and development costs have been estimated using
prices and costs in effect at the end of the years indicated, except in those
instances where the sale of oil and natural gas is covered by contracts, energy
swap agreements or volumetric production payments. At December 31, 1996 and
1995, the Canadian amounts include 100% of amounts attributable to the reserves
owned by Saxon, a consolidated subsidiary in which the Company holds a majority
interest. In the case of contracts, the applicable contract prices, including
fixed and determinable escalations, were used for the duration of the contract.
Thereafter, the current spot price was used. Future oil and gas sales also
include the estimated effects of existing energy swap agreements as discussed in
Note 13.
Future income tax expenses are estimated using the statutory tax rate of 35%
in the United States and a combined Federal and Provincial rate of 44.62% in
Canada. Estimates for future general and administrative and interest expenses
have not been considered.
Changes in the demand for oil and natural gas, inflation and other factors
make such estimates inherently imprecise and subject to substantial revision.
This table should not be construed to be an
F-48
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(18) SUPPLEMENTAL FINANCIAL DATA -- OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
estimate of the current market value of the Company's proved reserves.
Management does not rely upon the information that follows in making investment
decisions.
The Company's presentation of the standardized measure of discounted future
net cash flows and changes therein excludes, for each of the years presented,
amounts attributable to future deliveries required under volumetric production
payments. In order to calculate such amounts, the Company has assumed that
deliveries under volumetric production payments are made as scheduled, that
production costs corresponding to the volumes delivered are incurred by the
Company at average rates for the properties subject to the production payments,
and that delivery commitments are satisfied through delivery of actual volumes
as opposed to cash settlements.
The Company has also presented, as additional information, the standardized
measure of discounted future net cash flows and changes therein including
amounts attributable to future deliveries required under volumetric production
payments. The Company believes that this information is informative to readers
of its financial statements because the related oil and gas property costs and
deferred revenue are shown on the Company's balance sheets for each of the years
presented. This additional information is not required to be presented in
accordance with SFAS No. 69; however, the Company believes this additional
information is useful in assessing its reserve acquisitions and financial
position on a comprehensive basis.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
UNITED
STATES CANADA TOTAL
------------ ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future oil and gas sales.................................................. $ 964,943 580,563 1,545,506
Future production and development costs................................... (258,866) (168,136) (427,002)
------------ ---------- -----------
Future net revenue........................................................ 706,077 412,427 1,118,504
10% annual discount for estimated timing of cash flows.................... (250,527) (165,788) (416,315)
------------ ---------- -----------
Present value of future net cash flows before income taxes................ 455,550 246,639 702,189
Present value of future income tax expense................................ (71,339) (70,981) (142,320)
------------ ---------- -----------
Standardized measure of discounted future net cash flows.................. 384,211 175,658 559,869
Additional disclosures:
Amounts attributable to volumetric production payments.................. 3,126 -- 3,126
------------ ---------- -----------
Total discounted future net cash flows, including amounts attributable
to volumetric production payments..................................... $ 387,337 175,658 562,995
------------ ---------- -----------
------------ ---------- -----------
</TABLE>
F-49
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(18) SUPPLEMENTAL FINANCIAL DATA -- OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
Undiscounted future income tax expense was $134,835,000 in the United States
and $127,833,000 in Canada at December 31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------
UNITED
STATES CANADA TOTAL
------------ ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future oil and gas sales.................................................. $ 554,609 93,021 647,630
Future production and development costs................................... (195,399) (43,060) (238,459)
------------ ---------- -----------
Future net revenue........................................................ 359,210 49,961 409,171
10% annual discount for estimated timing of cash flows.................... (122,528) (19,108) (141,636)
------------ ---------- -----------
Present value of future net cash flows before income taxes................ 236,682 30,853 267,535
Present value of future income tax expense................................ (8,855) (1,763) (10,618)
------------ ---------- -----------
Standardized measure of discounted future net cash flows.................. 227,827 29,090 256,917
Additional disclosures:
Amounts attributable to volumetric production payments.................. 8,476 -- 8,476
------------ ---------- -----------
Total discounted future net cash flows, including amounts attributable
to volumetric production payments..................................... $ 236,303 29,090 265,393
------------ ---------- -----------
------------ ---------- -----------
</TABLE>
Undiscounted future income tax expense was $22,316,000 in the United States
and $2,924,000 in Canada at December 31, 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------
UNITED
STATES CANADA TOTAL
------------ ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future oil and gas sales.................................................. $ 502,186 -- 502,186
Future production and development costs................................... (193,376) -- (193,376)
------------ ---------- -----------
Future net revenue........................................................ 308,810 -- 308,810
10% annual discount for estimated timing of cash flows.................... (100,480) -- (100,480)
------------ ---------- -----------
Present value of future net cash flows before income taxes................ 208,330 -- 208,330
Present value of future income tax expense................................ (781) -- (781)
------------ ---------- -----------
Standardized measure of discounted future net cash flows.................. 207,549 -- 207,549
Additional disclosures:
Amounts attributable to volumetric production payments.................. 22,600 -- 22,600
------------ ---------- -----------
Total discounted future net cash flows, including amounts attributable
to volumetric production payments..................................... $ 230,149 -- 230,149
------------ ---------- -----------
------------ ---------- -----------
</TABLE>
Undiscounted future income tax expense was $1,348,000 at December 31, 1994.
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES -- An analysis of the changes in the
standardized measure of discounted future net
F-50
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(18) SUPPLEMENTAL FINANCIAL DATA -- OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
cash flows during each of the last three years is as follows. At December 31,
1996 and 1995, the Canadian amounts include 100% of the reserves owned by Saxon,
a consolidated subsidiary in which the Company holds a majority interest.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------
UNITED
STATES CANADA TOTAL
----------- --------- ----------
<S> <C> <C> <C>
Standardized measure of discounted future net cash flows relating to proved
oil and gas reserves, at beginning of year................................. $ 227,827 29,090 256,917
Changes resulting from:
Sales of oil and gas, net of production costs.............................. (56,768) (35,492) (92,260)
Net changes in prices and future production costs.......................... 169,975 96,547 266,522
Net changes in future development costs.................................... (14,192) (8,256) (22,448)
Extensions, discoveries and improved recovery.............................. 60,423 37,491 97,914
Previously estimated development costs incurred during the period.......... 19,734 18,939 38,673
Revisions of previous quantity estimates................................... (4,396) (8,054) (12,450)
Sales of reserves in place................................................. (2,405) (3,993) (6,398)
Purchases of reserves in place............................................. 21,948 115,518 137,466
Accretion of discount on reserves at beginning of year before income
taxes.................................................................... 24,549 3,085 27,634
Net change in income taxes................................................. (62,484) (69,217) (131,701)
----------- --------- ----------
Standardized measure of discounted future net cash flows relating to proved
oil and gas reserves, at end of year....................................... 384,211 175,658 559,869
Additional disclosures:
Amounts attributable to volumetric production payments..................... 3,126 -- 3,126
----------- --------- ----------
Total discounted future net cash flows relating to proved oil and gas
reserves, including amounts attributable to volumetric production
payments, at end of year................................................. $ 387,337 175,658 562,995
----------- --------- ----------
----------- --------- ----------
</TABLE>
The computation of the standardized measure of discounted future net cash
flows relating to proved oil and gas reserves at December 31, 1996 was based on
average natural gas prices of approximately $3.50 per MCF in the U.S. and
approximately $2.10 per MCF in Canada and on average liquids prices of
approximately $26.25 per barrel in the U.S. and approximately $19.10 per barrel
in Canada. During March 1997, the Company was receiving average natural gas
prices of approximately $1.90 per MCF in the U.S. and approximately $1.70 per
MCF in Canada and was receiving average liquids prices of approximately $19.20
per barrel in the U.S. and approximately $17.00 per barrel in Canada. Had the
lower March 1997 prices been used, the Company's standardized measure of
discounted future net
F-51
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(18) SUPPLEMENTAL FINANCIAL DATA -- OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
cash flows relating to proved oil and gas reserves at December 31, 1996 would
have been significantly reduced.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------
UNITED
STATES CANADA TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Standardized measure of discounted future net cash flows relating to proved oil
and gas reserves, at beginning of year....................................... $ 207,549 -- 207,549
Changes resulting from:
Sales of oil and gas, net of production costs................................ (48,090) -- (48,090)
Net changes in prices and future production costs............................ 43,991 -- 43,991
Net changes in future development costs...................................... (3,392) -- (3,392)
Extensions, discoveries and improved recovery................................ 7,231 -- 7,231
Previously estimated development costs incurred during the period............ 7,633 -- 7,633
Revisions of previous quantity estimates..................................... 127 -- 127
Sales of reserves in place................................................... (3,114) -- (3,114)
Purchases of reserves in place............................................... 865 30,853 31,718
Accretion of discount on reserves at beginning of year before income taxes... 23,102 -- 23,102
Net change in income taxes................................................... (8,075) (1,763) (9,838)
----------- --------- ---------
Standardized measure of discounted future net cash flows relating to proved oil
and gas reserves, at end of year............................................. 227,827 29,090 256,917
Additional disclosures:
Amounts attributable to volumetric production payments....................... 8,476 -- 8,476
----------- --------- ---------
Total discounted future net cash flows relating to proved oil and gas
reserves, including amounts attributable to volumetric production payments,
at end of year............................................................. $ 236,303 29,090 265,393
----------- --------- ---------
----------- --------- ---------
</TABLE>
F-52
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(18) SUPPLEMENTAL FINANCIAL DATA -- OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1994
--------------
(IN THOUSANDS)
<S> <C>
Standardized measure of discounted future net cash flows relating to proved oil and gas reserves,
at beginning of year............................................................................ $ 262,176
Changes resulting from:
Sales of oil and gas, net of production costs................................................... (69,607)
Net changes in prices and future production costs............................................... (80,526)
Net changes in future development costs......................................................... 7,432
Extensions, discoveries and improved recovery................................................... 10,817
Previously estimated development costs incurred during the period............................... 10,000
Revisions of previous quantity estimates........................................................ 16,840
Sales of reserves in place...................................................................... (10,630)
Purchases of reserves in place.................................................................. 8,467
Accretion of discount on reserves at beginning of year before income taxes...................... 32,334
Net change in income taxes...................................................................... 20,246
--------------
Standardized measure of discounted future net cash flows relating to proved oil and gas reserves,
at end of year.................................................................................. 207,549
Additional disclosures:
Amounts attributable to volumetric production payments.......................................... 22,600
--------------
Total discounted future net cash flows relating to proved oil and gas reserves, including
amounts attributable to volumetric production payments, at end
of year....................................................................................... $ 230,149
--------------
--------------
</TABLE>
F-53
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
CANADIAN FOREST OIL LTD. The Board of Directors of Canadian Forest Oil Ltd.
("Canadian Forest") has enacted By-law No. 1 as confirmed by the shareholder of
Canadian Forest, which includes provision for the protection of directors and
officers subject to the provisions of the Business Corporations Act (Alberta).
The provisions of By-law No. 1 as affected by the Business Corporations Act
(Alberta) may be summarized as follows:
(a) except in respect of an action by or on behalf of Canadian Forest or of
a body corporate of which Canadian Forest is or was a shareholder to
procure a judgment in its favour, Canadian Forest may indemnify a
director or officer of Canadian Forest, a former director of officer of
Canadian Forest or a person who acts or acted at Canadian Forest's
request as a director or officer of a body corporate of which Canadian
Forest is or was a shareholder or creditor, from and against any
liability in respect of any civil, criminal or administrative action or
proceeding to which he is made a party by reason of being or having been
a director of officer, provided such director or officer acted honestly
and in good faith with a view to the best interests of Canadian Forest
and in the case of criminal or administrative action or proceedings that
is enforced by a monetary penalty he had reasonable grounds for believing
that his conduct was lawful;
(b) a director or officer or other person referred to in (a) above is
entitled to indemnity from Canadian Forest, (in certain circumstances,
only with the approval of the Court of Queen's Bench of Alberta) in
respect of all costs, charges and expenses reasonably incurred by him in
connection with the defense of any proceeding to which he is made a party
provided such person seeking indemnification is substantially successful
on the merits in his defense of such proceedings, he fulfills the
conditions set forth in (a) above and is fairly and reasonably entitled
to indemnity; and
(c) Canadian Forest may purchase and maintain insurance for the benefit of
each director and officer against any liability incurred by him in his
capacity as a director or officer of Canadian Forest or another body
corporate except when the liability relates to his failure to act
honestly and in good faith with a view to the best interests of Canadian
Forest or such other body corporate, as the case may be.
As permitted and for the purposes described in paragraph (c) above, Canadian
Forest has purchased and maintains insurance with such authorization. Directors
and officers of Canadian Forest are insured, subject to all the terms,
conditions and exclusions of the policy, against certain liabilities incurred by
them in their capacity as directors and officers of Canadian Forest and its
subsidiaries. This insurance provides for an annual limit for liability and
reimbursement of payments of US $25,000,000. The deductible applicable to
reimbursement of Canadian Forest is US $100,000, ($200,000 per occurrence in
respect of securities claims) and there is no deductible applicable to
individual directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
FOREST OIL CORPORATION. Sections 721 through 724 of the Business
Corporation Law of the State of New York (the "BCL"), in which Forest Oil
Corporation is incorporated, permit New York corporations, acting through their
boards of directors, to extend broad protection to their directors, officers and
other
II-1
<PAGE>
employees by way of indemnity and advancement of expenses. These sections (1)
provide that the statutory indemnification provisions of the BCL are not
exclusive, provided that no indemnification may be made to or on behalf of any
director or officer if a judgment or other final adjudication adverse to the
director or officer establishes that his acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action so adjudicated, or that he personally gained in fact a financial
profit or other advantage to which he was not entitled, (2) establish procedures
for indemnification and advancement of expenses that may be contained in the
certificate of incorporation or by-laws, or, when authorized by either of the
foregoing, set forth in a resolution of the shareholders or directors or an
agreement providing for indemnification and advancement of expenses, (3) apply a
single standard for statutory indemnification for third-party and derivative
suits by providing that indemnification is available if the director or officer
acted in good faith, for a purpose which he reasonably believed to be in the
best interests of the corporation, and, in criminal actions, had no reasonable
cause to believe that his conduct was unlawful, (4) eliminate the requirement
for mandatory statutory indemnification that the indemnified party be "wholly"
successful and (5) provide for the advancement of litigation expenses upon
receipt of an undertaking to repay such advance if the director or officer is
ultimately determined not to be entitled an undertaking to repay such advance if
the director or officer is ultimately determined not to be entitled to
indemnification. Section 726 of the BCL permits the purchase of insurance to
indemnify a corporation or its officers and directors to the extent permitted.
Essentially, the amended BCL allows corporations to provide for indemnification
of directors, officers and employees except in those cases where a judgment or
other final adjudication adverse to the indemnified party establishes that the
acts were committed in bad faith or were the result of active and deliberate
dishonesty or that the indemnified party personally gained a financial profit or
other advantage to which he was not legally entitled.
Article IX of the By-laws of Forest Oil Corporation contains very broad
indemnification provisions which permit the corporation to avail itself of the
amended BCL to extend broad protection to its directors, officers and employees
by way of indemnity and advancement of expenses. It sets out the standard under
which the Company will indemnify directors and officers, provides for
reimbursement in such instances, for the advancement or reimbursement for
expenses reasonably incurred in defending an action, and for the extension of
indemnity to persons other than directors and officers. It also establishes the
manner of handling indemnification when a lawsuit is settled. It is not intended
that this By-law is an exclusive method of indemnification.
Article IX of the By-laws may only be amended prospectively. In addition,
the Company cannot, except by elimination or amendment of such section of the
By-laws, limit the rights of any indemnified person to indemnity or advancement
of expenses provided in accordance with this By-law. It also permits the
indemnified person to sue the Company for indemnification, shifting the burden
of proof to the Company to prove that the indemnified person has not met the
standards of conduct required for indemnification and requires the Company to
pay the costs of such suit if the indemnified person is successful.
The Restated Certificate of Incorporation of the Company limits the personal
liability of the Company's directors to the fullest extent permitted under the
BCL.
Additionally, the BCL was amended in 1987 to allow New York corporations to
limit or eliminate director's liability for certain breaches of duty. The
Restated Certificate of Incorporation provides that a director of the Company
shall not be liable to the Company or its shareholders for damages for any
breach of duty in such a capacity unless a judgment or other final adjudication
adverse to the director establishes that:
(a) the director's acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law; or
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<PAGE>
(b) the director personally gained in fact a financial profit or other
advantage to which the director was not legally entitled; or
(c) the director's act violated Section 719 of the BCL.
A director's liability for any act or omission prior to the adoption of the
amendment to the BCL to eliminate director's liability for certain breaches of
duty shall not be eliminated or limited by virtue thereof and any repeal or
modification of the foregoing provisions of, or the adoption of any provision
of, the Restated Certificate of Incorporation inconsistent with the BCL shall
not adversely affect any right, immunity or protection of director existing
thereunder with respect to any act or omission occurring prior to or at the time
of such repeal or modification or the adoption of such inconsistent provision.
If the BCL is subsequently amended to permit the further elimination or
limitation of the personal liability of a director, then the liability of the
director shall be eliminated or limited to the fullest extent permitted by the
BCL as so amended.
The Company has insurance coverage which protects directors and officers of
Forest Oil Corporation and its subsidiaries against judgments, settlements and
legal costs incurred because of actual or alleged errors or omissions in
connection with their activities as directors or officers of Forest Oil
Corporation and its subsidiaries. One of the policies is a Directors and
Officers Liability and Corporation Reimbursement Policy, which covers the period
July 25, 1997 to July 25, 1998. Where Forest Oil Corporation or its subsidiaries
indemnifies covered directors and officers, Forest Oil Corporation is
responsible for a $100,000 ($200,000 for securities claims) deductible per loss.
The maximum annual cumulative policy limit is $25 million.
The Company also has Pension Trust Liability coverage as respects Forest Oil
Corporation Pension Trust and the Retirement Savings Plan. It covers legal
liability and defense of Plan sponsors and fiduciaries for certain claims based
upon actual or alleged Breach of Fiduciary Duty (as defined in the policy) as
respects the covered benefit plans. The coverage limit is $10 million (annual
cumulative policy limit) and is subject to a deductible of $100,000 for each
loss when indemnifiable by Forest Oil Corporation and its subsidiaries.
These policies contain exclusions commonly found in such insurance policies
including, but not limited to, exclusions for claims based on fines and
penalties imposed by law or other matters deemed uninsurable by law, claims
brought by one insured against another insured, claims based upon or
attributable to an officer or director gaining any personal profit or advantage
to which he or she is not legally entitled, adjudicated acts of active or
deliberate dishonesty, and claims based upon attempts (whether alleged or
actual, successful or unsuccessful) by persons to acquire securities of the
Company against the opposition of the Company's Board of Directors and in
connection with which the Company acquires its securities from such persons at a
price not available to all other shareholders or gives consideration to such
persons to terminate such attempts. Also excluded are those attempts (whether
alleged or actual, successful or unsuccessful) by the Company to acquire its
securities at a premium over the then existing market price other than pursuant
to an offer to all of the holders of that class.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person thereof in connection with the
securities being registered (and the Securities and Exchange Commission is still
of the same opinion), the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of
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<PAGE>
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following instruments and documents are included or incorporated by
reference as Exhibits to this Registration Statement.
<TABLE>
<CAPTION>
Exhibit 3(i) Restated Certificate of Incorporation of Forest Oil Corporation dated
October 14, 1993, incorporated herein by reference to Exhibit 3(i) to
Form 10-Q for Forest Oil Corporation for the quarter ended September 30,
1993 (File No. 0-4597).
<S> <C>
Exhibit 3(i)(a) Certificate of Amendment of the Restated Certificate of Incorporation
dated as of July 20, 1995, incorporated herein by reference to Exhibit
3(i)(a) to Form 10-Q for Forest Oil Corporation for the quarter ended
June 30, 1995 (File No. 0-4597).
Exhibit 3(i)(b) Certificate of Amendment of Restated Certificate of Incorporation dated
as of July 26, 1995, incorporated herein by reference to Exhibit 3(i)(b)
to Form 10-Q for Forest Oil Corporation for the quarter ended June 30,
1995 (File No. 0-4597).
Exhibit 3(i)(c) Certificate of Amendment of the Restated Certificate of Incorporation
dated as of January 5, 1996, incorporated herein by reference to Exhibit
3(i)(c) to Forest Oil Corporation's Registration Statement on Form S-2
(File No. 33-64949).
Exhibit 3(ii) Restated By-Laws of Forest Oil Corporation as of May 9, 1990, Amendment
No. 1 to By-Laws dated as of April 2, 1991, Amendment No. 2 to By-Laws
dated as of May 8, 1991, Amendment No. 3 to By-Laws dated as of July 30,
1991, Amendment No. 4 to By-Laws dated as of January 17, 1992, Amendment
No. 5 to By-Laws dated as of March 18, 1993 and Amendment No. 6 to
By-Laws dated as of September 14, 1993, incorporated herein by reference
to Exhibit 3(ii) to Form 10-Q for Forest Oil Corporation for the quarter
ended September 30, 1993 (File No. 0-4597).
Exhibit 3(ii)(a) Amendment No. 7 to By-Laws dated as of December 3, 1993, incorporated
herein by reference to Exhibit 3(ii)(a) to Form 10-K for Forest Oil
Corporation for the year ended December 31, 1993 (File No. 0-4597).
Exhibit 3(ii)(b) Amendment No. 8 to By-Laws dated as of February 24, 1994, incorporated
herein by reference to Exhibit 3(ii)(b) to Form 10-K for Forest Oil
Corporation for the year ended December 31, 1993 (File No. 0-4597).
Exhibit 3(ii)(c) Amendment No. 9 to By-Laws dated as of May 15, 1995, incorporated herein
by reference to Exhibit 3(ii)(c) to Form 10-Q for Forest Oil Corporation
for the quarter ended June 30, 1995 (File No. 0-4597).
Exhibit 3(ii)(d) Amendment No. 10 to By-Laws dated as of July 27, 1995, incorporated
herein by reference to Exhibit 3(ii)(d) to Form 10-Q for Forest Oil
Corporation for the quarter ended June 30, 1995 (File No. 0-4597).
*Exhibit 3(iii) Articles of Amalgamation of Canadian Forest Oil Ltd.
*Exhibit 3(iv) Bylaws of Canadian Forest Oil Ltd.
*Exhibit 4.1 Indenture dated as of September 29, 1997 among Canadian Forest Oil Ltd.,
as Issuer, Forest Oil Corporation, as Guarantor, and State Street Bank
and Trust, as Trustee.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
*Exhibit 4.2 Registration Agreement dated September 23, 1997 by and among Canadian
Forest Oil Ltd., Forest Oil Corporation and Salomon Brothers Inc, Lehman
Brothers Inc., Chase Securities Inc., and Morgan Stanley & Co.
Incorporated.
Exhibit 4.3 Second Amended and Restated Credit Agreement dated as of January 31,
1997 between Forest Oil Corporation and Subsidiary Guarantors and The
Chase Manhattan Bank, as agent, incorporated herein by reference to
Exhibit 4.4 to Form 10-K for Forest Oil Corporation for the year ended
December 31, 1996 (File No. 0-4597).
*Exhibit 4.4.1 Amendment No. 1 to Second Amended and Restated Credit Agreement dated as
of April 1, 1997.
*Exhibit 4.4.2 Amendment No. 2 to Second Amended and Restated Credit Agreement dated as
of August 19, 1997.
*Exhibit 4.4.3 Amendment No. 3 to Second Amended and Restated Credit Agreement dated as
of September 26, 1997.
Exhibit 4.5 Deed of Trust, Mortgage, Security Agreement, Assignment of Production,
Financing Statement (Personal Property including Hydrocarbons), and
Fixture Filing dated as of December 1, 1993, incorporated herein by
reference to Exhibit 4.6 to Form 10-K for Forest Oil Corporation for the
year ended December 31, 1993 (File No. 0-4597).
Exhibit 4.6 Amendment No. 1 dated as of June 3, 1994 to the Deed of Trust, Mortgage,
Security Agreement, Assignment of Production, Financing Statement
(Personal Property including Hydrocarbons) and Fixture Filing dated as
of December 1, 1993 between Forest Oil Corporation and The Chase
Manhattan Bank (National Association), as agent, incorporated herein by
reference to Exhibit 4.9 of Form 10-K for Forest Oil Corporation for the
year ended December 31, 1994 (File No. 0-4597).
Exhibit 4.7 Amendment No. 2 dated as of August 31, 1995 to the Deed of Trust,
Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property including Hydrocarbons) and Fixture Filing
dated as of December 1, 1993 between Forest Oil Corporation and The
Chase Manhattan Bank (National Association), as agent, incorporated
herein by reference to Exhibit 4.14 to Form 10-K for Forest Oil
Corporation for the year ended December 31, 1995 (File No. 0-4597).
Exhibit 4.8 Amendment No. 2 dated as of January 31, 1997 to the Deed of Trust,
Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property including Hydrocarbons) and Fixture Filing
dated as of June 3, 1994 between Forest Oil Corporation and The Chase
Manhattan Bank, as agent, incorporated herein by reference to Exhibit
4.8 to Form 10-K for Forest Oil Corporation for the year ended December
31, 1996 (File No. 0-4597).
Exhibit 4.9 Amendment No. 3 dated as of January 31, 1997 to the Deed of Trust,
Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property including Hydrocarbons) and Fixture Filing
dated as of December 1, 1993 between Forest Oil Corporation and The
Chase Manhattan Bank, as agent, incorporated herein by reference to
Exhibit 4.9 to Form 10-K for Forest Oil Corporation for the year ended
December 31, 1996 (File No. 0-4597).
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
Exhibit 4.10 Deed of Trust, Mortgage, Security Agreement, Assignment of Production,
Financing Statement (Personal Property including Hydrocarbons) and
Fixture Filing dated as of June 3, 1994 between Forest Oil Corporation
and The Chase Manhattan Bank (National Association), as agent,
incorporated herein by reference to Exhibit 4.9 of Form 10-K for Forest
Oil Corporation for the year ended December 31, 1994 (File No. 0-4597).
Exhibit 4.11 Amendment No. 1 dated as of August 31, 1995 to Deed of Trust, Mortgage,
Security Agreement, Assignment of Production, Financing Statement
(Personal Property including Hydrocarbons), and Fixture Filing dated
June 3, 1994, incorporated herein by reference to Exhibit 4.16 on Form
10-K for Forest Oil Corporation for the year ended December 31, 1995
(File No. 0-4597).
*Exhibit 4.12 Amendment No. 4 dated as of August 19, 1997 to the Deed of Trust,
Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property including Hydrocarbons) and Fixture Filing
dated as of December 1, 1993 between Forest Oil Corporation and The
Chase Manhattan Bank, as agent.
*Exhibit 4.13 Amendment No. 3 dated as of August 19, 1997 to the Deed of Trust,
Mortgage, Security Agreement, Assignment of Production, Financing
Statement (Personal Property including Hydrocarbons) and Fixture Filing
dated as of June 3, 1994 between Forest Oil Corporation and The Chase
Manhattan Bank, as agent.
*Exhibit 4.14 Second Amended and Restated Credit Agreement dated as of April 1, 1997
among 611852 Saskatchewan Ltd. and The Chase Manhattan Bank of Canada,
as Administrative Agent.
*Exhibit 4.14.1 Amendment No. 1 to Second Amended and Restated Credit Agreement dated as
of August 19, 1997.
*Exhibit 4.14.2 Amendment No. 2 to Second Amended and Restated Credit Agreement dated as
of September 26, 1997.
*Exhibit 4.15 Second Amended and Restated Credit Agreement dated as of April 1, 1997
among Canadian Forest Oil Ltd. and Subsidiary Borrowers and 611852
Saskatchewan Ltd.
*Exhibit 4.15.1 Amendment No. 1 to Second Amended and Restated Credit Agreement dated as
of August 19, 1997.
*Exhibit 4.15.2 Amendment No. 2 to Second Amended and Restated Credit Agreement dated as
of September 26, 1997.
*Exhibit 4.16 Second Amended and Restated Security Agreement dated as of January 31,
1997 between Forest Oil Corporation, the Subsidiary Guarantors named
therein and The Chase Manhattan Bank, as agent.
*Exhibit 4.17 Pledge Agreement dated as of August 19, 1997 between 3189503 Canada Ltd.
and The Chase Manhattan Bank.
*Exhibit 4.18 Guarantee dated as of August 19, 1997 by Forest Oil Corporation and The
Chase Manhattan Bank.
*Exhibit 4.19 Third Security Confirmation, Amendment and Supplemental Debenture
Agreement made as of August 19, 1997 among Canadian Forest Oil Ltd.,
Producers Marketing Ltd., 3189503 Canada Ltd., 611852 Saskatchewan Ltd.,
Forest Oil Corporation and The Chase Manhattan Bank.
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C>
*Exhibit 4.20 Second Security Confirmation, Amendment and Supplemental Debenture
Agreement made as of April 1, 1997 among Canadian Forest Oil Ltd.,
Producers Marketing Ltd., 3189503 Canada Ltd., 611852 Saskatchewan Ltd.,
Forest Oil Corporation and The Chase Manhattan Bank.
*Exhibit 4.21 Guarantee and Pledge Agreement dated as of April 1, 1997 between 3189503
Canada Ltd. and 611852 Saskatchewan Ltd.
*Exhibit 4.22 Limited Recourse Secured Guarantee dated as of April 1, 1997 between
Forest Oil Corporation and 611852 Saskatchewan Ltd.
*Exhibit 4.23 Limited Recourse Demand Debenture and Negative Pledge issued as of April
1, 1997 by Forest Oil Corporation to 611852 Saskatchewan Ltd.
*Exhibit 4.24 Deposit Agreement made as of April 1, 1997 by Forest Oil Corporation in
favor of 611852 Saskatchewan Ltd.
*Exhibit 5.1 Opinion of Bennett Jones Verchere
*Exhibit 5.2 Opinion of Vinson & Elkins L.L.P.
*Exhibit 5.3 Opinion of Ernst & Young as to tax matters
*Exhibit 5.4 Opinion of Ernst & Young, Chartered Accountants
*Exhibit 23.1 Consent of KPMG Peat Marwick LLP.
*Exhibit 23.2 Consent of Ryder Scott Company.
*Exhibit 23.3 Consent of McDaniel & Associates Ltd.
*Exhibit 23.4 Consent of Fekete & Associates, Inc.
*Exhibit 23.5 Consent of Bennett Jones Verchere (included in Exhibit 5.1 hereto).
*Exhibit 23.6 Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.2 hereto).
*Exhibit 23.7 Consent of Ernst & Young (included in Exhibit 5.3 hereto).
*Exhibit 23.8 Consent of Ernst & Young, Chartered Accountants (included in Exhibit 5.4
hereto).
*Exhibit 23.9 Consent of Price Waterhouse.
Exhibit 24.1 Powers of Attorney (included on the signature pages hereto).
*Exhibit 25.1 Statement of Eligibility of State Street Bank and Trust Company.
*Exhibit 99.1 Form of Letter of Transmittal.
</TABLE>
- ------------------------
* previously filed.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions
II-7
<PAGE>
described under Item 15 above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final jurisdiction of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Canadian Forest Oil Ltd. has duly caused this Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Calgary, Alberta, on November 7, 1997.
<TABLE>
<S> <C> <C>
CANADIAN FOREST OIL LTD.
By: /s/ DANIEL L. MCNAMARA
------------------------------------------
Daniel L. McNamara
VICE PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ President and Chief November 7, 1997
Arthur C. Eastly Executive Officer
* Vice President, Finance
- ------------------------------ (Principal Financial and November 7, 1997
Ronald E. Pratt Accounting Officer)
*
- ------------------------------ Director November 7, 1997
Daniel L. Baxter
*
- ------------------------------ Director November 7, 1997
Robert S. Boswell
*
- ------------------------------ Director November 7, 1997
William L. Dorn
*
- ------------------------------ Director November 7, 1997
Arthur C. Eastly
*By:
/s/ DANIEL L. MCNAMARA
- ------------------------------
Daniel L. McNamara,
as attorney-in-fact
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Forest Oil Corporation has duly caused this Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Denver, State of Colorado, on November 7, 1997.
<TABLE>
<S> <C> <C>
FOREST OIL CORPORATION
By: /s/ WILLIAM L. DORN
------------------------------------------
William L. Dorn
CHAIRMAN OF THE BOARD
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ President and Chief November 7, 1997
Robert S. Boswell Executive Officer
Vice President and Chief
* Financial Officer
- ------------------------------ (Principal Financial November 7, 1997
David H. Keyte Officer)
*
- ------------------------------ Controller (Principal November 7, 1997
Joan C. Sonnen Accounting Officer)
*
- ------------------------------ Director November 7, 1997
Philip F. Anschutz
*
- ------------------------------ Director November 7, 1997
Robert S. Boswell
*
- ------------------------------ Director November 7, 1997
William L. Britton
*
- ------------------------------ Director November 7, 1997
Cortlandt S. Dietler
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ WILLIAM L. DORN
- ------------------------------ Director November 7, 1997
William L. Dorn
*
- ------------------------------ Director November 7, 1997
Jordan L. Haines
*
- ------------------------------ Director November 7, 1997
James H. Lee
*
- ------------------------------ Director November 7, 1997
J. J. Simmons, III
*
- ------------------------------ Director November 7, 1997
Craig D. Slater
*
- ------------------------------ Director November 7, 1997
Drake S. Tempest
*
- ------------------------------ Director November 7, 1997
Michael B. Yanney
*By:
/s/ DANIEL L. MCNAMARA
- ------------------------------
Daniel L. McNamara,
as attorney-in-fact
</TABLE>
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