<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number 1-13515
FOREST OIL CORPORATION
(Exact name of registrant as specified in its charter)
New York 25-0484900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Broadway
Suite 2200
Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 812-1400
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
<TABLE>
<CAPTION>
Number of Shares
Outstanding
Title of Class of Common Stock April 30, 1999
- ------------------------------------------------------ -----------------
<S> <C>
Common Stock, Par Value $.10 Per Share 44,648,138
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
March 31, December 31,
1999 1998
---------- ------------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,182 3,415
Accounts receivable 50,404 55,587
Other current assets 4,823 2,374
---------- --------
Total current assets 57,409 61,376
Net property and equipment, at cost 657,932 663,310
Goodwill and other intangible assets, net 22,546 22,689
Other assets 9,339 12,361
---------- --------
$ 747,226 759,736
---------- --------
---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 45,258 49,389
Accrued interest 3,354 9,970
Other current liabilities 2,831 1,669
---------- --------
Total current liabilities 51,443 61,028
Long-term debt 501,889 505,450
Other liabilities 16,377 16,181
Deferred income taxes 8,453 8,086
Shareholders' equity:
Common stock 4,465 4,465
Capital surplus 589,977 589,972
Accumulated deficit (414,600) (415,050)
Accumulated other comprehensive loss (10,329) (9,948)
Treasury stock, at cost (449) (448)
---------- --------
Total shareholders' equity 169,064 168,991
---------- --------
$ 747,226 759,736
---------- --------
---------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-1-
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF PRODUCTION AND OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 1998
------- -------
(In Thousands Except Production
and Per Share Amounts)
<S> <C> <C>
PRODUCTION
Natural gas (mmcf) 16,994 13,665
------- -------
------- -------
Oil, condensate and natural gas liquids (thousands of barrels) 1,056 975
------- -------
------- -------
STATEMENTS OF CONSOLIDATED OPERATIONS
Revenue:
Marketing and processing $ 47,506 35,003
Oil and gas sales:
Gas 32,962 27,607
Oil, condensate and natural gas liquids 9,884 12,886
------- -------
Total oil and gas sales 42,846 40,493
------- -------
Total revenue 90,352 75,496
Operating expenses:
Marketing and processing 44,187 33,168
Oil and gas production 11,265 8,842
General and administrative 4,098 4,255
Depreciation and depletion 22,599 23,333
------- -------
Total operating expenses 82,149 69,598
------- -------
Earnings from operations 8,203 5,898
Other income and expense:
Other (income) expense, net (780) (78)
Interest expense 10,657 8,506
Translation gain on subordinated debt (2,216) (1,024)
------- -------
Total other income and expense 7,661 7,404
------- -------
Earnings (loss) before income taxes 542 (1,506)
Income tax expense (benefit):
Current (159) 346
Deferred 251 (849)
------- -------
92 (503)
------- -------
Net earnings (loss) $ 450 (1,003)
------- -------
------- -------
Weighted average number of common shares outstanding 44,648 36,975
------- -------
------- -------
Basic and diluted earnings (loss) per common share $ .01 (.03)
------- -------
------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1999 1998
---------- ---------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 450 (1,003)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and depletion 22,599 23,333
Translation gain on subordinated debt (2,216) (1,024)
Amortization of deferred debt costs 280 185
Deferred income tax expense (benefit) 251 (849)
Other, net (3,228) (62)
Decrease in accounts receivable 5,372 18,236
Increase in other current assets (2,350) (3,419)
Decrease in accounts payable (1,066) (17,678)
Increase (decrease) in accrued interest and other current liabilities (8,946) 272
---------- ---------
Net cash provided by operating activities 11,146 17,991
Cash flows from investing activities:
Capital expenditures for property and equipment (19,962) (260,628)
Less stock issued for acquisition - 14,219
---------- ---------
(19,962) (246,409)
Proceeds from sales of assets 12,296 -
Increase in other assets, net (715) (1,604)
---------- ---------
Net cash used by investing activities (8,381) (248,013)
Cash flows from financing activities:
Proceeds from bank borrowings 43,112 338,309
Repayments of bank borrowings (145,943) (195,449)
Issuance of 10 1/2% senior subordinated notes, net of issuance costs 98,825 -
Issuance of 8 3/4% senior subordinated notes, net of issuance costs - 74,812
Redemption of 11 1/2% senior subordinated notes (45) -
Increase (decrease) in other liabilities, net 86 (141)
---------- ---------
Net cash provided (used) by financing activities (3,965) 217,531
Effect of exchange rate changes on cash (33) 70
---------- ---------
Net decrease in cash and cash equivalents (1,233) (12,421)
Cash and cash equivalents at beginning of period 3,415 18,191
---------- ---------
Cash and cash equivalents at end of period $ 2,182 5,770
---------- ---------
---------- ---------
Cash paid during the period for:
Interest $ 9,398 9,168
Income taxes $ 218 647
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements included herein are
unaudited. In the opinion of management, all adjustments, consisting of
normal recurring accruals, have been made which are necessary for a fair
presentation of the financial position of the Company at March 31, 1999 and
the results of operations for the three month periods ended March 31, 1999
and 1998. Quarterly results are not necessarily indicative of expected annual
results because of the impact of fluctuations in prices received for liquids
(oil, condensate and natural gas 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 on
Form 10-K for the year ended December 31, 1998, previously filed with the
Securities and Exchange Commission.
The components of total comprehensive income (loss) for the periods
consist of net earnings (loss), foreign currency translation and changes in
the unfunded pension liability and are as follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 31, March 31,
1999 1998
--------- ---------
(In Thousands)
<S> <C> <C>
Net earnings (loss) $ 450 (1,003)
Other comprehensive net earnings (loss) (381) 236
-------- ------
Total comprehensive net earnings (loss) $ 69 (767)
-------- ------
-------- ------
</TABLE>
(2) ACQUISITIONS
In February 1998 the Company purchased interests in oil and natural
gas properties in 13 fields located onshore Louisiana (the Louisiana
Acquisition) from a private company for total consideration of approximately
$230,776,000. The consideration consisted of approximately $216,557,000 of
cash, funded primarily from the Company's bank credit facility, and the
issuance of $75,000,000 principal amount of 8 3/4% subordinated notes (see
Note 6) and 1,000,000 shares of the Company's Common Stock. Estimated proved
reserves acquired in the Louisiana Acquisition were approximately 189 BCFE at
the time of purchase.
In June 1998 Forest issued 5,950,000 shares of common stock to The
Anschutz Corporation in exchange for certain oil and gas assets (the Anschutz
Acquisition). The oil and gas assets acquired included an interest in The
Anschutz Ranch East Field located in Utah and Wyoming. Forest's interest in
this field had net proved developed producing reserves estimated at
approximately 72 BCFE at the date of acquisition. The Company also acquired
all of Anschutz's Canadian oil and gas assets, comprised primarily of
approximately 170,000 net acres of undeveloped land, as well as 5.2 BCFE of
estimated proved reserves. The acquistion included certain of Anschutz's
international oil and gas assets comprised of 13 international projects
encompassing approximately 18 million net acres of undeveloped land.
(3) SUBSIDIARIES
SAXON PETROLEUM INC. In December 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. Since Forest had majority voting control over Saxon as a
result of the voting common shares owned and proxies that it held, it
accounted for Saxon as a consolidated subsidiary from the date of its
acquisition. During 1997 Forest converted
-4-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(3) SUBSIDIARIES, CONTINUED
preferred shares of Saxon into common shares and acquired additional common
shares of Saxon pursuant to an equity participation agreement. These
transactions increased Forest's ownership in Saxon to a 65% economic (49%
voting) interest.
In August 1998 the Company acquired all of the outstanding common
shares of Saxon not previously owned by Forest in exchange for 1,081,256
shares of Forest Common Stock. A former officer of Saxon returned 9,922
shares of Forest Common Stock to Saxon in exchange for extinguishment of a
loan. These shares held by Saxon have been recorded as treasury stock at
March 31, 1999.
In October 1998 ownership of Saxon was transferred from Forest to
its wholly owned subsidiary, Canadian Forest Oil Ltd.
CANADIAN FOREST OIL LTD. In January 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).
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).
Canadian Forest is the issuer of the 8 3/4% Senior Subordinated
Notes (the 8 3/4% Notes) (see Note 6). The Company has not presented separate
financial statements and other disclosures concerning Canadian Forest because
management has determined that such information is not material to holders of
the 8 3/4% Notes; however, the following summarized consolidated financial
information is being provided for Canadian Forest as of March 31, 1999 and
December 31, 1998 and for the three months ended March 31, 1999 and 1998.
These amounts include the effects of the transfer of the Company's investment
in Saxon to Canadian Forest effective October 1998.
-5-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(3) SUBSIDIARIES, CONTINUED
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
(In Thousands)
<S> <C> <C>
CANADIAN FOREST OIL LTD.
Summarized Consolidated Balance Sheet Information:
ASSETS
Current assets $ 20,601 25,245
Net property and equipment 135,670 123,215
Goodwill and other intangible assets, net 22,546 25,948
Note receivable from parent 27,266 75,060
Other assets 3,430 3,728
----------- --------
$ 209,513 253,196
----------- --------
----------- --------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities $ 25,270 21,675
Long-term debt 24,143 -
8 3/4% Senior Subordinated Notes 199,976 199,974
Other liabilities 302 367
Deferred income taxes 9,828 35,113
Shareholder's equity (deficit) (50,006) (3,933)
----------- --------
$ 209,513 253,196
----------- --------
----------- --------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
----------- --------
<S> <C> <C>
(In Thousands)
Summarized Consolidated Statements of Operations Information:
Revenue $ 53,609 40,022
----------- --------
----------- --------
Income (loss) before income taxes $ 822 (2,169)
----------- --------
----------- --------
Net income (loss) $ 882 (1,046)
----------- --------
----------- --------
</TABLE>
(4) NET PROPERTY AND EQUIPMENT
Components of net property and equipment are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(In Thousands)
<S> <C> <C>
Oil and gas properties $ 2,046,706 2,029,352
Buildings, transportation and
other equipment 12,519 12,356
----------- ---------
2,059,225 2,041,708
Less accumulated depreciation,
depletion and valuation allowance 1,401,293 1,378,398
----------- ---------
$ 657,932 663,310
----------- ---------
----------- ---------
</TABLE>
-6-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(5) 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:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
(In Thousands)
<S> <C> <C>
Goodwill $ 15,193 14,980
Gas marketing contracts 13,256 13,070
---------- ---------
28,449 28,050
Less accumulated amortization (5,903) (5,361)
---------- ---------
$ 22,546 22,689
---------- ---------
---------- ---------
</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 12 years.
(6) LONG-TERM DEBT
Components of long-term debt are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
(In Thousands)
<S> <C> <C>
Global Credit Facility:
U.S. borrowings $ 170,300 261,400
Canadian borrowings - 10,456
Saxon Credit Facility 24,143 24,942
8 3/4% Senior Subordinated Notes 199,976 199,976
10 1/2% Senior Subordinated Notes 98,839 -
11 1/4% Senior Subordinated Notes 8,631 8,676
---------- -------
$ 501,889 505,450
---------- -------
---------- -------
</TABLE>
On February 2, 1998 Canadian Forest issued $75,000,000 principal
amount of 8 3/4% subordinated notes which were sold at 100.375%. Net proceeds
were used to provide funds for the Louisiana Acquisition. The notes issued in
1998 were subsequently exchanged for notes of the same series of 8 3/4% Notes
that were issued in September 1997.
The Company is required to recognize foreign currency translation
gains or losses related to the 8 3/4% Notes because the debt is denominated
in U.S. dollars and the functional currency of Canadian Forest is the
Canadian dollar. As a result of the increase in the value of the Canadian
dollar relative to the U.S. dollar during the first quarter of 1999, the
Company reported a noncash translation gain of approximately $2,216,000.
-7-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(6) LONG-TERM DEBT, CONTINUED
In June 1998 the Company settled its remaining nonrecourse
production payment obligation for 271,214 shares of the Company's Common
Stock. The stock was valued at $3,750,000 based upon the weighted average
trading price for the 10 day trading period preceding the closing date. The
obligation, which originated in May 1992, had a remaining book value of
approximately $9,966,000. As a result of this settlement, the Company
recorded an extraordinary gain on extinguishment of debt of $6,196,000 (net
of related expenses) in the second quarter of 1998.
In February 1999 Forest completed a public offering of $100,000,000
principal amount of 10 1/2% Senior Subordinated Notes due 2006. The 10 1/2%
Notes were issued at 98.811% of par.
(7) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net earnings
(loss) attributable to common stock by the weighted average number of common
shares outstanding during each period, excluding treasury shares.
Diluted earnings (loss) per share is computed by adjusting the
average number of common shares outstanding for the dilutive effect, if any,
of convertible preferred stock, stock options and warrants. The effect of
potentially dilutive securities is based on earnings (loss) before
extraordinary items.
The following sets forth the calculation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1999 (1) 1998 (2)
---------- --------
(In Thousands Except
Per Share Amounts)
<S> <C> <C>
Net earnings (loss) available to common shareholders $ 450 (1,003)
Weighted average common shares outstanding
during the period 44,648 36,975
Add dilutive effects of:
Employee options - -
---------- --------
Weighted average common shares outstanding
including the effects of dilutive securities 44,648 36,975
---------- --------
---------- --------
Basic earnings (loss) per share $ .01 (.03)
---------- --------
---------- --------
Diluted earnings (loss) per share $ .01 (.03)
---------- --------
---------- --------
</TABLE>
(1) At March 31, 1999, options to purchase 3,057,000 shares of common stock at
prices ranging from $7.44 to $25.00 per share were outstanding, but were
not included in the computation of diluted loss per share for the three
months ended March 31, 1999. The exercise prices of these options were
greater than the average market price of the common stock during the
quarter. These options expire at various dates from 2000 through 2009.
(2) At March 31, 1998, options to purchase 1,900,000 shares of common stock at
prices ranging from $11.25 to $25.00 per share were outstanding, but were
not included in the computation of diluted earnings per share for the three
months ended March 31, 1998. The exercise prices of these options were
greater than the average market price of the common shares. These options
expire at various dates from 2002 through 2007.
-8-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(8) BUSINESS AND GEOGRAPHICAL SEGMENTS
Segment information has been prepared in accordance with Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information (Statement No. 131). Forest has five
reportable segments: oil and gas operations in the Gulf Coast Offshore
Region, Gulf Coast Onshore Region, Western Region and in Canada, and
marketing and processing operations in Canada. The segments were determined
based upon the type of operations in each segment and the geographical
location of each segment. The segment data presented below was prepared on
the same basis as Forest's consolidated financial statements.
<TABLE>
<CAPTION>
Three months ended March 31, 1999
- ---------------------------------
Oil and Gas Operations
--------------------------------------------------------- Marketing
Gulf Coast Region and
----------------- Western Total Processing Total
Offshore Onshore Region U.S. Canada Total Canada Company
-------- ------- ------ ------ ------ ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 20,262 7,435 6,927 34,624 8,331 42,955 47,397 90,352
Marketing and processing expense - - - - - - 44,187 44,187
Oil and gas production expense 3,084 4,368 1,421 8,873 2,392 11,265 - 11,265
General and administrative expense 1,271 875 571 2,717 729 3,446 652 4,098
Depreciation and depletion expense 12,140 3,728 2,099 17,967 3,897 21,864 465 22,329
-------- ------- ------- ------- ------- ------- ------ -------
Earnings (loss) from operations $ 3,767 (1,536) 2,836 5,067 1,313 6,380 2,093 8,473
-------- ------- ------- ------- ------- ------- ------ -------
-------- ------- ------- ------- ------- ------- ------ -------
Capital expenditures $ 2,367 5,951 1,164 9,482 9,793 19,275 - 19,275
-------- ------- ------- ------- ------- ------- ------ -------
-------- ------- ------- ------- ------- ------- ------ -------
Property and equipment, net $117,809 263,147 102,235 483,191 154,103 637,294 - 637,294
-------- ------- ------- ------- ------- ------- ------ -------
-------- ------- ------- ------- ------- ------- ------ -------
</TABLE>
Information for Forest's reportable segments relates to the Company's March
31, 1999 consolidated totals as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------
<S> <C>
EARNINGS BEFORE INCOME TAXES:
Earnings from operations for reportable segments $ 8,473
Administrative asset depreciation (270)
Other income, net 780
Interest expense (10,657)
Translation gain on subordinated debt 2,216
----------
Earnings before income taxes $ 542
----------
----------
CAPITAL EXPENDITURES:
Reportable segments $ 19,275
International interests 208
Administrative assets and other 479
----------
Total capital expenditures $ 19,962
----------
----------
PROPERTY AND EQUIPMENT, NET:
Reportable segments $ 637,294
International interests 14,643
Administrative assets, net and other 5,995
----------
Total property and equipment, net $ 657,932
----------
----------
</TABLE>
-9-
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
Three months ended March 31, 1998
- ---------------------------------
Oil and Gas Operations
--------------------------------------------------------- Marketing
Gulf Coast Region and
------------------ Western Total Processing Total
Offshore Onshore Region U.S. Canada Total Canada Company
-------- ------- ------ ------ ------ ------ ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 18,530 8,257 2,317 29,104 11,543 40,647 34,849 75,496
Marketing and processing expense - - - - - - 33,168 33,168
Oil and gas production expense 3,144 1,859 869 5,872 2,970 8,842 - 8,842
General and administrative expense 794 1,125 259 2,178 1,330 3,508 747 4,255
Depreciation and depletion expense 12,195 3,747 158 16,100 6,417 22,517 471 22,988
-------- ------- ------ ------- ------- ------- ------ -------
Earnings from operations $ 2,397 1,526 1,031 4,954 826 5,780 463 6,243
-------- ------- ------ ------- ------- ------- ------ -------
-------- ------- ------ ------- ------- ------- ------ -------
Capital expenditures $ 11,522 232,047 5,603 249,172 11,180 260,352 - 260,352
-------- ------- ------ ------- ------- ------- ------ -------
-------- ------- ------ ------- ------- ------- ------ -------
Property and equipment, net $166,773 306,166 76,808 549,747 200,389 750,136 5,279 755,415
-------- ------- ------ ------- ------- ------- ------ -------
-------- ------- ------ ------- ------- ------- ------ -------
</TABLE>
Information for Forest's reportable segments relates to the Company's March
31, 1998 consolidated totals as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------
<S> <C>
LOSS BEFORE INCOME TAXES:
Earnings from operations for reportable segments $ 6,243
Administrative asset depreciation (345)
Other income, net (2)
Interest expense (8,506)
Minority interest in loss of subsidiary 80
Translation gain on subordinated debt 1,024
----------
Loss before income taxes $ (1,506)
----------
----------
CAPITAL EXPENDITURES:
Reportable segments $ 260,352
Administrative assets and other 276
----------
Total capital expenditures $ 260,628
----------
----------
PROPERTY AND EQUIPMENT, NET:
Reportable segments $ 755,415
Administrative assets, net and other 5,308
----------
Total property and equipment, net $ 760,723
----------
----------
</TABLE>
-10-
<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.
FORWARD-LOOKING STATEMENTS
Certain of the statements set forth in this Form 10-Q, such as the
statements regarding planned capital expenditures and the availability of
capital resources to fund capital expenditures, are forward-looking and are
based on our current belief as to the outcome and timing of such future
events. There are numerous risks and uncertainties that can affect the
outcome and timing of such events, including many factors which are beyond
our control. Should one or more of these risks or uncertainties occur, or
should underlying assumptions prove incorrect, the actual results and plans
for 1999 and beyond could differ materially from those expressed in the
forward-looking statements. For a description of risks affecting Forest's
business, see "Item 1 - Business -Forward-Looking Statements and Risk
Factors" in the 1998 Annual Report on Form 10-K.
RESULTS OF OPERATIONS FOR THE FIRST QUARTER OF 1999
Net earnings for the first quarter of 1999 were $450,000 or $.01 per
basic and diluted common share compared to a net loss of $1,003,000 or $.03
per basic and diluted common share in the corresponding period of 1998. The
1999 and 1998 periods include gains on foreign currency translation of
$2,216,000 and $1,024,000, respectively, related to subordinated debt issued
by a Canadian subsidiary.
Marketing and processing revenue increased by 36% to $47,506,000 in
the first quarter of 1999 from $35,003,000 in the first quarter of 1998 and
the related marketing and processing expense also increased by 33% to
$44,187,000 in the first quarter of 1999 from $33,168,000 in the previous
year. The gross margin reported for marketing and processing activities
increased to $3,319,000 in the first quarter of 1999 from $1,835,000 in the
first quarter of 1998. The increase resulted primarily from the sale of
processing facilities during the quarter, offset to some extent by the
effects of a more competitive market which caused trading margins to tighten.
Oil and gas sales revenue increased by 6% to $42,846,000 in the
first quarter of 1999 from $40,493,000 in the first quarter of 1998.
Production volumes for natural gas and liquids (consisting of oil, condensate
and natural gas liquids) in the first quarter of 1999 increased 20% from the
comparable 1998 period. The increases in production are primarily due to
discoveries in the Gulf of Mexico being brought on production as well as
production attributable to property acquisitions in the second quarter of
1998. The average sales price received for natural gas in the first quarter
of 1999 decreased 4% compared to the average sales price received in the
corresponding 1998 period. The average sales price received for liquids
production during the first quarter of 1999 decreased 29% compared to the
average sales price received during the comparable 1998 period.
-11-
<PAGE>
Oil and gas production expense of $11,265,000 in the first quarter
of 1999 increased 27% from $8,842,000 in the comparable period of 1998
primarily as a result of increased workover expense in the 1999 period as
well as additional production expense related to acquired properties. On an
MCFE basis (MCFE means thousands of cubic feet of natural gas equivalents,
using conversion ratio of one barrel of oil to six MCF of natural gas),
production expense increased approximately 7% in the first quarter of 1999 to
$.48 per MCFE from $.45 MCFE in the first quarter of 1998.
The following tables set forth production volumes, weighted average
sales prices and production expenses during the periods as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
-------------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
------- ----- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 8,272 2,621 2,718 13,611 3,383 16,994
Sales price received (per MCF) $ 1.83 1.70 1.71 1.78 1.28 1.68
Effects of energy swaps (per MCF)(1) .31 .42 .28 .33 (.02) .26
------- ----- ------- ------ ------ ------
Average sales price (per MCF) $ 2.14 2.12 1.99 2.11 1.26 1.94
LIQUIDS
Oil and condensate:
Production (MBBLS) 255 171 61 487 305 792
Sales price received (per BBL) $ 8.87 11.08 12.26 10.07 10.63 10.28
Effects of energy swaps (per BBL)(1) - .54 - .19 - .12
------- ----- ------- ------ ------ ------
Average sales price (per BBL) $ 8.87 11.62 12.26 10.26 10.63 10.40
Natural gas liquids:
Production (MBBLS) 1 39 112 152 112 264
Average sales price (per BBL) $ 10.00 7.21 4.77 5.43 7.33 6.23
Total liquids production (MBBLS) 256 210 173 639 417 1,056
Average liquids sales price (per BBL) $ 8.88 10.80 7.41 9.11 9.74 9.36
TOTAL PRODUCTION:
Production volumes (MMCFE) 9,808 3,881 3,756 17,445 5,885 23,330
Average sales price (per MCFE) $ 2.04 2.02 1.78 1.98 1.42 1.83
Operating expense (per MCFE) .31 1.13 .38 .51 .41 .48
------- ----- ------- ------ ------ ------
Netback (per MCFE) $ 1.73 .89 1.40 1.47 1.01 1.35
------- ----- ------- ------ ------ ------
------- ----- ------- ------ ------ ------
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market
volumes against price fluctuations. Hedged natural gas volumes were
8,565 MMCF in the three months ended March 31, 1999. Hedged oil and
condensate volumes were 70,000 barrels in the three months ended March
31, 1999. The aggregate net gain under energy swap agreements was
$4,472,000 for the period and was accounted for as an increase to oil
and gas sales.
-12-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
---------------------------------------------------------------------
Offshore Onshore
Gulf of Gulf Total Total
Mexico Coast Western U.S. Canada Company
------- ----- ------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C>
NATURAL GAS
Production (MMCF) 6,210 2,686 922 9,818 3,847 13,665
Sales price received (per MCF) $ 2.22 2.18 2.06 2.19 1.24 1.93
Effects of energy swaps (per MCF)(1) .19 .04 - .13 .01 .09
------- ----- ------- ----- ------ ------
Average sales price (per MCF) $ 2.41 2.22 2.06 2.32 1.25 2.02
LIQUIDS
Oil and condensate:
Production (MBBLS) 244 147 28 419 385 804
Sales price received (per BBL) $ 12.87 14.24 14.21 13.44 13.51 13.48
Effects of energy swaps (per BBL)(1) .84 - - .49 1.11 .78
------- ----- ------- ----- ------ ------
Average sales price (per BBL) $ 13.71 14.24 14.21 13.93 14.62 14.26
Natural gas liquids:
Production (MBBLS) - 39 3 42 129 171
Average sales price (per BBL) $ - 7.54 7.67 7.55 8.54 8.30
Total liquids production (MBBLS) 244 186 31 461 514 975
Average liquids sales price (per BBL) $ 13.71 12.83 13.58 13.35 13.10 13.22
TOTAL PRODUCTION
Production volumes (MMCFE) 7,674 3,802 1,108 12,584 6,931 19,515
Average sales price (per MCFE) $ 2.38 2.20 2.09 2.31 1.66 2.07
Operating expense (per MCFE) .41 .49 .78 .47 .43 .45
------- ----- ------- ----- ------ ------
Netback (per MCFE) $ 1.97 1.71 1.31 1.84 1.23 1.62
------- ----- ------- ----- ------ ------
------- ----- ------- ----- ------ ------
</TABLE>
(1) Energy swaps were entered into to hedge the price of spot market
volumes against price fluctuations. Hedged natural gas volumes were
4,400 MMCF in the three months ended March 31, 1998. Hedged oil and
condensate volumes were 180,000 barrels in the three months ended March
31, 1998. The aggregate net gain under energy swap agreements was
$1,912,000 for the period and was accounted for as an increase to oil
and gas sales.
General and administrative expense decreased to $4,098,000 in the
first quarter of 1999 compared to $4,255,000 in the comparable period of
1998. Total overhead costs (capitalized and expensed general and
administrative costs) were $6,295,000 in the first quarter of 1999 compared
to $6,164,000 in the comparable period of 1998.
-13-
<PAGE>
The following table summarizes the total overhead costs incurred during
the periods:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
--------- ---------
(In Thousands)
<S> <C> <C>
Overhead costs capitalized $2,197 1,909
General and administrative costs expensed (1) 4,098 4,255
------ -----
Total overhead costs $6,295 6,164
------ -----
------ -----
</TABLE>
(1) Includes $652,000 and $747,000 related to marketing and processing
operations for the three months ended March 31, 1999 and 1998,
respectively.
Depreciation and depletion expense decreased 3% to $22,599,000 in
the first quarter of 1999 from $23,333,000 in the first quarter of 1998. On a
per-unit basis, depletion expense was approximately $.94 per MCFE in the
first quarter of 1999 compared to $1.15 per MCFE in the corresponding 1998
period. The decline in the depletion rate during 1999 is attributable to
favorable per-unit costs associated with 1998 acquisitions and Gulf of Mexico
discoveries, as well as to the writedowns of oil and gas properties in the
third and fourth quarters of 1998. At March 31, 1999 Forest had undeveloped
properties with a cost basis of approximately $55,615,000 in the U.S. and
$26,739,000 in Canada which were not subject to depletion, compared to
approximately $69,558,000 in the U.S. and $19,917,000 in Canada at March 31,
1998. The decrease in the U.S. is attributable primarily to impairment of
undeveloped properties. The increase in Canada is attributable primarily to
the purchase of undeveloped acreage. At March 31, 1999 Forest also had
approximately $14,643,000 of costs related to international interests. These
costs are not being depleted pending the establishment of proved reserves.
Other income was $780,000 in the first quarter of 1999 and was
$78,000 in the first quarter of 1998. The 1999 period includes a gain on the
sale of an investment in subsidiary.
Interest expense increased 25% to $10,657,000 in the first quarter
of 1999 compared to $8,506,000 in the corresponding 1998 period, due
primarily to higher debt levels.
The foreign currency translation gain was $2,216,000 in the first
quarter of 1999, compared to a gain of $1,024,000 in the first quarter of
1998. Foreign currency translation gains and losses relate to translation of
the 8 3/4% Notes issued by Canadian Forest, and are attributable to the
increases and decreases in the value of the Canadian dollar relative to the
U.S. dollar during the period. The value of the Canadian dollar was $.6628
per $1.00 U.S. at March 31, 1999 compared to $.6535 at December 31, 1998. The
Company is required to recognize the noncash foreign currency translation
gains or losses related to the 8 3/4% Notes because the debt is denominated
in U.S. dollars and the functional currency of Canadian Forest is the
Canadian dollar.
LIQUIDITY AND CAPITAL RESOURCES
Forest 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 bank credit facilities and cash provided by
operating activities. In 1998 and early 1999, we completed several
transactions that improved our financial position.
- - In February 1998 Canadian Forest issued $75,000,000 principal amount of 8
3/4% Notes, an add-on to the issue of 8 3/4% Notes completed in September
1997. The net proceeds funded a portion of our purchase of interests in oil
and natural gas properties in 13 fields located onshore Louisiana from a
private company for total consideration of approximately $230,776,000. The
consideration consisted of approximately $216,557,000 in cash and 1,000,000
shares of Common Stock.
- - In June 1998 Forest issued 5,950,000 shares of common stock to Anschutz in
exchange for certain oil and gas assets located in the U.S. and Canada, as
well as 13 international projects.
-14-
<PAGE>
- - In June 1998 we settled our only remaining nonrecourse production payment
loan by issuing 271,214 shares of common stock to the lender, Bank of
America National Trust & Savings Association. The loan, which originated in
May 1992, had a remaining principal amount of approximately $14,600,000 and
a book value of approximately $9,966,000. The loan was secured primarily by
certain oil and gas properties in Oklahoma and the Gulf of Mexico. As a
result of the settlement, we recorded an extraordinary gain of $6,196,000
in 1998.
- - In February 1999 we issued $100,000,000 of 10 1/2% Senior Subordinated
Notes (the 10 1/2% Notes) due 2006 which were sold at 98.811% of par.
We continue 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 Forest, the
issuance of net profits interests, sales of non-strategic assets, prospects
and technical information, and joint venture financing. Availability of these
sources of capital and, therefore, our ability to execute our operating
strategy will depend upon a number of factors, some of which are beyond
Forest's control.
In addition, the prices we receive for future oil and natural gas
production and the level of production will significantly impact future
operating cash flows. At current production and borrowing levels, Forest's
sensitivity to price declines is significantly increased compared to prior
periods. No prediction can be made as to the prices we will receive for our
future oil and gas production. Additionally, we have five offshore Gulf of
Mexico wells whose combined production represents approximately 27% of our
consolidated daily deliverability at May 1, 1999. Our production, revenue and
cash flow could be adversely affected if production from these properties
decreases significantly.
BANK CREDIT FACILITIES. Forest and its subsidiaries, Canadian Forest
and ProMark, have a $300,000,000 global credit facility which currently
provides for a global borrowing base of $250,000,000 through a syndicate of
banks led by The Chase Manhattan Bank and The Chase Manhattan Bank of Canada.
The maximum credit facility allocations in the United States and Canada are
currently $275,000,000 and $25,000,000, respectively. The borrowing base is
subject to semi-annual redeterminations. Funds borrowed under the global
credit facility can be used for general corporate purposes. Under the terms
of the global credit facility, Forest, Canadian Forest and ProMark are
subject to certain covenants and financial tests, including restrictions or
requirements with respect to cash dividends, including cash dividends on
preferred stock, working capital, cash flow, additional debt, liens, asset
sales, investments, mergers and reporting responsibilities.
The global credit facility is secured by a lien on, and a security
interest in, a portion of our U.S. proved oil and gas properties, related
assets, pledges of accounts receivable, and a pledge of 66% of the capital
stock of Canadian Forest. The global credit facility is also indirectly
secured by substantially all of the assets of Canadian Forest. We may
increase the number of properties that are pledged under the facility.
At March 31, 1999, the outstanding borrowings under the global
credit facility were $170,300,000 in the U.S. There was no outstanding
balance in Canada. At April 30, 1999, the borrowing base was $250,000,000 and
the outstanding borrowings under the Global Credit Facility were $165,600,000
in the U.S. and $4,640,000 in Canada, with an average effective interest rate
of 6.5%. At April 30, 1999 the Company has also used the global credit
facility for Letters of Credit in the amount of $233,000 in the U.S. and
$1,144,000 CDN in Canada.
Saxon Petroleum is an unrestricted subsidiary under the terms of
Forest's global credit facility and its subordinated debt. Saxon, a
wholly-owned subsidiary of Canadian Forest Oil Ltd., has a separate credit
facility with a $36,400,000 CDN borrowing base, of which $35,882,000 CDN was
drawn as of April 30, 1999. Forest is examining various alternatives with
respect to this credit facility, but has the ability to fund any potential
borrowing base reduction from the global credit facility if necessary.
WORKING CAPITAL. Forest had a working capital surplus of
approximately $5,966,000 at March 31, 1999 compared to approximately $348,000
at December 31, 1998. The increase is due to disbursements for interest and
other payables being funded primarily by drawdowns on the global credit
facility.
In the U.S., Forest periodically reports working capital deficits at
the end of a period. Such working capital deficits are principally the result
of accounts payable for capitalized exploration and development costs.
Settlement of these payables is funded by cash flow from operations or, if
necessary, by drawdowns on long-term bank credit
-15-
<PAGE>
facilities. For cash management purposes, drawdowns on the credit facilities
are not made until the due dates of the payables.
CASH FLOW. Historically, one of Forest's primary sources of capital
has been net cash provided by operating activities. Net cash provided by
operating activities decreased to $11,146,000 in 1999 compared to $17,991,000
in 1998. The 1999 period included decreases due to working capital changes of
$6,990,000. The 1998 period included decreases due to working capital changes
of $2,589,000. We used $8,381,000 for investing activities in 1999 compared
to $248,013,000 in 1998. The 1998 period included the purchase of properties
in the Louisiana Acquisition for approximately $230,776,000. The 1999 capital
expenditures were primarily for exploration and development activities. Cash
used by financing activities in 1999 was $3,965,000 compared to cash provided
of $217,531,000 in 1998. The 1999 period included net repayments of bank
borrowings of $102,831,000 and net proceeds of $98,825,000 from the issuance
of the 10 1/2% Notes. The 1998 period included net bank borrowings of
$142,860,000 and net proceeds of $74,812,000 from the issuance of the 8 3/4%
Notes.
CAPITAL EXPENDITURES. Expenditures for property acquisition,
exploration and development for the first quarter of 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1999 1998
---------- -------
(In Thousands)
<S> <C> <C>
Property acquisition costs:
Proved properties $ (732) 202,176
Undeveloped properties - 30,033
---------- -------
(732) 232,209
Exploration costs:
Direct costs 11,666 17,030
Overhead capitalized 769 896
---------- -------
12,435 17,926
Development costs:
Direct costs 6,384 9,204
Overhead capitalized 1,428 1,013
---------- -------
7,812 10,217
---------- -------
$ 19,515 260,352
---------- -------
---------- -------
</TABLE>
Forest's budgeted 1999 direct expenditures for exploration and
development are approximately $78,000,000. We intend to meet our 1999 capital
expenditure financing requirements using cash flows generated by operations,
sales of non-strategic assets and borrowings under existing lines of credit.
There can be no assurance, however, that we will have access to sufficient
capital to meet these capital requirements. The planned levels of capital
expenditures could be reduced if we experience lower than anticipated net
cash provided by operations or other liquidity needs or could be increased if
we experience increased cash flow or access additional sources of capital.
In addition, while Forest intends to continue a strategy of acquiring
reserves that meet our investment criteria, no assurance can be given that we
can locate or finance any property acquisitions.
INVESTMENT IN SAXON PETROLEUM INC. In August 1998, we acquired all
of the outstanding common shares of Saxon Petroleum Inc. not previously owned
by us in exchange for 1,081,256 shares of Forest common stock. We expect to
realize general and administrative cost savings of approximately $1,500,000
(U.S.) per year as a result of the consolidation of the operations of Saxon
with those of Canadian Forest.
-16-
<PAGE>
LONG-TERM SALES CONTRACTS. A significant portion of Canadian
Forest's natural gas production is sold through the ProMark Netback Pool. At
March 31, 1999 the ProMark Netback Pool had entered into fixed price
contracts to sell approximately 1.7 BCF of natural gas through the remainder
of 1999 at an average price of $2.69 CDN per MCF and approximately 5.4 BCF of
natural gas in 2000 at an average price of approximately $2.24 CDN per MCF.
Canadian Forest, as one of the producers in the ProMark Netback Pool, is
obligated to deliver a portion of this gas. In 1998 Canadian Forest supplied
27% of the gas for the Netback Pool.
HEDGING PROGRAM. In a typical swap agreement, Forest 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, Forest pays the difference. Our current swaps are settled on
a monthly basis. At March 31, 1999 Forest had natural gas swaps for an
aggregate of approximately 72 BBTU (billion British Thermal Units) per day of
natural gas during the remainder of 1999 at fixed prices ranging from $1.53
per MMBTU (million British Thermal Units) on an Alberta Energy Company "C"
(AECO "C") basis to $2.36 per MMBTU on a New York Mercantile Exchange (NYMEX)
basis, an aggregate of approximately 2 BBTU per day of natural gas during
2000 at fixed prices ranging from $2.01 to $2.34 per MMBTU (NYMEX basis) and
an aggregate of approximately 2 BBTU per day of natural gas during 2001 at
fixed prices ranging from $2.03 to $2.36 per MMBTU (NYMEX basis). The
weighted average hedged price for natural gas under such agreements is $2.17,
$2.12 and $2.14 per MMBTU in 1999, 2000 and 2001, respectively. Also at March
31, 1999 Forest had oil swaps for an aggregate of approximately 3,000 barrels
per day of oil during the remainder of 1999 at fixed prices ranging from
$14.00 to $14.50 (NYMEX basis). The weighted average hedged price for oil
under such agreements is $14.17 per barrel.
Subsequent to March 31, 1999 we entered into two natural gas swaps
for an aggregate of 30 BBTU per day of natural gas from May 1999 through July
1999 at a weighted average fixed price of $2.12 per MMBTU (NYMEX basis), as
well as one natural gas swap for 10 BBTU per day of natural gas from April
2000 through October 2000 at a fixed price of $2.30 per MMBTU (NYMEX basis).
We also entered into three oil swaps for an aggregate of 3,500 barrels of oil
per day from May, 1999 to October, 1999 at a weighted average fixed price of
$17.50 per barrel (NYMEX basis).
YEAR 2000 ISSUES. The Year 2000 issue results from computer programs
being written using two digits (rather than four) to define the applicable
year. As a result, certain of Forest's computer applications that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This situation could result in system failure,
miscalculations and disruption of operations including, among other things, a
temporary inability to process transactions, operate equipment with
date-sensitive computer controls or communicate electronically with other
parties.
Forest has instituted a Year 2000 Project that addresses the effects
the Year 2000 will have on software applications and analyzes upgrades and
purchases that may be required. In addition, the Year 2000 Project assesses
the potential impact on Forest in the event that other parties with whom we
do business do not implement systems which are Year 2000 compliant.
We commenced our Year 2000 Project in 1996, in conjunction with a
review of the functionality of the hardware and software in certain existing
systems. Replacement of the lease and land system with Year 2000 compliant
software was completed in early 1997. Review of systems solutions for our
primary business applications, including those used for accounting,
production reporting and oil and gas reserve reporting, was completed during
1997 and early 1998. Possible solutions explored by Forest included
modification of existing systems to make them Year 2000 compliant,
replacement of existing systems with new systems which were Year 2000
compliant and/or provided greater functionality and, in certain areas,
replacement of systems by outsourcing processes to a third party.
Forest completed its review of accounting systems in early 1998,
deciding to replace its U.S. accounting system with a new system that will be
Year 2000 compliant and also provide greater functionality. The
identification of necessary enhancements to the base product was completed in
mid-1998, after which the programming and data conversion processes
commenced. In Canada, we plan to upgrade to a newer release of our existing
oil and gas accounting software in order to be Year 2000 compliant. We expect
to be fully operational on our new accounting systems in the U.S. and Canada
by the third quarter of 1999.
We are also installing an updated version of our U.S. production
accounting software. The new version is Year 2000 compliant and also provides
greater functionality. Installation of this software commenced in mid-1998.
Completion of this project, which also requires updated interface programming
to the accounting and reserve systems,
-17-
<PAGE>
is expected to occur in the second quarter of 1999. The Company does not use
an automated production reporting system in Canada.
Forest's U.S. oil and gas reserve software will also be updated to a
version that is Year 2000 compliant. This upgrade, which requires some
revision to interface programming, is expected to be complete by the third
quarter of 1999. In Canada, we installed new oil and gas reserve software
that is Year 2000 compliant.
The new systems described above are expected to make Forest's
business computer systems Year 2000 compliant in all material respects during
the third quarter of 1999. Remaining business systems have also been reviewed
for Year 2000 compliance. To date, no significant instances of noncompliance
have been noted.
During the course of the projects described above, there have been
and will continue to be significant time requirements placed on Forest's
managers and staff in the affected areas. Wherever possible, we have
contracted additional personnel to supplement programming efforts and to
"backfill" critical positions so that normal workflow is not adversely
affected. However, the ability of Forest's information technology staff to
respond to new issues is expected to be hampered during the upcoming year due
to the difficulty encountered in attracting and retaining qualified personnel.
A Year 2000 Steering Committee was formed in early 1998 consisting
of representatives from the Finance, Accounting, Legal, Operations and
Information Systems disciplines. Based on the Committee's recommendations,
Forest entered into contracts with several consultants to provide additional
support to our efforts to ensure Year 2000 compliance. In the U.S., a
national consulting firm was engaged to assist in the identification,
classification and itemization of Year 2000 issues not previously identified.
This effort encompassed a review of all field operations (operated and
non-operated), significant vendor and customer relationships and business
systems not included in the projects described above. The consulting firm has
also been assisting Forest personnel in the assessment and remediation of
Year 2000 issues. The consultants commenced their work in November 1998 and
expect to complete the project in mid-1999. Canadian Forest has engaged a
consultant to review its business systems and has retained outside legal
counsel to provide support to management in the review of third party
relationships.
Forest believes that its Year 2000 project is approximately 80%
complete as of April 30, 1999.
The internal and external costs associated with implementation of
business systems for accounting, production reporting and oil and gas reserve
reporting during 1998 and 1999 are expected to be between $2,500,000 and
$3,000,000. Of this amount, approximately 20% to 30% would have been required
to make our old systems Year 2000 compliant, and the remainder is for
upgraded hardware and software. The cost of the reviews being undertaken by
outside consultants contracted by the Year 2000 Steering Committee in the
U.S. and Canada is expected to be $200,000 to $300,000. The remediation cost
of non-compliant items noted in such reviews has not yet been quantified, but
is not expected to exceed $300,000.
Forest believes that a failure to complete Year 2000 compliance, or
a failure by parties with whom Forest has material relationships to complete
Year 2000 compliance, could have a material adverse effect on our financial
condition and results of operations. We believe we can provide the resources
necessary to ensure Year 2000 compliance prior to 2000, and thereby reduce
the possibility of significant interruptions of normal business operations.
We also believe that a sufficient number of alternate customers and suppliers
exist if current customers or suppliers are delayed in their efforts to
achieve Year 2000 compliance.
Forest has not, to date, implemented a Year 2000 Contingency Plan
because it is our goal to have major issues resolved by mid-1999. If,
however, Forest's Year 2000 Project falls behind schedule, we would expect to
develop and implement a Year 2000 Contingency Plan by mid-1999.
RECENT ACCOUNTING PRONOUNCEMENT. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
(Statement No. 133), effective beginning with the first quarter of fiscal
years beginning after June 15, 1999. Statement No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company has not determined the impact Statement No. 133 will
have on its financial statements and believes that such determination will
not be meaningful until closer to the date of initial adoption.
-18-
<PAGE>
PART II. OTHER INFORMATION
ITEM 2c. RECENT SALE OF UNREGISTERED SECURITIES
There were no sales of unregistered securities during the first quarter
of 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
* Exhibit 27 Financial Data Schedule.
* Filed with this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by Forest during the first
quarter of 1999.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOREST OIL CORPORATION
(Registrant)
Date: May 14, 1999 /s/ Joan C. Sonnen
-------------------------------------
Joan C. Sonnen
Vice President - Controller and
Corporate Secretary
(Signed on behalf of the registrant)
/s/ David H. Keyte
-------------------------------------
David H. Keyte
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
-20-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ON PAGES 1
THROUGH __ OF THE COMPANY'S FORM 10-Q FOR THE 3 MONTH PERIOD ENDING 3-31-99,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,182
<SECURITIES> 0
<RECEIVABLES> 50,404
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,409
<PP&E> 2,059,225
<DEPRECIATION> 1,401,293
<TOTAL-ASSETS> 747,226
<CURRENT-LIABILITIES> 51,443
<BONDS> 501,889
0
0
<COMMON> 4,465
<OTHER-SE> 164,599
<TOTAL-LIABILITY-AND-EQUITY> 747,226
<SALES> 90,352
<TOTAL-REVENUES> 90,352
<CGS> 55,452
<TOTAL-COSTS> 59,550
<OTHER-EXPENSES> 19,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,657
<INCOME-PRETAX> 542
<INCOME-TAX> 92
<INCOME-CONTINUING> 450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 450
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
