<PAGE>
SUBJECT TO COMPLETION, DATED JULY 30, 1999
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
AND IS EFFECTIVE. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
P R O S P E C T U S S U P P L E M E N T
(TO PROSPECTUS DATED NOVEMBER 9, 1998)
[LOGO]
8,000,000 Shares
Forest Oil Corporation
Common Stock
$ per share
----------
Forest Oil Corporation is offering 8,000,000 shares of its common stock. The
underwriters named in this prospectus supplement may purchase up to 1,200,000
additional shares of common stock from Forest under certain circumstances.
Our common stock is listed on the New York Stock Exchange under the symbol
"FST." On July 29, 1999, the last reported sale price on the New York Stock
Exchange was $14 15/16 per share.
----------------
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE S-6 OF THIS PROSPECTUS SUPPLEMENT.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
----------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Forest (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
----------------
Salomon Smith Barney Credit Suisse First Boston
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Banc of America Securities LLC
Petrie Parkman & Co.
, 1999
<PAGE>
This document is in two parts. The first part is the prospectus supplement,
which describes the specific terms of the common stock we are offering. The
second part, the base prospectus, gives more general information, some of which
may not apply to the common stock we are offering. In this prospectus supplement
"Forest", "we", "us", "our" and "the Company" refer to Forest Oil Corporation
and its subsidiaries.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU
WITH DIFFERENT INFORMATION. WE ARE NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN
OFFER TO SELL COMMON STOCK IN ANY JURISDICTION WHERE THE OFFER IS NOT PERMITTED.
YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT, THE ACCOMPANYING BASE PROSPECTUS OR THE DOCUMENTS INCORPORATED BY
REFERENCE IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE
DOCUMENTS. INFORMATION INCLUDED IN THOSE DOCUMENTS HAS NOT BEEN UPDATED OR
CHANGED SINCE THEIR RESPECTIVE DATES, AND OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THOSE DATES.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary.................................................................................................... S-1
Risk Factors............................................................................................... S-6
Cautionary Statement About Forward-Looking Statements...................................................... S-13
Use of Proceeds............................................................................................ S-14
Price Range of Common Stock................................................................................ S-14
Capitalization............................................................................................. S-15
Dividend Policy............................................................................................ S-15
Selected Financial and Operating Data...................................................................... S-16
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... S-17
Business................................................................................................... S-32
Management................................................................................................. S-44
Underwriting............................................................................................... S-47
Legal Matters.............................................................................................. S-49
Experts.................................................................................................... S-49
Glossary of Certain Industry Terms......................................................................... S-50
Index to Financial Statements.............................................................................. F-1
PROSPECTUS
About this Prospectus...................................................................................... 2
Where You Can Find More Information........................................................................ 2
The Company................................................................................................ 3
Use of Proceeds............................................................................................ 3
Ratio of Earnings To Fixed Charges......................................................................... 3
Description of Debt Securities............................................................................. 3
Description of Capital Stock............................................................................... 7
Anti-Takeover Provisions................................................................................... 8
Plan of Distribution....................................................................................... 8
Legal Matters.............................................................................................. 9
Experts.................................................................................................... 9
</TABLE>
Please read the "Glossary of Certain Industry Terms" on page S-50 for
explanations of abbreviations and terms used in this prospectus supplement.
i
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND MAY
NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN
THE COMMON STOCK OF FOREST. YOU SHOULD READ THE ENTIRE PROSPECTUS SUPPLEMENT,
THE ACCOMPANYING PROSPECTUS AND THE INFORMATION INCORPORATED BY REFERENCE
CAREFULLY.
FOREST
Forest Oil Corporation is an independent oil and gas company engaged in the
acquisition, exploration, development, production and marketing of natural gas
and liquids in North America. Forest was incorporated in New York in 1924, the
successor to a company formed in 1916, and has been a publicly held company
since 1969. Since 1995, The Anschutz Corporation, a private Denver-based
corporation, has invested approximately $175 million in Forest and currently
owns approximately 40% of its common stock.
Forest operates from production offices located in Lafayette, Louisiana;
Denver, Colorado; and Calgary, Alberta. Forest's corporate headquarters are
located in Denver, Colorado.
Forest's estimated proved reserves were 775 BCFE at December 31, 1998, an
increase of 47% compared to estimated proved reserves of 526 BCFE at December
31, 1997. Approximately 73% of our estimated proved reserves were natural gas at
December 31, 1998, compared to 72% in the previous year. As of December 31,
1998, our estimated proved developed reserves were approximately 84% of total
estimated proved reserves.
Forest's principal reserves and producing properties are all located in
North America. We operate in four business units: onshore Gulf of Mexico,
offshore Gulf of Mexico, the U.S. Rockies and Canada. At December 31, 1998,
approximately 72% of our oil and gas reserves were in the United States and
approximately 28% were in Canada. During the first six months of 1999, we
produced approximately 253 MMCFE per day. Approximately 75% of our total
production for the first half of 1999 was in the United States and approximately
25% was in Canada. We conduct exploration activities in each of our core areas.
BUSINESS STRATEGY
Our business strategy is to focus on exploration and development of oil and
gas properties located in selected areas in North America where we have
substantial expertise and experience. The following points summarize our
strategy:
- We focus our business efforts on exploring for natural gas in North
America on a geographically diverse basis.
- We are committed to exploration as a source of future growth. We seek to
balance higher risk exploration activities in Canada and the U.S. Rockies
with lower risk exploration and development activities in the Gulf of
Mexico and the Gulf Coast.
- In both the United States and Canada, we periodically acquire producing
oil and gas properties with exploration prospects consistent with our
defined exploration strategy.
- We emphasize control of operations in all of our core areas and in our
evaluation of acquisition opportunities. As operator we are in a better
position to control the timing and costs of drilling operations. We also
seek to be a major participant in each of our core areas.
- We emphasize maintaining a strong balance sheet in order to provide
operating and financial flexibility.
S-1
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.............. 8,000,000
Common stock to be outstanding
after the offering.............. 52,700,378 shares
Use of Proceeds................... To fund identified exploration and development
activities in the Northwest Territories and other core
areas, as well as for other projects or property
acquisitions and for general corporate purposes. We will
reduce indebtedness under our global credit facility
pending such uses.
New York Stock Exchange Symbol.... "FST"
</TABLE>
The number of shares shown above to be outstanding after the offering does
not include:
- up to 1,200,000 shares the underwriters may purchase if they exercise
their over-allotment option;
- up to 2,938,760 shares that may be issued pursuant to stock options
outstanding as of July 23, 1999; and
- shares that may be issued under our stock compensation plans.
RISK FACTORS
Before investing in our common stock, you should consider the risk factors
and the impact from various events which could adversely affect our business.
See "Risk Factors" beginning on page S-6.
S-2
<PAGE>
SUMMARY FINANCIAL, PRODUCTION AND RESERVE DATA
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- --------------------------------
1999 1998 1998 1997 1996
---------- --------- ---------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Marketing and processing............................... $ 88,020 68,842 151,079 184,399 187,374
Oil and gas sales...................................... 89,919 81,827 170,740 155,242 128,713
---------- --------- ---------- --------- ---------
Total revenue........................................ 177,939 150,669 321,819 339,641 316,087
Expenses:
Marketing and processing............................... 83,851 65,264 144,758 175,847 178,706
Oil and gas production................................. 23,703 18,204 41,983 36,284 32,199
General and administrative............................. 7,981 9,177 19,849 16,864 13,623
Interest............................................... 21,064 18,261 38,986 21,403 23,307
Depreciation and depletion............................. 44,366 47,195 100,105 79,991 63,068
Impairment of oil and gas properties................... -- -- 199,500 -- --
Translation (gain) loss on subordinated debt........... (6,517) 3,162 8,320 4,051 --
Miscellaneous, net..................................... (97) (6,782) (8,078) (1,181) (1,406)
---------- --------- ---------- --------- ---------
Total expenses....................................... 174,351 154,481 545,423 333,259 309,497
---------- --------- ---------- --------- ---------
Earnings (loss) before income taxes and extraordinary
item................................................... $ 3,588 (3,812) (223,604) 6,382 6,590
---------- --------- ---------- --------- ---------
---------- --------- ---------- --------- ---------
Earnings (loss) before extraordinary item(1)............. $ 4,493 (5,407) (197,786) 3,089 1,139
---------- --------- ---------- --------- ---------
---------- --------- ---------- --------- ---------
Net earnings (loss)...................................... $ 4,493 789 (191,590) (9,270) 3,305
---------- --------- ---------- --------- ---------
---------- --------- ---------- --------- ---------
Basic earnings (loss) per share:(2)
Earnings (loss) attributable to common stock before
cumulative effect of change in accounting principle
and extraordinary items.............................. $ .10 (.14) (4.83) .09 (.04)
Cumulative effect of change in accounting principle.... -- -- -- -- --
Extraordinary items.................................... -- .16 .15 (.37) .09
---------- --------- ---------- --------- ---------
Net earnings (loss) attributable to common stock....... $ .10 .02 (4.68) (.28) .05
---------- --------- ---------- --------- ---------
---------- --------- ---------- --------- ---------
OTHER FINANCIAL DATA:
Cash provided by operating activities.................... $ 39,822 57,079 89,444 60,535 70,442
Cash used by investing activities........................ $ 34,851 304,781 365,294 151,638 226,870
Cash provided (used) by financing activities............. $ (5,930) 242,920 260,954 101,233 161,876
Total capital expenditures............................... $ 48,656 389,422 471,754 156,799 252,431
EBITDA (3)............................................... $ 62,501 64,678 122,790 111,935 92,946
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------------
ACTUAL AS ADJUSTED(4)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net property and equipment.......................................................... $ 666,480 666,480
Total assets........................................................................ $ 758,960 758,960
Long-term debt...................................................................... $ 502,671 389,896
Shareholders' equity................................................................ $ 172,259 285,034
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
S-3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
ESTIMATED PROVED OIL AND GAS RESERVES(5):
Natural gas (MMCF):
Proved developed........................................................... 467,749 289,835 236,485
Proved undeveloped......................................................... 96,515 88,480 97,695
---------- ---------- ----------
Total.................................................................... 564,264 378,315 334,180
---------- ---------- ----------
---------- ---------- ----------
Liquids (MBbls):
Proved developed........................................................... 30,182 19,784 18,571
Proved undeveloped......................................................... 4,887 4,852 5,443
---------- ---------- ----------
Total.................................................................... 35,069 24,636 24,014
---------- ---------- ----------
---------- ---------- ----------
Total proved oil and gas reserves (MMCFE).................................... 774,678 526,131 478,264
---------- ---------- ----------
---------- ---------- ----------
ESTIMATED PRESENT VALUE OF PROVED RESERVES (IN THOUSANDS):
Estimated present value of future net cash flows from proved reserves
discounted at 10% per annum (before income taxes) "PV-10 Value"(5): $ 547,476 486,506 702,189
---------- ---------- ----------
---------- ---------- ----------
Standardized measure of discounted estimated future net cash flows (after
income taxes)(5)........................................................... $ 522,831 439,570 559,869
---------- ---------- ----------
---------- ---------- ----------
PRICES USED IN CALCULATING PRESENT VALUE OF END OF YEAR PROVED RESERVES:
Natural Gas (per MCF):
United States............................................................ $ 2.03 2.55 3.50
Canada................................................................... $ 1.38 1.30 2.10
Liquids (per Bbl):
United States............................................................ $ 9.56 16.73 26.25
Canada................................................................... $ 8.91 13.71 19.10
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
OTHER RESERVE DATA:
Reserve replacement cost (per MCFE)(6)....................................... $ 1.37 1.30 .95
Reserve replacement rate(7).................................................. 406% 174% 441%
Gas as % of total proved reserve quantities.................................. 73% 72% 70%
Proved developed reserves as % of total proved reserves...................... 84% 78% 73%
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Net Sales Volume:
Natural gas (MMCF)....................................... 32,745 27,962 62,310 49,035 42,496
Liquids (MBbls).......................................... 2,174 2,001 4,269 3,207 2,749
Total production (MMCFE)................................. 45,789 39,968 87,924 68,277 58,990
Average Sales Prices:
Natural gas (per MCF).................................... $ 1.99 2.02 1.95 2.06 1.89
Liquids (per Bbl)........................................ $ 11.35 12.65 11.51 16.92 17.59
Selected Data per MCFE:
Production costs......................................... $ .52 .46 .48 .53 .55
Depreciation, depletion, and amortization................ $ .97 1.18 1.14 1.17 1.07
General and administrative expense....................... $ .17 .23 .23 .25 .23
</TABLE>
(NOTES ON FOLLOWING PAGE)
S-4
<PAGE>
- ------------------------
(1) In 1998, Forest recorded a gain on the extinguishment of debt of $6,196,000
as a result of the settlement of its remaining nonrecourse production
payment obligation. In 1997, Forest recorded a loss on extinguishment of
debt of $12,359,000 as a result of the tender offer for its 11 1/4% Notes.
In 1996, Forest recorded a gain on extinguishment of debt of $2,166,000 as a
result of the extinguishment of nonrecourse secured debt.
(2) Diluted earnings (loss) per share in each of the periods shown is equal to
the basic earnings (loss) per share except for the year ended December 31,
1997. The diluted loss per share for the year ended December 31, 1997 was
$.28.
(3) EBITDA represents earnings before depreciation and depletion, interest,
impairment of oil and gas properties, minority interest in earnings (loss)
of subsidiary, translation gain (loss) on subordinated debt, income taxes,
and extraordinary items. 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. In evaluating EBITDA, Forest 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
also be considered. You should not construe EBITDA as an alternative to
operating income (as determined in accordance with GAAP), as an indicator of
Forest's operating performance, or to cash provided by operating activities
(as determined in accordance with GAAP) as a measure of liquidity. Forest's
method of calculating EBITDA may differ from the methods used by other
companies, and as a result, EBITDA measures disclosed herein may not be
comparable to other similarly titled measures disclosed by other companies.
(4) Adjusted to give effect to the sale of 8,000,000 shares of common stock in
this offering and the application of the net proceeds as described in "Use
of Proceeds."
(5) Quantity estimates, their PV-10 Value and the standardized measure are
affected by the change in crude oil and gas prices at the end of each year.
While our total proved reserves quantities on an MMCFE basis at year-end
1998 increased by 47% over reserves quantities at the prior year-end, the
PV-10 Value and the standardized measure of those reserves increased by only
13% and 19%, respectively, from the PV-10 Value and the standardized measure
at year-end 1997, as a result of lower year-end 1998 prices.
(6) Calculated by dividing total acquisition, exploration and development costs,
excluding future development costs, less property sales, by net reserves
added during the period, including any revisions of those reserves, less
volumes associated with property sales.
(7) Calculated by dividing the net increase in reserves, including any revisions
of those reserves, by the production quantities for such period.
S-5
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus supplement, the accompanying prospectus and the information
incorporated by reference before investing in our securities.
OIL AND GAS PRICE DECLINES AND THEIR VOLATILITY COULD ADVERSELY AFFECT FOREST'S
REVENUE, CASH FLOWS AND PROFITABILITY.
Prices for oil and natural gas fluctuate widely. The average spot price
received by Forest for natural gas produced in the Gulf of Mexico decreased from
approximately $2.61 per MCF at December 31, 1997, to $2.17 per MCF at December
31, 1998 and was approximately $2.36 per MCF at July 1, 1999. During the same
period, the NYMEX price for West Texas Intermediate crude oil decreased from
$17.61 per barrel to $12.06 per barrel and was $19.39 per barrel at July 1,
1999.
Natural gas prices affect Forest more than oil prices, because most of our
production and reserves are natural gas. At December 31, 1998, 73% of our
estimated proved reserves consisted of natural gas on an MCFE basis and, for the
first six months of 1999, approximately 72% of our total production consisted of
natural gas.
Forest's revenues, profitability and future rate of growth depend
substantially upon the prevailing prices of oil and natural gas. Prices also
affect the amount of cash flow available for capital expenditures and our
ability to borrow money or raise additional capital. We reduced our 1999 capital
expenditures budget because of lower oil and gas prices. The amount we can
borrow from banks is subject to redetermination based on current prices. In
addition, we may have ceiling test writedowns when prices decline. Lower prices
may also reduce the amount of oil and natural gas that Forest can produce
economically.
We cannot predict future oil and natural gas prices. Factors that can cause
this fluctuation include:
- relatively minor changes in the supply of and demand for oil and natural
gas;
- market uncertainty;
- the level of consumer product demand;
- weather conditions;
- domestic and foreign governmental regulations;
- the price and availability of alternative fuels;
- political and economic conditions in oil producing countries, particularly
those in the Middle East;
- the foreign supply of oil and natural gas;
- the price of oil and gas imports; and
- overall economic conditions.
We enter into energy swap agreements and other financial arrangements at
various times to attempt to minimize the effect of oil and natural gas price
fluctuations. We cannot assure you that such transactions will reduce risk or
minimize the effect of any decline in oil or natural gas prices. Any substantial
or extended decline in the prices of or demand for oil or natural gas would have
a material adverse effect on our financial condition and results of operations.
Energy swap arrangements may limit the risk of declines in prices, but such
arrangements may also limit further revenues from price increases.
S-6
<PAGE>
WE MAY NOT BE ABLE TO OBTAIN ADEQUATE FINANCING TO EXECUTE OUR OPERATING
STRATEGY.
We have historically addressed our long-term liquidity needs through the use
of bank credit facilities, the issuance of debt and equity securities and the
use of cash provided by operating activities. We continue to examine the
following alternative sources of long-term capital:
- bank borrowings or the issuance of debt securities;
- the sale of common stock, preferred stock or other equity securities;
- the issuance of nonrecourse production-based financing or net profits
interests;
- sales of non-strategic properties;
- sales of prospects and technical information; and
- joint venture financing.
The availability of these sources of capital will depend upon a number of
factors, some of which are beyond our control. These factors include general
economic and financial market conditions, oil and natural gas prices and the
value and performance of Forest. We may be unable to execute our operating
strategy if we cannot obtain capital from these sources.
ESTIMATES OF OIL AND GAS RESERVES ARE UNCERTAIN AND INHERENTLY IMPRECISE.
This prospectus supplement contains estimates of our proved oil and gas
reserves and the estimated future net revenues from such reserves. These
estimates are based upon various assumptions, including assumptions required by
the Securities and Exchange Commission relating 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. Such process requires
significant decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. Therefore, these
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 most likely will vary from those estimated. Our properties may also be
susceptible to hydrocarbon drainage from production by operators on adjacent
properties. Any significant variance could materially affect the estimated
quantities and present value of reserves set forth in this prospectus
supplement, the accompanying prospectus and the information incorporated by
reference. In addition, we may adjust estimates of proved reserves to reflect
production history, results of exploration and development, prevailing oil and
gas prices and other factors, many of which are beyond our control. Actual
production, revenue, taxes, development expenditures and operating expenses with
respect to our reserves will likely vary from the estimates used. Such variances
may be material.
At December 31, 1998, approximately 16% of our estimated proved reserves
were undeveloped. Undeveloped reserves, by their nature, are less certain.
Recovery of undeveloped reserves requires significant capital expenditures and
successful drilling operations. The reserve data assumes that we will make
significant capital expenditures to develop our reserves. Although we have
prepared estimates of our oil and gas reserves and the costs associated with
these reserves in accordance with industry standards, we cannot assure you that
the estimated costs are accurate, that development will occur as scheduled or
that the results will be as estimated.
You should not assume that the present value of future net revenues referred
to in this prospectus supplement, the accompanying prospectus and the
information incorporated by reference is the current market value of our
estimated oil and gas reserves. In accordance with Securities and Exchange
Commission requirements, the estimated discounted future net cash flows from
proved reserves are generally based on prices and costs as of the date of the
estimate. Actual future prices and costs may be
S-7
<PAGE>
materially higher or lower than the prices and costs as of the date of the
estimate. Any changes in consumption by gas purchasers or in governmental
regulations or taxation will also affect actual future net cash flows. The
timing of both the production and the expenses from the development and
production of oil and gas properties will affect the timing of actual future net
cash flows from estimated proved reserves and their present value. For example,
we reduced our 1999 capital expenditure budget at the end of 1998 as a result of
lower oil and gas prices. This reduction will delay cash flows and thereby
reduce present value. In addition, the 10% discount factor, which is required by
the Securities and Exchange Commission to be used in calculating discounted
future net cash flows for reporting purposes, is not necessarily the most
accurate discount factor. The effective interest rate at various times and the
risks associated with Forest or the oil and gas industry in general will affect
the accuracy of the 10% discount factor.
LEVERAGE MATERIALLY AFFECTS OUR OPERATIONS.
As of June 30, 1999, our long-term debt was approximately $503 million,
including $195.2 million outstanding under our global bank credit facility with
a syndicate of banks led by The Chase Manhattan Bank and The Chase Manhattan
Bank of Canada. Our long-term debt represented 74.4% of our total capitalization
at June 30, 1999.
Our level of debt affects our operations in several important ways,
including the following:
- a large portion of our cash flow from operations is used to pay interest
on borrowings;
- the covenants contained in the agreements governing our debt limit our
ability to borrow additional funds or to dispose of assets;
- the covenants contained in the agreements governing our debt may affect
our flexibility in planning for, and reacting to, changes in business
conditions;
- a high level of debt may impair our ability to obtain additional financing
in the future for working capital, capital expenditures, acquisitions,
general corporate or other purposes; and
- the terms of the agreements governing our debt permit our creditors to
accelerate payments upon an event of default or a change of control.
In addition, we may significantly alter our capitalization in order to make
future acquisitions or develop our properties. These changes in capitalization
may significantly increase our level of debt. A high level of debt increases the
risk that we may default on our debt obligations. Our ability to meet our debt
obligations and to reduce our level of debt depends on our future performance.
General economic conditions and financial, business and other factors affect our
operations and our future performance. Many of these factors are beyond our
control.
If Forest is unable to repay its debt at maturity out of cash on hand, it
could attempt to refinance such debt, or repay such debt with the proceeds of an
equity offering. We cannot assure you that Forest will be able to generate
sufficient cash flow to pay the interest on its debt or that future borrowings
or equity financing will be available to pay or refinance such debt. In
addition, Forest's bank borrowing base is subject to semi-annual
redeterminations. Forest could be forced to repay a portion of its bank
borrowings due to redeterminations of its borrowing base, and we cannot assure
you that we will have sufficient funds to make such repayments. If we are not
able to negotiate renewals of our borrowings or to arrange new financing, we may
have to sell significant assets. Any such sale would have a material adverse
effect on our business and financial results. Factors that will affect our
ability to raise cash through an offering of our capital stock or a refinancing
of our debt include financial market conditions and our value and performance at
the time of such offering or other financing. We cannot assure you that any such
offering or refinancing can be successfully completed.
S-8
<PAGE>
LOWER OIL AND GAS PRICES MAY CAUSE US TO RECORD CEILING LIMITATION WRITEDOWNS.
We use the full cost method of accounting to report our oil and gas
operations. Accordingly, we capitalize 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, we must charge the amount of the excess to earnings.
This is called a "ceiling limitation writedown." This charge does not impact
cash flow from operating activities, but does reduce our shareholders' equity.
The risk that we will be required to write down the carrying value of our oil
and gas properties increases when oil and gas prices are low or volatile. In
addition, writedowns may occur if we experience substantial downward adjustments
to our estimated proved reserves or if purchasers cancel long-term contracts for
our natural gas production. In 1998, we recorded after-tax writedowns of $175
million ($199.5 million pre-tax). We cannot assure you that we will not
experience ceiling limitation writedowns in the future.
WE MAY NOT BE ABLE TO REPLACE PRODUCTION WITH NEW RESERVES.
In general, the volume of production from oil and gas properties declines as
reserves are depleted. The decline rates depend on reservoir characteristics.
Gulf of Mexico reservoirs experience steep declines, while the declines in
long-lived fields in other regions are relatively slow. A significant portion of
our production is from Gulf of Mexico reservoirs. Our reserves will decline as
they are produced unless we acquire properties with proved reserves or conduct
successful exploration and development activities. Forest's future natural gas
and oil production is 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 and uncertain. We may be unable to make
the necessary capital investment to maintain or expand our oil and gas reserves
if cash flow from operations is reduced and external sources of capital become
limited or unavailable. We cannot assure you that our future exploration,
development and acquisition activities will result in additional proved reserves
or that we will be able to drill productive wells at acceptable costs.
We have reduced our 1999 capital expenditures budget compared to 1998.
Therefore, it is unlikely that we will replace 1999 production based on the
lower level of capital expenditures.
OUR OPERATIONS ARE SUBJECT TO NUMEROUS RISKS OF OIL AND GAS DRILLING AND
PRODUCTION ACTIVITIES.
Oil and gas drilling and production activities are subject to numerous
risks, including the risk that no commercially productive oil or natural gas
reservoirs will be found. The cost of drilling and completing wells is often
uncertain. Oil and gas drilling and production activities may be shortened,
delayed or canceled as a result of a variety of factors, many of which are
beyond our control. These factors include:
- unexpected drilling conditions;
- pressure or irregularities in formations;
- equipment failures or accidents;
- weather conditions; and
- shortages in experienced labor or shortages or delays in the delivery of
equipment.
The prevailing prices of oil and natural gas also affect the cost of and the
demand for drilling rigs, production equipment and related services.
S-9
<PAGE>
We cannot assure you that the new wells we drill will be productive or that
we will recover all or any portion of our investment. Drilling for oil and
natural gas may be unprofitable. Drilling activities can result in dry wells and
wells that are productive but do not produce sufficient net revenues after
operating and other costs.
OUR INDUSTRY EXPERIENCES NUMEROUS OPERATING RISKS.
The oil and gas industry experiences numerous operating risks. These
operating risks include the risk of fire, explosions, blow-outs, pipe failure,
abnormally pressured formations and environmental hazards. Environmental hazards
include oil spills, gas leaks, pipeline ruptures or discharges of toxic gases.
If any of these industry operating risks occur, we could have substantial
losses. Substantial losses may be caused by 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 our oil and gas operations is located offshore in the
Gulf of Mexico. The Gulf of Mexico area experiences tropical weather
disturbances, some of which can be severe enough to cause substantial damage to
facilities and possibly interrupt production. In accordance with industry
practice, we maintain insurance against some, but not all, of the risks
described above. We cannot assure you that our insurance will be adequate to
cover losses or liabilities. Also, we cannot predict the continued availability
of insurance at premium levels that justify its purchase.
FOREST'S CONCENTRATION OF ASSETS INCREASES ITS EXPOSURE TO PRODUCTION DECLINES.
At July 1, 1999, the combined production from four of our offshore Gulf of
Mexico wells represented approximately 25% of our consolidated daily
deliverability. Our production, revenue and cash flow will be adversely affected
if production from these wells decreases significantly.
THE PROFITABILITY OF OUR GAS MARKETING ACTIVITIES MAY BE LIMITED.
Our operations include gas marketing through our subsidiary, ProMark.
ProMark's gas marketing operations consist of the marketing of gas production in
Canada, 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 on our ability to assess and respond to changing market
conditions, including credit risk. Profitability also depends on our ability to
maximize the volume of third party natural gas that we purchase and resell and
to obtain a satisfactory margin between the purchase price and the sales price
for such volumes. If we are unable to respond accurately to changing conditions
in the gas marketing business, our results of operations could be materially
adversely affected. In addition, ProMark sells a significant portion of its
volumes at fixed prices under long-term contracts. The loss of one or more such
long-term buyers could have a material adverse effect on Forest. ProMark buys
and sells gas in its trading operations for terms varying from one day to two
years. Profits from trading are derived from the difference between the price of
gas purchased and the price of gas sold. ProMark tries to limit its exposure to
price risk by offsetting its gas purchase or sales commitments with other gas
purchase or sales contracts. However, ProMark is exposed to credit risk because
the counterparties to agreements might not perform their contractual
obligations.
OUR INTERNATIONAL OPERATIONS MAY BE ADVERSELY AFFECTED BY CURRENCY FLUCTUATIONS
AND ECONOMIC AND POLITICAL DEVELOPMENTS.
We have significant operations in Canada. The expenses of such operations
are payable in Canadian dollars while most of the revenue from natural gas and
oil sales is based upon U.S. dollar price indices. As a result, Canadian
operations are subject to the risk of fluctuations in the relative value of the
Canadian and U.S. dollars. Forest is also required to recognize foreign currency
translation gains or
S-10
<PAGE>
losses related to the debt issued by our Canadian subsidiary because the debt is
denominated in U.S. dollars and the functional currency of such subsidiary is
the Canadian dollar. We recently acquired additional oil and gas assets in other
countries. Our foreign operations may also be adversely affected by local
political and economic developments, royalty and tax increases and other foreign
laws or policies, as well as U.S. policies affecting trade, taxation and
investment in other countries.
COMPETITION WITHIN OUR INDUSTRY MAY ADVERSELY AFFECT OUR OPERATIONS.
We operate in a highly competitive environment. Forest competes with major
and independent oil and gas companies for the acquisition of desirable oil and
gas properties and the equipment and labor required to develop and operate such
properties. Forest also competes with major and independent oil and gas
companies in the marketing and sale of oil and natural gas. Many of these
competitors have financial and other resources substantially greater than ours.
OUR FUTURE ACQUISITIONS MAY NOT CONTAIN ECONOMICALLY RECOVERABLE RESERVES.
Our recent growth is due in part to acquisitions of producing properties.
The successful acquisition of producing properties requires an assessment of a
number of factors beyond our control. These factors include recoverable
reserves, future oil and gas prices, operating costs and potential environmental
and other liabilities. Such assessments are inexact and their accuracy is
inherently uncertain. In connection with such assessments, we perform a review
of the subject properties, which we believe is generally consistent with
industry practices. However, such a review will not reveal all existing or
potential problems. In addition, the review will not permit a buyer to become
sufficiently familiar with the properties to fully assess their deficiencies and
capabilities. We do not inspect every platform or well. Even when a platform or
well is inspected, structural and environmental problems are not necessarily
discovered. We are generally not entitled to contractual indemnification for
preclosing liabilities, including environmental liabilities. Normally, we
acquire interests in 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 our competitors have
financial and other resources which are substantially greater than those
available to us. Therefore, we cannot assure you that we will be able to acquire
oil and gas properties that contain economically recoverable reserves or that we
will acquire such properties at acceptable prices.
THE MARKETABILITY OF FOREST'S PRODUCTION DEPENDS IN MOST PART UPON THE
AVAILABILITY, PROXIMITY AND CAPACITY OF GAS GATHERING SYSTEMS, PIPELINES AND
PROCESSING FACILITIES.
The marketability of our production depends in part upon the availability,
proximity and capacity of gas gathering systems, pipelines and processing
facilities. U.S. federal and state and Canadian regulation of oil and gas
production and transportation, general economic conditions, and changes in
supply and demand all could adversely affect our ability to produce and market
oil and natural gas. If market factors dramatically change, the financial impact
on Forest could be substantial. The availability of markets is beyond our
control.
OUR OIL AND GAS OPERATIONS ARE SUBJECT TO VARIOUS U.S. FEDERAL, STATE AND LOCAL
AND CANADIAN FEDERAL AND PROVINCIAL GOVERNMENTAL REGULATIONS THAT MATERIALLY
AFFECT OUR OPERATIONS.
Our oil and gas operations are subject to various U.S. federal, state and
local and Canadian federal and provincial governmental regulations. These
regulations may be changed in response to economic or political conditions.
Matters regulated include permits for discharges of wastewaters and other
substances generated in connection with drilling operations, bonds or other
financial responsibility requirements to cover drilling contingencies and well
plugging and abandonment costs, reports concerning operations, the spacing of
wells, and unitization and pooling of properties and taxation. At
S-11
<PAGE>
various times, regulatory agencies have imposed price controls and limitations
on oil and gas production. In order to conserve supplies of oil and gas, these
agencies have restricted the rates of flow of oil and gas wells below actual
production capacity. In addition, the Oil Pollution Act of 1990 requires
operators of offshore facilities to prove that they have the financial
capability to respond to costs that may be incurred in connection with potential
oil spills. Under such law and other federal and state environmental statutes,
owners and operators of certain defined facilities are strictly liable for such
spills of oil and other regulated substances, subject to certain limitations. A
substantial spill from one of our facilities could have a material adverse
effect on our results of operations, competitive position or financial
condition. Federal, state, provincial and local laws regulate production,
handling, storage, transportation and disposal of oil and gas, by-products from
oil and gas and other substances and materials produced or used in connection
with oil and gas operations. We cannot predict the ultimate cost of compliance
with these requirements or their effect on our operations.
THE SIGNIFICANT OWNERSHIP POSITION OF ANSCHUTZ COULD LIMIT FOREST'S ABILITY TO
ENTER INTO CERTAIN TRANSACTIONS.
As of June 30, 1999, Anschutz owned approximately 40.2% of the outstanding
shares of our common stock. Pursuant to a shareholder agreement between Anschutz
and Forest, Anschutz may designate three of Forest's directors. Therefore,
Anschutz can substantially influence matters considered by Forest's board of
directors. The shareholder agreement prohibits Anschutz from acquiring in excess
of 49.9% of the outstanding shares of common stock. The shareholder agreement
terminates on July 27, 2000.
Under certain circumstances, Anschutz could veto proposed transactions
between Forest and third parties. For example, Anschutz could veto a merger of
Forest, which under applicable law requires the approval of the holders of
two-thirds of the outstanding shares of common stock. Control of Forest most
likely could not be transferred to a third party without Anschutz's consent and
agreement. A third party probably would not offer to pay a premium to acquire
Forest without the prior agreement of Anschutz, even if the Board of Directors
should choose to attempt to sell Forest in the future. In addition, shareholder
approval would be required by New York Stock Exchange rules for the issuance of
common stock to a third party in an amount in excess of 20% of the outstanding
common stock. Anschutz's opposition to such a transaction could significantly
reduce the likelihood of its approval.
WE DO NOT PAY DIVIDENDS.
We have not declared any cash dividends on our common stock in a number of
years and have no intention to do so in the near future. In addition, we are
restricted from doing so by our global credit agreement and the indentures
pursuant to which our subordinated notes were issued.
OUR RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS HAVE PROVISIONS THAT
DISCOURAGE CORPORATE TAKEOVERS AND COULD PREVENT SHAREHOLDERS FROM REALIZING A
PREMIUM ON THEIR INVESTMENT.
Our Restated Certificate of Incorporation and By-Laws contain provisions
that may have the effect of delaying or preventing a change in control. Our
directors are elected to staggered terms. Also, our Restated Certificate of
Incorporation authorizes our board of directors to issue preferred stock without
stockholder approval and to set the rights, preferences and other designations,
including voting rights of those shares as the board may determine. These
provisions, alone or in combination with each other and with the rights plan
described below, may discourage transactions involving actual or potential
changes of control, including transactions that otherwise could involve payment
of a premium over prevailing market prices to shareholders for their common
stock.
Our board of directors has adopted a stockholder rights plan. The existence
of the rights plan may impede a takeover of Forest not supported by the board,
including a proposed takeover that may be desired by a majority of our
stockholders or involving a premium over the prevailing market price of our
common stock.
S-12
<PAGE>
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
The information in this prospectus supplement, the accompanying prospectus
and the information incorporated by reference may contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. These statements appear in a number of
places and include statements regarding our plans, beliefs or current
expectations including those plans beliefs and expectations of our officers and
directors with respect to, among other things:
- budgeted capital expenditures;
- increases in oil and gas production;
- the assessment of our Year 2000 compliance;
- our outlook on oil and gas prices;
- estimates of our oil and gas reserves;
- our future financial condition or results of operations; and
- our business strategy and other plans and objectives for future
operations.
When considering such forward-looking statements, you should keep in mind
the risk factors and other cautionary statements in this prospectus supplement.
The risk factors noted in this prospectus supplement and other factors noted
throughout this prospectus supplement, the accompanying prospectus and the
information incorporated by reference, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward-looking statement. Prices for oil and natural gas
fluctuate widely. Numerous uncertainties are inherent in estimating proved oil
and natural gas reserves and in projecting future rates of production and timing
of development expenditures. Many of these uncertainties are beyond our control.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact way.
The accuracy of any reserve estimate depends on the quality of available data
and the interpretation of such data by geological engineers. As a result,
estimates made by different engineers often vary from one another. In addition,
the results of drilling, testing and production activities may justify revisions
of estimates that were made previously. If significant, such revisions 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.
All forward-looking statements attributable to Forest are expressly
qualified in their entirety by this cautionary statement.
S-13
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to Forest from the sale of the 8,000,000
shares of common stock in this offering will be approximately $112.8 million
($130.0 million if the underwriters exercise their over-allotment option) at an
assumed public offering price of $14 15/16 per share, after deducting the
underwriting discount and estimated offering expenses of $750,000. The closing
price of the common stock on the New York Stock Exchange on July 29, 1999 was
$14 15/16.
Forest will use the net proceeds from this offering to fund identified
exploration and development activities in the Northwest Territories and other
core areas, as well as for other projects or property acquisitions and for
general corporate purposes. We will reduce indebtedness under our global credit
facility pending such uses.
Our debt under the global credit facility bears interest at a floating rate
based (at our option) upon the base rate with respect to base rate loans, plus
the applicable margin for base rate loans or LIBOR for one, two, three or six
months, plus the applicable margin for Eurodollar loans. The global credit
facility will terminate on August 19, 2001. As of July 23, 1999, $204.7 million
was outstanding under the global credit facility with an average effective
interest rate of 6.74%.
PRICE RANGE OF COMMON STOCK
Forest's common stock is listed on the New York Stock Exchange under the
symbol "FST". The following table sets forth the range of high and low sales
prices per share of common stock for the periods indicated, as reported by the
New York Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
1997
First Quarter......................... $ 19 3/8 $ 12 7/8
Second Quarter........................ 15 3/8 12 1/4
Third Quarter......................... 18 1/2 13 1/4
Fourth Quarter........................ 19 13 3/16
1998
First Quarter......................... $ 17 3/8 $ 13
Second Quarter........................ 16 1/4 13 1/4
Third Quarter......................... 14 3/4 8
Fourth Quarter........................ 11 3/4 7 9/16
1999
First Quarter......................... $ 8 15/16 $ 5 3/8
Second Quarter........................ 13 9/16 7 1/2
Third Quarter (through July 29,
1999)............................... 15 5/8 12 11/16
</TABLE>
On July 29, 1999, the last reported sale price of the common stock on the
New York Stock Exchange was $14 15/16 per share. As of June 30, 1999, there were
1,544 record owners of the common stock.
S-14
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of Forest as of
June 30, 1999 and as adjusted to give effect to the application of the net
proceeds from this offering. This table should be read in conjunction with the
historical consolidated financial statements and the notes thereto included
elsewhere in this prospectus supplement.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Global credit facility............................................................. $ 195,181 82,406
8 3/4% Senior subordinated notes................................................... 199,977 199,977
10 1/2% Senior subordinated notes.................................................. 98,882 98,882
11 1/4% Senior subordinated notes.................................................. 8,631 8,631
----------- --------------
Total long-term debt................................................................. 502,671 389,896
Shareholders' equity:
Common stock, par value $.10 per share, 200,000,000 shares authorized, 44,652,263
shares and 52,652,263 shares issued and outstanding, respectively(2)............. 4,465 5,265
Capital surplus.................................................................... 590,010 701,985
Accumulated deficit................................................................ (410,557) (410,557)
Accumulated other comprehensive loss............................................... (11,210) (11,210)
Treasury stock..................................................................... (449) (449)
----------- --------------
Total shareholders' equity........................................................... 172,259 285,034
----------- --------------
Total capitalization................................................................. $ 674,930 674,930
----------- --------------
----------- --------------
</TABLE>
- ------------------------
(1) Reflects the issuance of 8,000,000 shares of common stock at an assumed
public offering price of $14 15/16 per share and the application of the
estimated net proceeds, after deducting the underwriting discount and
estimated offering expenses, to reduce the amount outstanding under the
global credit facility.
(2) Does not include a total of 2,978,260 shares that may be issued pursuant to
stock options outstanding as of June 30, 1999, and shares that may be issued
under our stock compensation plans.
DIVIDEND POLICY
Forest has not declared or paid and does not intend to pay cash dividends on
its common stock in the near future. Any future determination as to the
declaration and payment of dividends will be at the discretion of our board of
directors and will depend on then existing conditions, including our financial
condition, results of operations, contractual restrictions, capital
requirements, business prospects, and such other factors as the board deems
relevant. We are restricted from paying dividends under the terms of our global
credit facility and the indentures pursuant to which our subordinated notes were
issued.
S-15
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected historical financial and operating
data for Forest for the six months ended June 30, 1999 and 1998 and for each of
the years in the three-year period ended December 31, 1998. The summary
financial data set forth below should be read in conjunction with the
consolidated financial statements of Forest (including the Notes thereto) for
the year ended December 31, 1998 and the condensed consolidated financial
statements for the quarter ended June 30, 1999, which are included in this
prospectus supplement, and also in conjunction with the condensed pro forma
combined statement of operations in our Report on Form 8-K dated July 29, 1999.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------- ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- ------- --------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA
Revenue:
Marketing and
processing.............. $ 88,020 68,842 151,079 184,399 187,374 -- --
Oil and gas sales......... 89,919 81,827 170,740 155,242 128,713 82,275 114,541
-------- ------- --------- ------- ------- ------- -------
Total revenue............. $177,939 150,669 321,819 339,641 316,087 82,275 114,541
Earnings (loss) before
cumulative effect of
change in accounting
principle and
extraordinary items....... $ 4,493 (5,407) (197,786) 3,089 1,139 (17,996) (67,853)
Net earnings (loss)......... $ 4,493 789 (191,590) (9,270) 3,305 (17,996) (81,843)
Weighted average number of
common shares
outstanding............... 44,651 37,350 40,910 33,669 25,062 7,360 5,619
Net earnings (loss)
attributable to common
stock..................... $ 4,493 (5,407) (191,590) (9,459) 1,147 (20,156) (84,004)
Basic earnings (loss) per
share:
Earnings (loss)
attributable to common
stock before cumulative
effect of change in
accounting principle and
extraordinary items..... $ .10 (.14) (4.83) .09 (.04) (2.74) (12.46)
Cumulative effect of
change in accounting
principle............... -- -- -- -- -- -- (2.49)
Extraordinary items....... -- .16 .15 (.37) .09 -- --
-------- ------- --------- ------- ------- ------- -------
Net earnings (loss)
attributable to common
stock................... $ .10 .02 (4.68) (.28) .05 (2.74) (14.95)
Diluted earnings (loss) per
share:
Earnings (loss)
attributable to common
stock before cumulative
effect of change in
accounting principle and
extraordinary items..... $ .10 (.14) (4.83) .08 (.04) (2.74) (12.46)
Cumulative effect of
change in accounting
principle............... -- -- -- -- -- -- (2.49)
Extraordinary items....... -- .16 .15 (.35) .09 -- --
-------- ------- --------- ------- ------- ------- -------
Net earnings (loss)
attributable to common
stock................... $ .10 .02 (4.68) (.27) .05 (2.74) (14.95)
Net property and
equipment................. $666,480 663,310 521,293 458,242 277,599 276,609
Total assets................ $758,960 759,736 647,782 563,458 321,043 324,832
Long-term debt.............. $502,671 505,450 254,760 168,859 193,879 207,054
Other long-term
liabilities............... $ 21,962 24,267 51,787 53,560 27,139 28,166
Deferred revenue............ $ -- -- -- 7,591 15,137 35,908
Shareholders' equity........ $172,259 168,991 261,827 242,443 44,297 6,086
OPERATING DATA
Production:
Gas (MMCF) (1)............ 32,745 27,962 62,310 49,035 42,496 33,342 48,048
Liquids (MBbls)........... 2,174 2,001 4,269 3,207 2,749 1,173 1,543
Average sales price:
Gas (per MCF) (2)......... $ 1.99 2.02 1.95 2.06 1.89 1.77 1.90
Liquids (per Bbl)......... $ 11.35 12.65 11.51 16.92 17.59 15.86 14.83
Capital expenditures, net of
asset sales............... $ 33,875 385,011 461,452 147,130 234,556 44,913 29,839
Proved reserves: (3)
Gas (MMCF)................ 564,264 378,315 334,180 231,890 231,638
Liquids (MBbls)........... 35,069 24,636 24,014 10,467 7,313
Standardized measure of
discounted future net cash
flows relating to proved
oil and gas reserves
(3)....................... $ 522,831 439,570 559,869 256,917 207,549
</TABLE>
- ----------------------------------
(1) Includes amounts attributable to required deliveries under volumetric
production payments. See Note 5 of Notes to Consolidated Financial
Statements.
(2) 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.
(3) The 1998, 1997, 1996 and 1995 amounts include 100% of the reserves owned by
Saxon, a consolidated subsidiary in which Forest held a majority interest in
1997, 1996 and 1995, but which was a wholly owned subsidiary at December 31,
1998.
S-16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION IS INTENDED TO ASSIST IN UNDERSTANDING FOREST'S
FINANCIAL POSITION AND RESULTS OF OPERATIONS FOR THE UNAUDITED SIX MONTH PERIODS
ENDED JUNE 30, 1999 AND 1998 AND FOR EACH YEAR OF THE THREE-YEAR PERIOD ENDED
DECEMBER 31, 1998. OUR FINANCIAL STATEMENTS AND THE NOTES THERETO, WHICH ARE
INCLUDED IN THIS PROSPECTUS SUPPLEMENT BEGINNING ON PAGE F-1, CONTAIN DETAILED
INFORMATION THAT SHOULD BE REFERRED TO IN CONJUNCTION WITH THE FOLLOWING
DISCUSSION.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net earnings for the first six months of 1999 were $4,493,000 or $.10 per
basic and diluted common share compared to $789,000 or $.02 per basic and
diluted common share in the first six months of 1998. The 1999 period includes a
gain on foreign currency translation of $6,517,000. The 1998 period included a
$3,162,000 loss on foreign currency translation, $6,603,000 of income related to
settlement of a Canadian gas contract and an extraordinary gain on
extinguishment of debt of $6,196,000.
Marketing and processing revenue increased 28% to $88,020,000 in the first
six months of 1999 from $68,842,000 in the first six months of 1998. The related
marketing and processing expense also increased by 28% to $83,851,000 in the
1999 period from $65,264,000 in the previous year. The gross margin reported for
marketing and processing activities of $4,169,000 in the first six months of
1999 was higher than the gross margin of $3,578,000 in the first six months of
1998. The increase in the gross margin resulted primarily from a gain of
$3,238,000 on the sale of processing facilities in the first quarter of 1999,
offset by the effects of a more competitive market which caused trading margins
to tighten.
Oil and gas sales revenue increased by 10% to $89,919,000 in the first six
months of 1999 compared to $81,827,000 in the first six months of 1998.
Production volumes for natural gas and liquids in the first six months of 1999
increased 17% and 9%, respectively, from the comparable 1998 period. The
increases in production are due primarily to discoveries in the Gulf of Mexico
being brought on production as well as production attributable to property
acquisitions in February and June of 1998. The average sales price received for
natural gas in the first six months of 1999 decreased slightly compared to the
corresponding 1998 period. The average sales price received for liquids during
the first six months of 1999 decreased 10% compared to the average sales price
received during the comparable 1998 period.
Oil and gas production expense of $23,703,000 in the first six months of
1999 increased 30% from $18,204,000 in the comparable period of 1998, primarily
as a result of increased workover expense in the onshore Gulf Coast area as well
as additional production expense related to acquired properties. On an MCFE
basis, production expense increased approximately 13% in the first six months of
1999 to $.52 per MCFE from $.46 per MCFE in the first six months of 1998.
S-17
<PAGE>
The following tables set forth production volumes, weighted average sales
prices and production expenses during the periods as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 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)................................. 15,530 5,398 5,352 26,280 6,465 32,745
Sales price received (per MCF).................... $ 2.01 1.97 1.81 1.97 1.40 1.85
Effects of energy swaps (per MCF)(1).............. .18 .24 .16 .18 (.05) .14
--------- ----- ----- --------- --------- -----------
Average sales price (per MCF)..................... $ 2.19 2.21 1.97 2.15 1.35 1.99
LIQUIDS
Oil and condensate:
Production (MBbls)................................ 466 404 110 980 623 1,603
Sales price received (per Bbl).................... $ 11.87 14.26 14.46 13.14 12.96 13.06
Effects of energy swaps (per Bbl)(1).............. -- (1.22) -- (.50) (.18) (.37)
--------- ----- ----- --------- --------- -----------
Average sales price (per Bbl)..................... $ 11.87 13.04 14.46 12.64 12.78 12.69
Natural gas liquids:
Production (MBbls)................................ 5 90 258 353 218 571
Average sales price (per Bbl)..................... $ 7.40 7.39 7.05 7.14 8.23 7.56
Total liquids production (MBbls).................... 471 494 368 1,333 841 2,174
Average liquids sales price (per Bbl)............... $ 11.82 12.01 9.27 11.19 11.60 11.35
TOTAL PRODUCTION:
Production volumes (MMCFE).......................... 18,356 8,362 7,560 34,278 11,511 45,789
Average sales price (per MCFE)...................... $ 2.16 2.14 1.84 2.09 1.61 1.96
Operating expense (per MCFE)........................ .38 1.03 .34 .53 .49 .52
--------- ----- ----- --------- --------- -----------
Netback (per MCFE).................................. $ 1.78 1.11 1.50 1.56 1.12 1.44
--------- ----- ----- --------- --------- -----------
--------- ----- ----- --------- --------- -----------
</TABLE>
- ------------------------
(1) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 17,212 MMCF in
the six months ended June 30, 1999. Hedged oil and condensate volumes were
678,000 Bbls in the six months ended June 30, 1999. The aggregate net gain
under energy swap agreements was $3,946,000 for the period and was accounted
for as an increase to oil and gas sales.
S-18
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 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)................................. 12,182 6,252 2,274 20,708 7,254 27,962
Sales price received (per MCF).................... $ 2.24 2.25 2.15 2.23 1.24 1.97
Effects of energy swaps (per MCF)(1).............. .08 .06 -- .07 -- .05
--------- ----- ----- --------- --------- -----------
Average sales price (per MCF)..................... $ 2.32 2.31 2.15 2.30 1.24 2.02
LIQUIDS
Oil and condensate:
Production (MBbls)................................ 469 374 78 921 731 1,652
Sales price received (per Bbl).................... $ 12.40 13.56 13.63 12.98 12.46 12.74
Effects of energy swaps (per Bbl)(1).............. .99 -- -- .50 1.37 .89
--------- ----- ----- --------- --------- -----------
Average sales price (per Bbl)..................... $ 13.39 13.56 13.63 13.48 13.83 13.63
Natural gas liquids:
Production (MBbls)................................ -- 72 56 128 221 349
Average sales price (per Bbl)..................... $ -- 8.08 7.09 7.65 8.24 8.02
Total liquids production (MBbls).................... 469 446 134 1,049 952 2,001
Average liquids sales price (per Bbl)............... $ 13.39 12.68 10.90 12.77 12.53 12.65
TOTAL PRODUCTION:
Production volumes (MMCFE).......................... 14,996 8,928 3,078 27,002 12,966 39,968
Average sales price (per MCFE)...................... $ 2.30 2.25 2.06 2.26 1.61 2.05
Operating expense (per MCFE)........................ .41 .49 .61 .46 .44 .46
--------- ----- ----- --------- --------- -----------
Netback (per MCFE).................................. $ 1.89 1.76 1.45 1.80 1.17 1.59
--------- ----- ----- --------- --------- -----------
--------- ----- ----- --------- --------- -----------
</TABLE>
- ------------------------
(1) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 11,799 MMCF in
the six months ended June 30, 1998. Hedged oil and condensate volumes were
316,000 Bbls in the six months ended June 30, 1998. The aggregate net gain
under energy swap agreements was $2,851,000 for the period and was accounted
for as an increase to oil and gas sales.
General and administrative expense was $7,981,000 in the first six months of
1999 compared to $9,177,000 in the comparable period of 1998. Total overhead
costs (capitalized and expensed general and administrative costs) were
$12,043,000 in the first six months of 1999 compared to $13,187,000 in the
comparable period of 1998. The 1998 period included non-recurring expenses of
Saxon as a result of its decision to investigate strategic alternatives, whereas
the 1999 period reflects the efficiencies achieved by combining Saxon's
operations with those of Canadian Forest.
S-19
<PAGE>
The following table summarizes the total overhead costs incurred during the
periods:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Overhead costs capitalized................................................. 4,062 4,010
General and administrative costs expensed(1)............................... 7,981 9,177
--------- ---------
Total overhead costs................................................... 12,043 13,187
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Includes $1,305,000 and $1,441,000 related to marketing and processing
operations for the six-month periods ended June 30, 1999 and 1998,
respectively.
Depreciation and depletion expense decreased 6% to $44,366,000 in the first
six months of 1999 from $47,195,000 in the first six months of 1998. On a
per-unit basis, depletion expense was approximately $.94 per MCFE in the first
six months of 1999 compared to $1.14 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 June 30, 1999, Forest had undeveloped properties with a
cost basis of approximately $56,841,000 in the United States and $33,841,000 in
Canada which were not subject to depletion, compared to approximately
$66,860,000 in the U.S. and $19,280,000 in Canada at June 30, 1998. The decrease
in the United States is attributable primarily to impairment of undeveloped
properties. The increase in Canada is attributable primarily to the purchase of
undeveloped acreage. At June 30, 1999, Forest also had approximately $19,175,000
of costs related to international interests. These costs are not being depleted
pending the establishment of proved reserves.
Other income was $97,000 in the first six months of 1999 and was $6,782,000
in the first six months of 1998. The 1998 period includes $6,603,000 of income
related to settlement of a Canadian gas purchase contract.
Interest expense increased 15% to $21,064,000 in the first six months of
1999 compared to $18,261,000 in the corresponding 1998 period, due primarily to
higher debt levels.
The foreign currency translation gain was $6,517,000 in the first six months
of 1999, compared to a loss of $3,162,000 in the first six months 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 $.6789 at June 30, 1999
compared to $.6535 at December 31, 1998. Forest 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.
The extraordinary gain on extinguishment of debt in the first six months of
1998 resulted from settlement of the Company's remaining nonrecourse production
payment obligation in exchange for 271,214 shares of common stock valued at
$3,750,000. The obligation 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).
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The net loss for 1998 was $191,590,000 compared to a net loss of $9,270,000
in 1997. The 1998 period included a writedown of oil and gas properties of
$175,000,000, net of related deferred taxes ($199,500,000 pre-tax), an
extraordinary gain on extinguishment of debt of $6,196,000 and a noncash
S-20
<PAGE>
loss on currency translation of $8,320,000 related to subordinated debt issued
by Canadian Forest. The 1997 period included an extraordinary loss on
extinguishment of debt of $12,359,000, as well as a noncash loss on currency
translation of $4,051,000. Exclusive of these items, the net loss would have
been $14,466,000 in 1998 compared to net income of $7,140,000 in 1997. Higher
production volumes in 1998 were more than offset by lower natural gas and
liquids sales prices and higher interest and depletion expense.
The net loss for 1997 was $9,270,000 compared to net earnings of $3,305,000
in 1996. Earnings for the 1996 period include an extraordinary gain on
extinguishment of debt of $2,166,000. Exclusive of the 1997 items mentioned
above and the 1996 extraordinary gain on extinguishment of debt, net income
would have been $7,140,000 in 1997 and $1,139,000 in 1996. The improvement in
1997 was attributable primarily to higher natural gas prices and increased
production from successful drilling programs in 1996 and 1997.
Marketing and processing revenue decreased by 18% to $151,079,000 in 1998
from $184,399,000 in 1997 and the related marketing and processing expense
decreased by 18% to $144,758,000 in 1998 from $175,847,000 in the previous year.
The gross margin for marketing and processing activities decreased 26% to
$6,321,000 in 1998 from $8,552,000 in 1997. The decrease resulted from lower
volumes processed and a decrease in product prices. Marketing and processing
revenue decreased by 2% to $184,399,000 in 1997 from $187,374,000 in 1996 and
the related marketing and processing expense decreased by 2% to $175,847,000 in
1997 from $178,706,000 in the previous year. The gross margin reported for
marketing and processing activities was $8,552,000 in 1997 which is comparable
to $8,668,000 reported in 1996.
Oil and gas sales revenue increased by 10% to $170,740,000 in 1998 from
$155,242,000 in 1997. Revenue from higher production volumes was partially
offset by lower prices received for both oil and natural gas. Production volumes
for natural gas in 1998 increased 27% from 1997. Production volumes for liquids
(consisting of oil, condensate and natural gas liquids) were 33% higher in 1998
than in 1997. The increases in 1998 are due to Gulf of Mexico discoveries and
volumes attributable to producing properties acquired in 1998. The average sales
price received for natural gas in 1998 decreased 5% compared to the average
sales price received in 1997. The average sales price received for liquids
production in 1998 decreased 32% compared to the average sales price received
during 1997.
Oil and gas sales revenue increased by 21% to $155,242,000 in 1997 from
$128,713,000 in 1996. Production volumes for natural gas in 1997 increased 15%
from 1996 due primarily to discoveries in the Gulf of Mexico being brought onto
production. Production volumes for liquids were 17% higher in 1997 than in 1996
due primarily to new production from Gulf of Mexico and Canadian properties. The
average sales price received for natural gas in 1997 increased 9% compared to
the average sales price received in 1996. The average sales price received by
Forest for its liquids production during 1997 decreased 4% compared to the
average sales price received during 1996.
Oil and gas production expense of $41,983,000 in 1998 increased 16% from
$36,284,000 in 1997. The 1998 period includes additional production expense
related to acquired properties. On an MCFE basis, production expense decreased
9% to $.48 per MCFE in 1998 compared to $.53 in 1997. The decrease is due
primarily to lower per-unit costs related to certain 1998 property acquisitions
as well as offshore fixed costs being spread over a larger production base. The
decrease was partially offset by the effects of significant expensed workovers
in the Onshore Gulf Coast Region.
S-21
<PAGE>
Oil and gas production expense of $36,284,000 in 1997 increased 13% from
$32,199,000 in 1996 due primarily to expenses relating to new production from
Gulf of Mexico properties, temporary transportation expenses associated with the
Bigoray field in Alberta and the inclusion of twelve months of costs for
Canadian Forest in 1997 versus only eleven months in 1996. On an MCFE basis,
production expense was $.53 per MCFE in 1997 compared to $.55 in 1996.
The production volumes, weighted average sales prices and production
expenses for the years ended December 31, 1998, 1997 and 1996 for Forest and its
subsidiaries were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GULF COAST REGION
------------------------ WESTERN TOTAL TOTAL
OFFSHORE ONSHORE REGION U.S. CANADA COMPANY
----------- ----------- ----------- --------- --------- -----------
NATURAL GAS
Total production (MMCF)............................ 26,521 12,883 7,990 47,394 14,916 62,310
Sales price received (per MCF)..................... $ 2.12 2.16 1.92 2.10 1.23 1.89
Effects of energy swaps (per MCF)(1)............... .08 .15 .03 .09 (.02) .06
----------- ----------- ----------- --------- --------- -----------
Average sales price (per MCF)...................... $ 2.20 2.31 1.95 2.19 1.21 1.95
LIQUIDS
Oil and condensate:
Total production (MBbls)........................... 903 794 222 1,919 1,389 3,308
Sales price received (per Bbl)..................... $ 11.50 12.69 13.00 12.16 11.95 12.07
Effects of energy swaps (per Bbl)(1)............... .95 -- -- .45 1.06 .71
----------- ----------- ----------- --------- --------- -----------
Average sales price (per Bbl)...................... $ 12.45 12.69 13.00 12.61 13.01 12.78
Natural gas liquids:
Total production (MBbls)........................... 4 167 315 486 475 961
Average sales price (per Bbl)...................... $ 9.00 8.45 6.21 7.00 7.25 7.13
Total liquids production (MBbls)................... 907 961 537 2,405 1,864 4,269
Average sales price (per Bbl)...................... $ 12.44 11.96 9.01 11.48 11.54 11.51
TOTAL
Total production (MMCFE)........................... 31,963 18,649 11,212 61,824 26,100 87,924
Average sales price (per MCFE)..................... $ 2.18 2.21 1.82 2.12 1.51 1.94
Operating expense (per MCFE)....................... .37 .67 .49 .48 .46 .48
----------- ----------- ----------- --------- --------- -----------
Netback (per MCFE)................................. $ 1.81 1.54 1.33 1.64 1.05 1.46
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
</TABLE>
- ------------------------
(1) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 26,527 MMCF and
hedged oil and condensate volumes were 392,900 Bbls. The aggregate net gain
under energy swap agreements was $6,305,000 for the period and was accounted
for as an increase to oil and gas sales.
S-22
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GULF COAST REGION
------------------------ WESTERN TOTAL TOTAL
OFFSHORE ONSHORE REGION U.S. CANADA COMPANY
----------- ----------- ----------- --------- ---------- -----------
NATURAL GAS
Total production (MMCF)(1)...................... 26,515 4,868 2,635 34,018 15,017 49,035
Sales price received (per MCF).................. $ 2.60 2.27 2.32 2.53 1.46 2.20
Effects of energy swaps (per MCF)(2)............ (.26) -- -- (.21) -- (.14)
----------- ----- ----- --------- ---------- -----------
Average sales price (per MCF)................... $ 2.34 2.27 2.32 2.32 1.46 2.06
LIQUIDS
Oil and condensate:
Total production (MBbls)........................ 936 91 110 1,137 1,498 2,635
Sales price received (per Bbl).................. $ 17.87 19.84 19.63 18.20 18.07 18.13
Effects of energy swaps (per Bbl)(2)............ (.28) -- -- (.23) (.08) (.15)
----------- ----- ----- --------- ---------- -----------
Average sales price (per Bbl)................... $ 17.59 19.84 19.63 17.97 17.99 17.98
Natural gas liquids:
Total production (MBbls)........................ -- 121 9 130 442 572
Average sales price (per Bbl)................... $ -- 10.55 11.56 10.62 12.42 12.01
Total liquids production (MBbls)................ 936 212 119 1,267 1,940 3,207
Average sales price (per Bbl)................... $ 17.59 14.54 19.02 17.21 16.72 16.92
TOTAL
Total production (MMCFE)........................ 32,131 6,140 3,349 41,620 26,657 68,277
Average sales price (per MCFE).................. $ 2.44 2.29 2.51 2.42 2.04 2.27
Operating expense (per MCFE).................... .42 .63 1.02 .50 .58 .53
----------- ----- ----- --------- ---------- -----------
Netback (per MCFE).............................. $ 2.02 1.66 1.49 1.92 1.46 1.74
----------- ----- ----- --------- ---------- -----------
----------- ----- ----- --------- ---------- -----------
</TABLE>
- ------------------------
(1) Total natural gas production includes scheduled deliveries under volumetric
production payments, net of royalties, of 801 MMCF. Natural gas delivered
pursuant to volumetric production payment agreements represented
approximately 2% of total natural gas production. On June 30, 1997, Forest
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 13,990 MMCF and
hedged oil and condensate volumes were 949,000 Bbls. The aggregate net loss
under energy swap agreements was $7,439,000 for the period and was accounted
for as a reduction of oil and gas sales.
S-23
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GULF COAST REGION
------------------------ WESTERN TOTAL TOTAL
OFFSHORE ONSHORE REGION U.S. CANADA COMPANY
----------- ----------- ----------- --------- --------- -----------
NATURAL GAS
Total production (MMCF)(1)......................... 20,718 4,251 3,655 28,624 13,872 42,496
Sales price received (per MCF)..................... $ 2.48 1.94 2.17 2.36 1.41 2.06
Effects of energy swaps (per MCF)(2)............... (.31) -- -- (.23) (.04) (.17)
----------- ----- ----- --------- --------- -----------
Average sales price (per MCF)...................... $ 2.17 1.94 2.17 2.13 1.37 1.89
LIQUIDS
Oil and condensate:
Total production (MBbls)........................... 704 127 133 964 1,308 2,272
Sales price received (per Bbl)..................... $ 19.85 20.06 20.92 20.03 20.64 20.38
Effects of energy swaps (per Bbl)(2)............... (1.47) -- -- (1.07) (1.82) (1.50)
----------- ----- ----- --------- --------- -----------
Average sales price (per Bbl)...................... $ 18.38 20.06 20.92 18.96 18.82 18.88
Natural gas liquids:
Total production (MBbls)........................... -- 132 8 140 337 477
Average sales price (per Bbl)...................... $ -- 10.11 13.63 10.48 11.87 11.46
Total liquids production (MBbls)................... 704 259 141 1,104 1,645 2,749
Average sales price (per Bbl)...................... $ 18.41 14.98 20.50 17.88 17.40 17.59
TOTAL
Total production (MMCFE)........................... 24,942 5,805 4,501 35,248 23,742 58,990
Average sales price (per MCFE)..................... $ 2.31 2.09 2.41 2.29 2.00 2.18
Operating expense (per MCFE)....................... .51 .62 .75 .56 .52 .55
----------- ----- ----- --------- --------- -----------
Netback (per MCFE)................................. $ 1.80 1.47 1.66 1.73 1.48 1.63
----------- ----- ----- --------- --------- -----------
----------- ----- ----- --------- --------- -----------
</TABLE>
(1) Total natural gas production includes scheduled deliveries under volumetric
production payments, net of royalties, of 3,168 MMCF. Natural gas delivered
pursuant to volumetric production payment agreements represented
approximately 7% of total natural gas production. 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 12,741 MMCF and
hedged oil and condensate volumes were 895,600 Bbls. The aggregate net loss
under energy swap agreements was $10,422,000 for the period and was
accounted for as a reduction of oil and gas sales.
General and administrative expense increased 18% to $19,849,000 in 1998 compared
to $16,864,000 in 1997. There were higher employee related costs in the 1998
period as a result of increased headcount and costs related to 1998 property
acquisitions, as well as approximately $1,500,000 of transition costs associated
with our acquisition of the minority interest in Saxon Petroleum, Inc. These
increases were partially offset by a premium refund in the first quarter of 1998
which lowered insurance costs. General and administrative expense increased 24%
to $16,864,000 in 1997 compared to $13,623,000 in 1996 due primarily to a larger
number of employees who were hired to support the Company's increased operations
and its expanded exploration and development programs.
Total overhead costs (capitalized and expensed general and administrative costs)
were $27,966,000 in 1998, $24,993,000 in 1997 and $21,396,000 in 1996. Total
overhead costs increased by 12% in 1998
S-24
<PAGE>
compared to 1997 and by 17% in 1997 compared to 1996. The increases are
attributable to increased headcount to support our larger property base. The
following table summarizes total overhead costs incurred during the periods:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Overhead costs capitalized.................................. $ 8,117 8,129 7,773
General and administrative costs expensed(1)................ 19,849 16,864 13,623
--------- --------- ---------
Total overhead costs...................................... $ 27,966 24,993 21,396
--------- --------- ---------
--------- --------- ---------
Number of salaried employees at end of year(2).............. 211 218 193
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Includes $2,819,000, $2,992,000 and $2,555,000 in 1998, 1997 and 1996,
respectively, related to marketing and processing operations.
(2) Includes the employees of Saxon in 1997 and 1996.
Depreciation and depletion expense increased 25% to $100,105,000 in 1998
from $79,991,000 in 1997 due to higher production, slightly offset by a lower
per-unit expense. The depletion rate decreased to $1.10 per MCFE in 1998
compared to $1.12 per MCFE in 1997. The lower depletion rate during 1998 is
attributable to favorable per-unit costs associated with 1998 acquisitions and
offshore Gulf of Mexico discoveries, as well as to the effects of the writedown
of oil and gas properties in the third quarter of 1998. Depreciation and
depletion expense increased 27% to $79,991,000 in 1997 from $63,068,000 in 1996
due to higher production and higher per-unit expense. The depletion rate
increased to $1.12 per MCFE in 1997 compared to $1.01 per MCFE in 1996,
primarily as a result of higher per-unit development costs in the Gulf of Mexico
due to increased costs for services during that time period.
At December 31, 1998 Forest had undeveloped properties with a cost basis of
approximately $58,609,000 in the U.S. and $26,443,000 in Canada which were not
subject to depletion, compared to $41,226,000 in the U.S. and $19,675,000 in
Canada at December 31, 1997 and $30,046,000 in the U.S. and $13,870,000 in
Canada at December 31, 1996. The increase in 1998 compared to 1997 is
attributable primarily to undeveloped acreage acquired onshore Louisiana,
reduced by undeveloped property impairments. The increase in 1997 compared to
1996 is due primarily to acquisitions of undeveloped acreage in both the U.S.
and Canada. At December 31, 1998 the Company also had approximately $14,435,000
of costs related to international interests. These costs are not being depleted
pending establishment of proved reserves.
In the third and fourth quarters of 1998, Forest recorded a writedown of its
oil and gas properties pursuant to the ceiling test limitation prescribed by the
Securities and Exchange Commission for companies using the full cost method of
accounting. The writedowns totaled $175,000,000 ($199,500,000 pre-tax) and were
primarily a result of declining oil and gas prices.
Additional writedowns of the full cost pools in the United States and Canada
may be required in 1999 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. The average spot price received
for natural gas produced in the Gulf Coast decreased from $2.17 per MCF at
December 31, 1998 to approximately $1.70 per MCF at March 1, 1999. The average
price received for natural gas produced in Canada decreased from $2.20 CDN per
MMBtu at December 31, 1998 to approximately $1.80 CDN per MMBtu at March 1,
1999.
S-25
<PAGE>
The NYMEX price for crude oil was $12.06 per barrel at December 31, 1998 and was
$12.24 per barrel at March 1, 1999. Based on these prices, Forest anticipates
that it would record an additional writedown in the first quarter of 1999.
Other income of $7,561,000 in 1998 included approximately $6,600,000 (before
tax) relating to a gas contract settlement in Canada and $1,400,000 of death
benefits received under a life insurance policy covering a former executive
officer of the Company. Other income of $1,289,000 in 1997 included
approximately $2,100,000 of accrued royalties reversed as a result of court
decisions in Oklahoma; income of approximately $595,000 recognized by Canadian
Forest following resolution of prior year crown royalty issues; and
approximately $1,400,000 of expense recorded in the U.S. as a result of a market
value adjustment to the carrying value of land purchased in 1982. Other income
of $1,387,000 in 1996 included the reversal of a $1,136,000 liability for
royalties on the proceeds from a gas contract settlement.
Interest expense of $38,986,000 in 1998 increased $17,583,000 or 82%
compared to 1997 due primarily to increased outstanding bank debt and
subordinated debt. Interest expense of $21,403,000 in 1997 decreased $1,904,000
or 8% compared to 1996 due primarily to extinguishment of a nonrecourse secured
loan in the fourth quarter of 1996 and redemption of our 11 1/4% Senior
Subordinated Notes in September and October of 1997. These decreases were offset
in part by interest charges on our 8 3/4% Notes and increased interest charges
on higher average outstanding balances under bank credit facilities throughout
most of 1997.
Foreign currency translation loss was $8,320,000 in 1998 and $4,051,000 in
1997. Foreign currency translation loss relates to translation of the 8 3/4%
Notes issued by Canadian Forest, and is attributable to the decrease in the
value of the Canadian dollar relative to the U.S. dollar during the period. The
value of the Canadian dollar was $.6535 per $1.00 U.S. at December 31, 1998
compared to $.6992 at December 31, 1997. Forest 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.
The extraordinary gain on extinguishment of debt in 1998 resulted from
settlement of Forest's remaining nonrecourse production payment obligation in
exchange for 271,214 shares of the Company's Common Stock valued at $3,750,000.
The obligation had a remaining book value of approximately $9,966,000 when it
was settled and we recorded an extraordinary gain on extinguishment of debt of
$6,196,000 after related expenses. The extraordinary loss on the extinguishment
of debt in 1997 of $12,359,000 relates to the tender offer for our 11 1/4%
Notes. The extraordinary gain on extinguishment of debt in 1996 of $2,166,000
relates to the extinguishment of nonrecourse secured debt.
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.
S-26
<PAGE>
- 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 United States
and Canada, as well as 13 international projects.
- In June 1998, we settled our only remaining nonrecourse production payment
loan by issuing 271,214 shares of common stock to the lender. 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, at 98.811% of par, $100,000,000 of 10 1/2%
Senior Subordinated Notes (the 10 1/2% Notes) due 2006.
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 four offshore Gulf of Mexico wells whose combined
production currently represents approximately 25% of our consolidated daily
deliverability. 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 $200,000,000
and $50,000,000, 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 June 30, 1999, the outstanding borrowings under the global credit
facility were $165,000,000 in the United States and $30,181,000 in Canada. At
July 23, 1999, the borrowing base was $250,000,000 and the outstanding
borrowings under the global credit facility were $174,700,000 in the United
States and $30,044,000 in Canada, with an average effective interest rate of
6.74%. At July 23, 1999, Forest had also used the global credit facility for
letters of credit in the amount of $233,000 in the United States and $1,144,000
CDN in Canada.
S-27
<PAGE>
WORKING CAPITAL. Forest had a working capital deficit of approximately
$1,602,000 at June 30, 1999 compared to a surplus of approximately $348,000 at
December 31, 1998. 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 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 $39,822,000 in 1999 compared to $57,079,000 in 1998. The
1999 period included working capital changes of $904,000, whereas such changes
amounted to $10,831,000 in 1998. We used $34,851,000 for investing activities in
1999 compared to $304,781,000 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.
Net cash used by financing activities in 1999 was $5,930,000 compared to net
cash provided of $242,920,000 in 1998. The 1999 period included net repayments
of bank borrowings of $100,629,000 and net proceeds of $98,825,000 from the
issuance of the 10 1/2% Notes. The 1998 period included net bank borrowings of
$168,852,000 and net proceeds of $74,620,000 from the issuance of the 8 3/4%
Notes.
CAPITAL EXPENDITURES. Expenditures for property acquisition, exploration
and development for the first six months of 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Property acquisition costs:
Proved properties..................................................... $ (1,169) 276,165
Undeveloped properties................................................ 79 43,933
--------- ---------
(1,090) 320,098
Exploration costs:
Direct costs.......................................................... 27,813 34,419
Overhead capitalized.................................................. 1,539 1,814
--------- ---------
29,352 36,233
Development costs:
Direct costs.......................................................... 16,582 30,201
Overhead capitalized.................................................. 2,523 2,196
--------- ---------
19,105 32,397
--------- ---------
$ 47,367 388,728
--------- ---------
--------- ---------
</TABLE>
Forest's anticipated 1999 direct expenditures for exploration and
development are approximately $90,000,000. 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.
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<PAGE>
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.
LONG-TERM SALES CONTRACTS. A significant portion of Canadian Forest's
natural gas production is sold through the ProMark Netback Pool. At June 30,
1999, the ProMark Netback Pool had entered into fixed price contracts to sell
approximately 1.2 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 ProMark
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.
<TABLE>
<CAPTION>
NATURAL GAS OIL
---------------------------- --------------------------
BBTU'S HEDGED PRICE BARRELS HEDGED PRICE
PER DAY PER MMBTU PER DAY PER BBL
----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
July through September 1999...................................... 89.7 $ 2.20 8,505 $ 16.80
October through December 1999.................................... 69.6 $ 2.29 5,679 $ 16.28
2000............................................................. 30.9 $ 2.39 1,166 $ 19.44
2001............................................................. 21.7 $ 2.45 -- --
2002............................................................. 16.7 $ 2.48 -- --
</TABLE>
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 United States and Canada in the third
quarter of 1999.
S-29
<PAGE>
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, was substantially completed in the second
quarter of 1999. Forest 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 remainder of the 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 United States, 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 the third quarter of 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 90% complete as
of July 31, 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 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.
S-30
<PAGE>
Forest has not, to date, implemented a Year 2000 Contingency Plan because we
believe all major issues have been resolved or will be resolved. If, however,
any remaining portions of Forest's Year 2000 Project fall behind schedule, we
would expect to develop and implement contingency plans addressing non-compliant
items in the third quarter of 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, 2000. Statement No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Forest 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.
S-31
<PAGE>
BUSINESS
OVERVIEW
Forest Oil Corporation is an independent oil and gas company engaged in the
acquisition, exploration, development, production and marketing of natural gas
and liquids in North America. Forest was incorporated in New York in 1924, the
successor to a company formed in 1916, and has been a publicly held company
since 1969. Since 1995, The Anschutz Corporation, a private Denver-based
corporation, has invested approximately $175 million in Forest and currently
owns approximately 40% of its common stock.
Forest operates from production offices located in Lafayette, Louisiana;
Denver, Colorado; and Calgary, Alberta. Forest's corporate headquarters are
located in Denver, Colorado.
Forest's estimated proved reserves were 775 BCFE at December 31, 1998, an
increase of 47% compared to estimated proved reserves of 526 BCFE at December
31, 1997. Approximately 73% of our estimated proved reserves were natural gas at
December 31, 1998, compared to 72% in the previous year. As of December 31,
1998, our estimated proved developed reserves were approximately 84% of total
estimated proved reserves.
Forest's principal reserves and producing properties are all located in
North America. We operate in four business units: onshore Gulf of Mexico,
offshore Gulf of Mexico, the U.S. Rockies and Canada. At December 31, 1998,
approximately 72% of our oil and gas reserves were in the United States and
approximately 28% were in Canada. During the first six months of 1999, we
produced approximately 253 MMCFE per day. Approximately 75% of our total
production for the first half of 1999 was in the United States and approximately
25% was in Canada. We conduct exploration activities in each of our core areas.
STRATEGY
Our business strategy is to focus on exploration and development of oil and
gas properties located in selected areas in North America where we have
substantial expertise and experience. The following points detail the specifics
of that strategy.
EMPHASIS ON NORTH AMERICAN GAS
We believe that natural gas demand will continue to increase in North
America. We also believe that natural gas will continue to gain market share
over other fuels supplying energy to the United States. As a result, we choose
to focus our business efforts on exploring for natural gas in North America.
Currently there are local market differences in supply and demand for natural
gas. There also exist regional differences in market access, operational
requirements, taxation and regulatory regimes, land access, and environmental
compliance. Consequently, we believe a geographically diversified holding lowers
the risk associated with exploration activities being limited to a single area
and further exposes us to higher upside by being associated with a diversified
number of plays in the areas of greatest commericial gas potential in North
America.
FOCUSED EXPLORATION AS A DRIVER OF GROWTH
We are committed to exploration as a source of future growth. We seek to
balance higher risk exploration activities in Canada and the U.S Rockies with
lower risk exploration and development activities in the Gulf of Mexico and the
Gulf Coast. Our North American undeveloped acreage position has increased
significantly over the last three years to 2.2 million gross acres
(approximately 1.0 million net) at December 31, 1998. This acreage position has
allowed us to develop a substantial prospect inventory.
S-32
<PAGE>
In Canada, we have established a large acreage position and have developed a
significant prospect portfolio in the emerging exploration plays in the
Northwest Territories and the Alberta foothills. The Northwest Territories has
only recently been opened up for drilling activity after a 25-year moratorium.
In Canada, we focus on opportunities that utilize proven technologies to
identify deep thrust and fold structures, as well as other deep stratigraphic
plays. With recent advancements in seismic applications and downhole drilling
techniques, we can identify and reach the optimal drilling target in these types
of structures more easily.
In the Gulf of Mexico and the Gulf Coast, we focus on exploration
opportunities in areas where we have an extensive infrastructure. Our
exploration activities in these areas rely heavily on advanced technologies,
such as new drilling and 3-D seismic processing techniques. We identify drilling
targets by processing data and correlating it to information from existing
production and geological data. Such information includes our regional and local
geologic models and available well control. This methodology has resulted in
significant discoveries by allowing us to explore deeper in existing producing
fields where more subtle targets exist.
TARGETED ACQUISITIONS TO EXPAND EXPLORATION OPPORTUNITIES
In both the United States and Canada, we periodically acquire producing oil
and gas properties with exploration prospects consistent with our defined
exploration strategy. We selectively target acquisitions when market factors are
favorable or when we have identified an emerging trend that has not yet been
broadly recognized.
In connection with the Saxon and Atcor acquisitions in 1995 and 1996, we
acquired $171 million of properties in Canada to capitalize on the differential
between Canadian and United States natural gas prices, which has subsequently
narrowed. In 1998, we enhanced our position by purchasing 100% of Unocal's
interest in the Northwest Territories. This acquisition included an additional
35% working interest in the P-66 well on the Liard plateau, significant
undeveloped acreage and substantial proprietary geological and geophysical data
accumulated by Unocal over a number of years. We now have one of the largest
acreage positions in the Northwest Territories. We believe that we also have the
dominant acreage position on the indentified structural plays in the Liard
plateau.
Subsequent to this acquisition, the testing of the P-66 well indicated that
it was a significant discovery. In 1999, Chevron announced a significant
discovery on a similar structural play six miles south of our P-66 well. The
Unocal acquisition also provided us with a substantial land position in a
shallower gas play on the Liard plateau, where a significant discovery was
recently announced by Paramount.
In 1992 and 1993, we made a substantial investment in producing properties
in the Gulf of Mexico that have been the basis for significant discoveries. The
properties acquired included the following, on all of which we have identified
additional exploration prospects:
<TABLE>
<CAPTION>
WORKING YEAR OF INITIAL PRODUCTION
FIELD YEAR ACQUIRED INTEREST DISCOVERY RATE (MMCFE/D)
- ------------------------------------ ------------- --------------- ---------------- --------------------
<S> <C> <C> <C> <C>
South Pelto 6....................... 1992 35 1992 30
High Island 116..................... 1993 55% 1996 55
Eugene Island 53.................... 1993 100% 1997, 1998 100
Eugene Island 255................... 1992 100% 1999 Currently Testing
</TABLE>
In 1998, we paid $231 million for producing properties onshore Louisiana,
where competition from large companies is minimal. We have identified numerous
exploration opportunities in deeper horizons on these properties, which we plan
to test beginning in 2000. The exploration methodology applied to,
S-33
<PAGE>
and the geological formations found within, the Louisiana properties are
comparable to those in our Gulf of Mexico properties.
CONTROL OF OPERATIONS
We emphasize control of operations in all of our core operating areas and in
our evaluation of acquisition opportunities. As operator, we are in a better
position to control the timing and costs of drilling operations. This allows us
to increase margins and optimize the net present value of our capital
investments.
We also seek to be a major participant in each of our core operating areas.
This allows us to evaluate opportunities generated by other parties more
efficiently and to focus and use the expertise of our technical staff more
efficiently.
MAINTAIN FINANCIAL FLEXIBILITY
We emphasize maintaining a strong balance sheet in order to provide
operating and financial flexibility. We will initially use the proceeds from
this offering to reduce bank borrowings. We believe that our strengthened
balance sheet and increased borrowing capacity under our credit facility as a
result of this offering will allow us to accelerate the exploration and
development of our significant prospects. We estimate that after this offering
we will have approximately $165 million of borrowing capacity under our senior
credit facility.
PROPERTIES
Forest's North American gas strategy focuses on three areas: Canada
(especially the foothills of Alberta and the Northwest Territories), the U.S.
Rockies (especially the Green River of Wyoming) and the Gulf Coast (both onshore
in Louisiana and Texas and offshore Gulf of Mexico.)
The following table summarizes our estimated proved reserves and the
discounted present value, before income tax, of these reserves by major
operating areas at December 31, 1998:
<TABLE>
<CAPTION>
PROVED RESERVES DISCOUNTED PRESENT
--------------------------------- VALUE BEFORE INCOME
GAS LIQUIDS TOTAL TAX OF PROVED
(MMCF) (MBBLS) (MMCFE) RESERVES (THOUSANDS)
--------- --------- ----------- --------------------
<S> <C> <C> <C> <C>
Gulf Offshore............................................ 102,751 2,045 115,021 $ 109,037
Gulf Onshore............................................. 181,428 13,379 261,702 228,342
Western.................................................. 140,341 6,160 177,301 96,176
--------- --------- ----------- --------
Total US................................................. 424,520 21,584 554,024 433,555
Canada................................................... 139,744 13,485 220,654 113,921
--------- --------- ----------- --------
Total................................................ 564,264 35,069 774,678 $ 547,476
--------- --------- ----------- --------
--------- --------- ----------- --------
</TABLE>
- ------------------------
CANADIAN BUSINESS UNIT
Our Canadian business unit produced 71 MMCFE per day. Our Canadian producing
assets are located primarily in Alberta and were purchased in 1995.
NORTHWEST TERRITORIES. We own approximately 120,000 net acres in the Ft.
Liard area (Southern MacKenzie Valley), 230,000 net acres in the Ft. Norman area
(Central MacKenzie Valley), and 8,300
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<PAGE>
net acres in Significant Discovery Licenses in the Beaufort Seas / MacKenzie
Delta. As a result, we are one of the largest land holders in the Northwest
Territories, which until 1995 had been under a drilling moratorium for 25 years.
In our purchase of all of Unocal's acreage position in the Northwest Territories
last year, we also acquired a meaningful proprietary database of the entire
area. Certain technical personnel who had been working prospects for Unocal in
the Northwest Territories also joined Forest following the acquisition.
We have a 50% working interest in a discovery well (P-66) operated by Ranger
Oil on the Liard Plateau that was completed in 1998. The P-66 well tested
unstimulated at 25 MMCF/d, with a gas column of 1,000 feet. As a result of
recent work, a water lens in this well has been plugged off and the well is
being prepared for stimulation in anticipation of hooking it up for production
in the first half of next year. We anticipate that after stimulation, the well
could produce up to 35 MMCF/d, which is the mechanical limit of the production
tubing presently installed in the wellbore. If the required approvals for
pipeline construction are obtained in a timely manner, production from the well
will be transported through a pipeline to be constructed by a joint venture
operated by Chevron.
We are currently drilling a delineation well (N-61) approximately six miles
from the discovery well, which we operate and in which we own a 50% interest.
This well is scheduled to be drilled to 10,800 feet with the expectation of
reaching total depth late in the month of August 1999. If successful, the well
would be placed on production during the first half of 2000, subject to receipt
of pipeline approvals in a timely manner. We anticipate drilling at least two
additional wells in connection with the Liard discovery, for a total of four
wells. The average completed well cost net to Forest is currently estimated at
$4.5 million.
Both the P-66 and N-61 wells are located on the same exploratory license.
Recently, Chevron announced a major discovery with a gas column of approximately
1,200 feet in the same formation just 1.5 miles from such license. Chevron said
its well tested at 35 MMCF/d unstimulated and indicated that it believes that
the well has 400 to 500 BCF of raw gas in place, and that it will produce at
approximately 75 to 100 MMCF/d. We have also identified structures similar to
those discovered by us and Chevron on other licenses that we own within 10 miles
of these discoveries, and have delineated prospects to test these structures.
Elsewhere in the Liard Plateau, we have a one-third working interest in a
license surrounding a discovery (in which Forest does not have an interest)
announced earlier by Paramount and Berkley. This sweet gas discovery in the
Mattson formation tested unstimulated at 45 MMCF/d and Paramount, the operator,
has announced its intention to drill additional wells and construct plant and
pipeline facilities to commence production during the first half of next year
assuming the necessary permits are obtained. The scope of the activities
announced by Paramount on this discovery license anticipates gross capital
outlays of $70 million of which Forest could have as much as a one-third
participation.
We are the largest leaseholder in the Liard Plateau. We have identified
numerous exploration opportunities on our 250,000 acres and have seismic
obligations that we want to fulfill in the near term to further our position in
this area. In total, Forest has identified investment opportunities in the Liard
Plateau on its current acreage position that could cost as much as $60 to $100
million net to Forest.
ALBERTA FOOTHILLS. In the Alberta foothills Forest has drilled one well, in
which it has a 100% working interest, to total depth and has tested the
productive capability of the well. Based upon the results of these tests, Forest
anticipates drilling an additional well on this lease near year-end or shortly
thereafter. Forest is drilling a second foothills prospect on another lease
where it is operator with a 40% working interest. This well is scheduled to be
drilled to a total depth of 14,400 feet, which should be reached by the end of
summer. Forest has two additional foothills prospects where it will be doing
further geological and geophysical work with the expectation of drilling wells
in late 1999 or 2000.
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<PAGE>
OFFSHORE GULF BUSINESS UNIT
We have been active in the Gulf Region both onshore and offshore since 1954.
In 1998, average daily production from this region was approximately 87 MMCFE.
We currently have interests in 65 blocks offshore, of which 21 are
unexplored in their primary term and 44 are held by production. We maintain a
substantial data base of 2-D and 3-D seismic, well logs, velocity surveys and
numerous paleo and regional studies of this region. Our primary offshore
production comes from Eugene Island Block 53 and High Island Block 116, which
accounted for approximately 16% of our average daily production in 1998 on a
combined basis.
In 1998, we participated in the drilling of seven Gulf of Mexico wells, five
of which were successful. The 1999 Offshore Gulf capital spending budget was
increased by $5 million in June 1999 to $20 million. We expect to drill eight
gross (five net) exploratory wells and conduct five recompletions in 1999.
Significant properties include:
EUGENE ISLAND BLOCK 53. We have a 50% working interest in and operate in
the shallow portion of this field. We own a 100% working interest in and operate
the deeper Cib Carst portion of the field, which we acquired in 1993. The C
platform was installed in October 1998 to produce our completions from three
newly drilled wells (numbers 12, 13 and 14). This completion initially increased
production to over 100 MMCFE/d. While there is no additional drilling on this
property scheduled for 1999, it represents approximately 20% of our production.
We have identified an additional deeper test in an adjacent fault block, which
we plan to drill in 2000.
EUGENE ISLAND BLOCK 255. We have a 100% working interest in and operate
this field. We recently completed a discovery on Eugene Island 255 that is
currently producing at a curtailed rate of 5.4 MMCF/d of gas and 400 Bbls/d of
oil with a flowing tube pressure of 5,780 psi. We are producing only 47 feet of
an overall 165 foot thick sand while we wait on the natural gas production
facility to be expanded to handle a 20 MMCF/d rate. The planned expansion should
be completed by late August 1999.
HIGH ISLAND BLOCK 116. We have a 54.8% working interest in and operate this
field. The B-1 well production had declined to 6 MMCFE/d, but was recently
recompleted uphole and is currently flowing 26 MMCFE/d. We are now drilling the
B-2 well, which was spudded in early July, targeting multiple stacked miocene
sands at a total depth of 17,673 feet. The well should reach total depth by
mid-August 1999.
EUGENE ISLAND 292 COMPLEX. The Eugene Island 292 Complex consists of 13
blocks. We operate the majority of this field with working interests ranging
from 20% to 59%. To date the wells in which we have an interest have produced
1.7 TCF of gas gross.
In 1997, we initiated an enhanced 3-D seismic survey utilizing ocean bottom
seismic cables to improve imaging of the existing structures, which have
previously been identified on the complex. A new 3-D survey delivered in 1998
enhanced the structural and stratigraphic interpretation of the complex and
generated six drillable prospects for 1999 and 2000.
ONSHORE GULF BUSINESS UNIT
The Onshore Gulf Business Unit, which includes our properties in the Gulf
Coast of Louisiana and Texas, is focused on low risk exploration and development
drilling. In February 1998, we purchased properties in Louisiana with 14,800 net
acres and interests in 100 wells for $231 million. In 1998, average daily
production from this region was approximately 51 MMCFE. We plan to drill 10
wells and perform 22 recompletions in 1999 in this business unit.
S-36
<PAGE>
In Louisiana there are five wells and 15 recompletions planned for 1999 with
the added goal of indentifying exploratory prospects for drilling in 2000. Our
two focus areas in Louisiana are the Deer Island and Saturday Island fields. In
Texas, our operational focus is the McAllen Ranch Field, where we have planned
four wells and two recompletions during 1999.
DEER ISLAND. We have a 95% working interest in and operate this field,
which is located in the marshland of West Terrebone Parish. The field was
discovered in 1953 and has cumulative production of 253 BCF of gas and 11 MMBbls
of oil. We acquired the property in 1998.
We are planning one development well later this year that targets pay zones
similar to an offset well with a total depth of 12,200 feet. We also plan to
recomplete five wells in the field during 1999 and continue to finalize a major
study of the field.
SATURDAY ISLAND. We have a 95% working interest and operate this field. The
field was acquired in 1998, and is located 40 miles southeast of New Orleans in
Barataria Bay. Cumulative production on this field is 42 BCF of gas and 14
MMBbls of oil. We purchased 3-D seismic data over our entire 1,100 net acres and
began a field study in 1998. Based on that study, we have successfully completed
three development wells in the first half of 1999, increasing production from
6,000 MMCFE/d to 12,000 MMCFE/d.
MCALLEN RANCH. We have a 45% working interest in and operate this field,
which is located in Hidalgo County Texas, southwest of Corpus Christi. The field
was discovered in 1960, and the portion that is operated by us was discovered by
us in 1973. We have acquired a 3-D seismic survey of this property.
We have drilled two successful exploration wells in this field in 1999 based
on the new seismic survey. The first well is currently producing at 4 MMCFE/d.
The second well is in the process of being fracture stimulated and will be put
on line during August. We expect to drill four more wells on the McAllen Ranch
this year and have identified four to six locations which we expect to drill in
2000.
WESTERN BUSINESS UNIT
The Western Business Unit's existing production and properties are located
in four primary areas: the Green River Basin and the Wind River Basin in
Wyoming, West Texas and Oklahoma. In 1998, average daily production was
approximately 31 MMCFE per day. Our capital spending budget for 1999 is $5
million for the Western Region, which includes the drilling of four wells. We
recently obtained a partner in the Green River Basin who will pay $3 million for
a 50% participation in three to four wells to be drilled before year-end on
prospects generated by us.
INTERNATIONAL
Forest is actively working the international concessions acquired in 1998.
Recently, Forest completed a 310 square kilometer 3-D seismic program offshore
South Africa. The survey was shot over a well that tested 40 MMCF/d in which
Forest owns a 90% working interest. The survey will be used to determine the
reserve potential of this discovery.
RESERVES
Information regarding Forest's proved and proved developed oil and gas
reserves and the standardized measure of discounted future net cash flows and
changes therein is included in Note 14 of Notes to Consolidated Financial
Statements.
S-37
<PAGE>
The following are estimated quanities of proved reserves and cash flows
therefrom as of December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Proved developed:
Natural Gas (MMCF).................................................... 467,749 289,835 236,485
Liquids (MBbls)....................................................... 30,182 19,784 18,571
Proved undeveloped:
Natural Gas (MMCF).................................................... 96,515 88,480 97,695
Liquids (MBbls)....................................................... 4,887 4,852 5,443
Total proved:
Natural Gas (MMCF).................................................... 564,264 378,315 334,180
Liquids (MBbls)....................................................... 35,069 24,636 24,014
Estimated future net cash flows:
Before income tax..................................................... $ 881,291 $ 762,094 $ 1,118,504
After income tax...................................................... $ 824,054 $ 658,202 $ 855,836
Present value of estimated future net cash flows,
discounted at 10%:
Before income tax..................................................... $ 547,476 $ 486,506 $ 702,189
After income tax...................................................... $ 522,831 $ 439,570 $ 559,869
</TABLE>
Since January 1, 1997 Forest has not filed any oil or natural gas reserve
estimates or included any such estimates in reports to any Federal or foreign
governmental authority or agency, other than the Securities and Exchange
Commission (SEC), the MMS and the Department of Energy (DOE). The reserve
estimate report filed with the MMS related solely to Forest's Gulf of Mexico
reserves. There were no differences between the reserve estimates included in
the MMS report, the SEC report, the DOE report and those included herein, except
for production and additions and deletions due to the difference in the "as of"
dates of such reserve estimates.
DRILLING AND PRODUCTION DATA
PRODUCTION
The following table shows net liquids and natural gas production for Forest
for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
NET NATURAL GAS AND
LIQUIDS PRODUCTION(1)
-------------------------------
<S> <C> <C> <C>
1998 1997(2) 1996(2)
--------- --------- ---------
United States:
Natural Gas (MMCF)............................................. 47,394 34,018 28,624
Liquids (MBbls)................................................ 2,405 1,267 1,104
Canada:
Natural Gas (MMCF)............................................. 14,916 15,017 13,872
Liquids (MBbls)................................................ 1,864 1,940 1,645
Total (MMCFE).................................................... 87,924 68,277 58,990
</TABLE>
- ------------------------
(1) 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.
S-38
<PAGE>
(2) Includes amounts delivered pursuant to volumetric production payments. See
Note 5 of Notes to Consolidated Financial Statements.
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, 1998, 1997 and 1996 for
Forest:
<TABLE>
<CAPTION>
UNITED STATES CANADA
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
Average Sales Prices:
Natural Gas
Total production (MMCF)(1)........................ 47,394 34,018 28,624 14,916 15,017 13,872
Sales price received (per MCF).................... $ 2.10 2.53 2.36 1.23 1.46 1.41
Effects of energy swaps (per MCF)(2).............. .09 (.21) (.23) (.02) -- (.04)
--------- --------- --------- --------- --------- ---------
Average sales price (per MCF)..................... $ 2.19 2.32 2.13 1.21 1.46 1.37
Liquids:
Oil and condensate:
Total production (MBbls).......................... 1,919 1,137 964 1,389 1,498 1,308
Sales price received (per Bbl).................... $ 12.16 18.20 20.03 11.95 18.07 20.64
Effects of energy swaps (per Bbl)(2).............. .45 (.23) (1.07) 1.06 (.08) (1.82)
--------- --------- --------- --------- --------- ---------
Average sales price (per Bbl)..................... $ 12.61 17.97 18.96 13.01 17.99 18.82
Natural gas liquids:
Total production (MBbls).......................... 486 130 140 475 442 337
Average sales price (per Bbl)..................... $ 7.00 10.62 10.48 7.25 12.42 11.87
Total liquids production (MBbls).................... 2,405 1,267 1,104 1,864 1,940 1,645
Average sales price (per Bbl)....................... $ 11.48 17.21 17.88 11.54 16.72 17.40
Average production cost (per MCFE)(3)................. $ .48 .50 .56 .46 .58 .52
</TABLE>
- ------------------------
(1) Total natural gas production includes scheduled deliveries under volumetric
production payments, net of royalties, of 801 MMCF and 3,168 MMCF 1997 and
1996, respectively. Natural gas delivered pursuant to volumetric production
payment agreements represented approximately 2% and 7% of total natural gas
production 1997 and 1996, respectively. On June 30, 1997 the Company
repurchased its last remaining volumetric production payment. For further
information concerning volumes and prices recorded under volumetric
production payments, see Note 5 of Notes to Consolidated Financial
Statements.
(2) Energy swaps were entered into to hedge the price of spot market volumes
against price fluctuations. Hedged natural gas volumes were 26,527 MMCF,
13,990 MMCF and 12,741 MMCF for the years ended December 31, 1998, 1997 and
1996, respectively. Hedged oil and condensate volumes were 392,900 barrels,
949,000 barrels and 895,600 barrels for 1998, 1997 and 1996, respectively.
The aggregate gains (losses) under energy swap agreements were $6,305,000,
$(7,439,000) and $(10,422,000), respectively, for the years ended December
31, 1998, 1997 and 1996 and were accounted for as increases (reductions) to
oil and gas sales.
(3) 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
S-39
<PAGE>
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 Forest at
December 31, 1998:
<TABLE>
<CAPTION>
PRODUCTIVE WELLS(1)
----------------------------
<S> <C> <C>
UNITED STATES CANADA
--------------- -----------
Gross(2)
Gas............................................................. 352 358
Oil............................................................. 70 440
----- -----
Totals(3)..................................................... 422 798
----- -----
----- -----
Net(4)
Gas............................................................. 142.5 130.0
Oil............................................................. 29.2 217.6
----- -----
Totals........................................................ 171.7 347.6
----- -----
----- -----
</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 23 dual completions in the United States and 17 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.
S-40
<PAGE>
DEVELOPED AND UNDEVELOPED ACREAGE
Forest held acreage as set forth below at December 31, 1998 and 1997. A
majority of the developed acreage is subject to mortgage liens securing our bank
indebtedness.
<TABLE>
<CAPTION>
DEVELOPED ACREAGE(1) UNDEVELOPED ACREAGE(2)
-------------------- --------------------------
GROSS(3) NET(4) GROSS(3) NET(4)
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
United States:
Louisiana offshore............................................ 117,947 53,498 61,133 42,118
Texas onshore................................................. 82,134 31,457 42,195 11,393
Texas offshore................................................ 36,742 23,624 52,057 29,004
Oklahoma...................................................... 26,068 5,052 6,892 2,465
Wyoming....................................................... 10,217 5,604 90,170 52,379
Other......................................................... 19,765 9,429 23,963 10,912
--------- --------- ------------ ------------
292,873 128,664 276,410 148,271
Canada:
Alberta....................................................... 261,365 117,853 322,971 189,011
Ontario....................................................... 10,707 5,354 303,681 151,840
Northwest Territories......................................... -- -- 718,166 350,133
Beaufort Sea.................................................. -- -- 384,744 7,248
British Columbia offshore..................................... -- -- 112,308 112,308
Other......................................................... 39,523 23,615 61,216 32,520
--------- --------- ------------ ------------
311,595 146,822 1,903,086 843,060
Other:
South Africa.................................................. -- -- 8,100,000 7,290,000
Switzerland................................................... -- -- 3,400,000 3,060,000
Tunisia....................................................... -- -- 2,520,420 2,520,420
Germany....................................................... -- -- 1,369,775 1,369,775
Albania....................................................... -- -- 1,113,185 333,956
Italy......................................................... -- -- 1,039,090 917,725
Romania....................................................... -- -- 766,900 766,900
Thailand...................................................... -- -- 730,675 730,675
--------- --------- ------------ ------------
-- -- 19,040,045 16,989,451
--------- --------- ------------ ------------
Total acreage at December 31, 1998.............................. 604,468 275,486 21,219,541 17,980,782
--------- --------- ------------ ------------
--------- --------- ------------ ------------
Total acreage at December 31, 1997.............................. 707,710 301,579 1,499,682 523,783
--------- --------- ------------ ------------
--------- --------- ------------ ------------
</TABLE>
- ------------------------
(1) Developed acres are those acres which are spaced or assigned to productive
wells.
(2) Undeveloped acres are considered to be 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.
S-41
<PAGE>
During 1998, Forest's gross and net developed acreage decreased approximately
15% and 9%, respectively, as a result of sales of producing properties. Gross
and net undeveloped acreage increased significantly as a result of international
projects acquired in 1998.
Approximately 13% of our net undeveloped acreage at December 31, 1998 is under
leases that have terms expiring in 1999, if not held by production, and
approximately 13% of net undeveloped acreage will expire in 2000 if not also
held by production.
DRILLING ACTIVITY
Forest owned interests in gross and net exploratory and development wells for
the years ended December 31, 1998, 1997 and 1996 as set forth below. This
information does not include wells drilled under farmout agreements.
<TABLE>
<CAPTION>
UNITED STATES CANADA
------------------------------------- --------------------
1998 1997 1996 1998 1997
----- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross Exploratory Wells:
Dry(1)............................................................... 6 4 4 7 5
Productive(2)........................................................ 7 8 9 2 7
-- -- --
--- ---
13 12 13 9 12
-- -- --
-- -- --
--- ---
--- ---
Net Exploratory Wells:(3)
Dry(1)............................................................... 4.3 1.4 2.0 5.6 3.9
Productive(2)........................................................ 4.7 4.0 3.5 .7 5.3
-- -- --
--- ---
9.0 5.4 5.5 6.3 9.2
-- -- --
-- -- --
--- ---
--- ---
Gross Development Wells:
Dry(1)............................................................... -- 5 3 2 15
Productive(2)........................................................ 9 13 15 14 31
-- -- --
--- ---
9 18 18 16 46
-- -- --
-- -- --
--- ---
--- ---
Net Development Wells:(3)
Dry(1)............................................................... -- .7 .5 2.0 10.6
Productive(2)........................................................ 2.6 4.0 1.9 10.0 21.5
-- -- --
--- ---
2.6 4.7 2.4 12.0 32.1
-- -- --
-- -- --
--- ---
--- ---
<CAPTION>
1996
---------
<S> <C>
Gross Exploratory Wells:
Dry(1)............................................................... 4
Productive(2)........................................................ 2
---
6
---
---
Net Exploratory Wells:(3)
Dry(1)............................................................... 2.9
Productive(2)........................................................ 1.4
---
4.3
---
---
Gross Development Wells:
Dry(1)............................................................... 4
Productive(2)........................................................ 70
---
74
---
---
Net Development Wells:(3)
Dry(1)............................................................... .9
Productive(2)........................................................ 19.9
---
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
OIL AND GAS OPERATIONS. 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. Liquids are typically sold under short-term contracts at prices based
upon posted field prices. Natural gas in the U.S. is generally sold month to
month on the spot market. Currently, nearly all of our U.S. natural gas is sold
at the wellhead at spot market prices. The term "spot market" as used herein
refers to contracts with a term
S-42
<PAGE>
of six months or less or contracts which call for a redetermination of sales
prices every six months or earlier. We believe that the loss of one or more of
our current natural gas spot purchasers should not have a material adverse
effect on Forest'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.
In Canada, liquids are typically sold under short-term contracts at prices
based upon posted field prices. Canadian Forest's natural gas production is sold
primarily through the ProMark Netback Pool which is operated by ProMark, the
marketing subsidiary of Canadian Forest. Canadian Forest sold approximately 85%
of its natural gas production through the ProMark Netback Pool in 1998.
MARKETING AND TRADING ACTIVITIES. The ProMark 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.
The ProMark Netback Pool gas sales in 1998 averaged 129 MMCF per day, of
which Canadian Forest supplied approximately 35 MMCF per day or 27%.
Approximately 26% of the volumes sold in the ProMark Netback Pool in 1998 were
sold at fixed prices. The remainder of the volumes sold were priced in a variety
of ways, including prices based on indices.
In addition to operating the ProMark 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 follows procedures to offset its gas purchase or
sales commitments with other gas purchase or sales contracts, thereby limiting
its exposure to price risk. We are, however, exposed to credit risk in that
there exists the possibility that the counterparties to agreements will fail to
perform their contractual obligations. The credit of counterparties is evaluated
and letters of credit or parent guarantees are obtained when considered
necessary to minimize credit risk.
S-43
<PAGE>
MANAGEMENT
The following table sets forth information regarding the names, ages,
positions and business experience of each of Forest's executive officers and
directors.
<TABLE>
<CAPTION>
YEARS WITH
NAME AGE FOREST OFFICE
- ------------------------------------ --- --------------- ---------------------------------------------------------
<S> <C> <C> <C>
Robert S. Boswell................... 49 13 President since November 1993 and Chief Executive Officer
since December 1995 and Chief Financial Officer until
December 1995. Member of the Board of Directors since
1986. Member of the Company's Executive Committee.
Director of C.E. Franklin Ltd.
David H. Keyte...................... 43 11 Executive Vice President and Chief Financial Officer
since November 1997. Vice President and Chief Financial
Officer December 1995. Vice President and Chief
Accounting Officer from December 1993 until December
1995. Chairman of the Company's Employee Benefits
Committee.
Forest D. Dorn...................... 44 21 Senior Vice President--Gulf Coast Region since November
1997. Vice President--Gulf Coast Region August 1996.
Prior thereto Vice President and General Business
Manager from December 1993 to August 1996. Member of
the Company's Employee Benefits Committee.
Neal A. Stanley..................... 51 3 Senior Vice President--Western Region since November
1997. Vice President--Western Region August 1996. Prior
thereto President of Teton Oil and Gas Corporation.
J. Walter Knell..................... 48 12 Vice President-Gulf Coast Offshore since May 1999. Prior
thereto Gulf Coast Offshore Business Unit Manager.
Joan C. Sonnen...................... 46 10 Vice President-Controller and Corporate Secretary since
May 1999. Corporate Secretary since March 1999 and
Controller since December 1993. Member of the Company's
Employee Benefits Committee.
Donald H. Stevens................... 46 1 Vice President--Capital Markets and Treasurer since
December 1998. Vice President--Capital Markets and
Strategic Initiatives August 1997. Prior thereto Vice
President--Corporate Relations and Capital Markets of
Barrett Resources Corporation.
</TABLE>
S-44
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION,
POSITIONS WITH COMPANY
YEARS WITH AND BUSINESS EXPERIENCE
NAME AGE FOREST DURING LAST FIVE YEARS
- ------------------------------ --------- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
William L. Dorn............... 50 28 Chairman of the Board and Chairman of the Executive Committee.
Chief Executive Officer until December 1995. Chairman of the
Nominating Committee. Member of the Board of Directors since
1982.
Philip F. Anschutz............ 59 4 Director. Member of the Nominating Committee. Director and
Chairman of the Board of The Anschutz Corporation and its
corporate parent, Anschutz Company, for more than five years,
and President of The Anschutz Corporation and Anschutz Company
until December 1996. Director and Chairman of the Board of Qwest
Communications International Inc. since February 1997 and
Director and Chairman of the Board of Qwest Communications
Corporation from November 1993 until September 1997. Director
and Vice Chairman of Union Pacific Corporation since September
1996. Director and Chairman of Southern Pacific Rail Corporation
("SPRC") from 1988 to September 1996, and President and Chief
Executive Officer of SPRC from 1988 to 1993.
William L. Britton............ 64 3 Director. Member of the Audit Committee. Partner in the law firm
of Bennett Jones. Director of Akita Drilling Ltd., ATCO Ltd.,
Canadian Western Natural Gas Ltd., Canadian Utilities Limited,
CanUtilities Holdings Ltd. and Northwestern Utilities Limited.
Cortlandt S. Dietler.......... 77 2 Director. Member of the Compensation Committee. Chairman and Chief
Executive Officer of TransMontaigne Inc. since April 1995. Prior
thereto founder, Chairman and Chief Executive Officer of
Associated Natural Gas Corporation prior to its 1994 merger with
Panhandle Eastern Corporation. Advisory Director of PanEnergy
Corporation. Director of TransMontaigne Inc., Hallador Petroleum
Company, Key Production Company, Inc. and Grease Monkey Holding
Corporation.
Cannon Y. Harvey.............. 58 0 Director. Director, President and Chief Operating Officer of The
Anschutz Corporation and Anschutz Company. Director of Qwest
Communications International Inc. Executive Vice
President--Finance and Law of SPRC from February 1995 until
September 1996; Senior Vice President and General Counsel of
SPRC from September 1993 to February 1995; Vice President--
Finance and Law and General Counsel of SPRC from May 1993 to
September 1993.
James H. Lee.................. 50 8 Director. Member of the Executive Committee. Chairman of the Audit
Committee. Managing Partner, Lee, Hite & Wisda Ltd., a private
oil and gas consulting firm.
</TABLE>
S-45
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION,
POSITIONS WITH COMPANY
YEARS WITH AND BUSINESS EXPERIENCE
NAME AGE FOREST DURING LAST FIVE YEARS
- ------------------------------ --------- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
J. J. Simmons, III............ 74 2 Director. Member of the Audit Committee. President of The Simmons
Company, a consulting firm. 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............... 42 4 Director. Member of the Executive Committee and the Compensation
Committee. President of Anschutz Investment Company since August
1997. Vice President of Acquisitions and Investments of both The
Anschutz Corporation and Anschutz Company since 1995. Corporate
Secretary of The Anschutz Corporation and Anschutz Company from
1991 to 1996, and other positions with The Anschutz Corporation
and Anschutz Company from 1988 to 1995. Director of Qwest
Communications International Inc. since February 1997 and
Director of Qwest Communications Corporation since November
1996. Director of Internet Communications Corporation since
September 1996.
Michael B. Yanney............. 65 7 Director. Chairman of the Compensation Committee. Member of the
Nominating Committee. Chairman and Chief Executive Officer of
the America First Companies, L.L.C. Director of Burlington
Northern Santa Fe Corporation, Level 3 Communications, Inc. and
RCN Corporation.
</TABLE>
S-46
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus supplement, each underwriter named below has
severally agreed to purchase, and we have agreed to sell to such underwriter,
the number of shares set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Salomon Smith Barney Inc.............................................................................
Credit Suisse First Boston Corporation...............................................................
Goldman, Sachs & Co..................................................................................
Morgan Stanley & Co. Incorporated....................................................................
Banc of America Securities LLC.......................................................................
Petrie Parkman & Co., Inc............................................................................
----------
Total........................................................................................ 8,000,000
----------
----------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation, Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated,
Banc of America Securities LLC and Petrie Parkman & Co., Inc. are acting as
representatives, propose to offer some of the shares directly to the public at
the public offering price set forth on the cover page of this prospectus
supplement and some of the shares to certain dealers at the public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share on sales to certain other dealers. If all of the shares are not sold at
the initial offering price, the representatives may change the public offering
price and the other selling terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to 1,200,000 additional
shares of our common stock at the public offering price less the underwriting
discount. The underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with this offering. To the
extent such option is exercised, each underwriter will be obligated, subject to
certain conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
We, for a period of 90 days, and our officers and directors, for a period of
90 days, have agreed that from the date of this prospectus supplement, we and
they will not, without the prior written consent of Salomon Smith Barney Inc.,
dispose of or hedge any shares of our common stock or any securities convertible
into or exercisable or exchangeable for common stock. Salomon Smith Barney Inc.,
in its sole discretion, may release any of the securities subject to these
lock-up agreements at any time without notice.
The common stock is listed on the New York Stock Exchange under the symbol
"FST."
S-47
<PAGE>
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
over-allotment option to purchase additional shares of our common stock.
<TABLE>
<CAPTION>
PAID BY FOREST
-------------------------
FULL
NO EXERCISE EXERCISE
----------- ------------
<S> <C> <C>
Per share.............................................................................. $ $
Total.................................................................................. $ $
</TABLE>
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in this offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of common stock made for the purpose of preventing or retarding a
decline in the market price of our common stock while the offering is in
progress.
The underwriters may also impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or market
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of our common stock to be higher
than the price that would otherwise exist in the open market in the absence of
such transactions. These transactions may be effected on the New York Stock
Exchange or in the over-the-counter market, or otherwise and, if commenced, may
be discontinued at any time.
We estimate that our total expenses for this offering will be $750,000.
The representatives have performed certain investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. The representatives may, from time to time, engage in transactions
with and perform services for us in the ordinary course of their business.
Certain of the underwriters or their affiliates are lenders under our global
credit facility, which is expected to be repaid with the net proceeds from this
offering. See "Use of Proceeds."
Under Rule 2710(c)(8) of the Conduct Rules of the NASD, special
considerations apply to a public offering of an issuer's securities where more
than ten percent of the net proceeds thereof will be paid to members of the NASD
that are participating in the offering, or persons affiliated or associated with
such members. Certain of the underwriters or their respective affiliates have
loaned money to us under our global credit facility. In the event more than ten
percent of the proceeds of this offering will be used to repay such money loaned
by any underwriter or its affiliates, the offering will be conducted in
conformity with Rule 2710(c)(8).
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
S-48
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock being offered hereby and certain
other legal matters in connection with this offering are being passed upon for
Forest by Vinson & Elkins L.L.P., New York, New York. Certain legal matters
related to the shares of common stock will be passed upon for the Underwriters
by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Forest Oil Corporation as of
December 31, 1998 and 1997, and for each of the years in the three-year period
ended December 31, 1998, have been incorporated by reference and included herein
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference and
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The audited statement of oil and gas revenue and direct operating and
production expenses of Forest Oil Corporation's interest in certain oil and gas
producing properties for the year ended December 31, 1997, which appears in Form
8-K/A of Forest Oil Corporation dated February 3, 1998, incorporated by
reference in the base Prospectus, has been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and is incorporated by reference in the base Prospectus in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said report.
S-49
<PAGE>
GLOSSARY OF CERTAIN INDUSTRY TERMS
The definitions set forth below shall apply to the indicated terms as used
in this prospectus supplement. All volumes of natural gas referred to herein are
stated at the legal pressure base of the state or area where the reserves exist
and at 60 degrees Fahrenheit and in most instances are rounded to the nearest
major multiple.
BCF. One billion cubic feet of gas.
BCFE. One billion cubic feet of gas equivalent. Determined using the ratio
of one barrel of crude oil to six MCF of natural gas.
BBL. One stock tank barrel, or 42 U S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BBLS/D. One stock tank barrel or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons, per day.
BTU. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
EXPLORATORY WELL. A well drilled to find and produce oil or gas reserves
not classified as proved to find a new reservoir in a field previously found to
be productive of oil or gas in another reservoir or to extend a known reservoir.
GAAP. Generally accepted accounting principles.
GROSS ACRES or GROSS WELLS. The total acres or wells, as the case may be, in
which a working interest is owned.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons.
MCF. One thousand cubic feet of gas.
MCFE. One thousand cubic feet of gas equivalent. Determined using the ratio
of one barrel of crude oil to six MCF of natural gas.
MMBLS. One million barrels of crude oil or other liquid hydrocarbons.
MMBTU. One million British thermal units.
MMCF. One million cubic feet of gas.
MMCF/D. One million cubic feet of gas per day.
MMCFE. One million cubic feet of gas equivalent. Determined using the ratio
of one barrel of crude oil to six MCF of natural gas.
MMCFE/D. One million cubic feet of gas equivalent per day.
NET ACRES or net WELLS. The sum of the fractional working interests owned in
gross acres or gross wells.
S-50
<PAGE>
PRESENT VALUE. When used with respect to oil and gas reserves, present
value means the estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future
development costs, using prices and costs in effect as of the date of the report
or estimate, without giving effect to non-property related expenses such as
general and administrative expenses, debt service and future income tax expenses
or to depreciation, depletion and amortization, discounted using an annual
discount rate of 10%.
PRODUCTION PAYMENT. An obligation of the purchaser of a property to pay a
specified portion of gross revenues less related production taxes and
transportation costs of the purchased property interest to the seller of the
property.
PRODUCTIVE WELL. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
PROVED DEVELOPED RESERVES. Proved reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
PROVED RESERVES. 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.
TCF. One trillion cubic feet of gas.
UNDEVELOPED ACREAGE. Lease acreage or exploration license on which wells
have not been drilled or completed to a point that would permit the production
of commercial quantities of oil and gas regardless of whether such acreage
contains proved reserves.
WORKING INTEREST. The operating interest which 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 produced on 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.
S-51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 (Unaudited).............. F-2
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 1999 and 1998
(Unaudited)............................................................................................ F-3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998
(Unaudited)............................................................................................ F-4
Notes to Condensed Consolidated Financial Statements (Unaudited)......................................... F-5
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................. F-14
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................. F-15
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996............... F-16
Consolidated Statements of Shareholders' Equity.......................................................... F-17
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............... F-18
Notes to Consolidated Financial Statements............................................................... F-19
</TABLE>
F-1
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 2,413 3,415
Accounts receivable.................................................................. 53,754 55,587
Other current assets................................................................. 4,299 2,374
---------- ------------
Total current assets............................................................... 60,466 61,376
Net property and equipment, at cost.................................................... 666,480 663,310
Goodwill and other intangible assets, net.............................................. 22,617 22,689
Other assets........................................................................... 9,397 12,361
---------- ------------
$ 758,960 759,736
---------- ------------
---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 48,044 49,389
Accrued interest..................................................................... 9,240 9,970
Other current liabilities............................................................ 4,784 1,669
---------- ------------
Total current liabilities.......................................................... 62,068 61,028
Long-term debt......................................................................... 502,671 505,450
Other liabilities...................................................................... 14,375 16,181
Deferred income taxes.................................................................. 7,587 8,086
Shareholders' equity:
Common stock......................................................................... 4,465 4,465
Capital surplus...................................................................... 590,010 589,972
Accumulated deficit.................................................................. (410,557) (415,050)
Accumulated other comprehensive loss................................................. (11,210) (9,948)
Treasury stock, at cost.............................................................. (449) (448)
---------- ------------
Total shareholders' equity......................................................... 172,259 168,991
---------- ------------
$ 758,960 759,736
---------- ------------
---------- ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE>
FOREST OIL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenue:
Marketing and processing................................................................ $ 88,020 68,842
Oil and gas sales:
Gas................................................................................... 65,253 56,507
Oil, condensate and natural gas liquids............................................... 24,666 25,320
---------- ----------
Total oil and gas sales............................................................. 89,919 81,827
---------- ----------
Total revenue......................................................................... 177,939 150,669
Operating expenses:
Marketing and processing................................................................ 83,851 65,264
Oil and gas production.................................................................. 23,703 18,204
General and administrative.............................................................. 7,981 9,177
Depreciation and depletion.............................................................. 44,366 47,195
---------- ----------
Total operating expenses.............................................................. 159,901 139,840
---------- ----------
Earnings from operations.................................................................. 18,038 10,829
Other income and expense:
Other (income) expense, net............................................................. (97) (6,782)
Interest expense........................................................................ 21,064 18,261
Translation (gain) loss on subordinated debt............................................ (6,517) 3,162
---------- ----------
Total other income and expense........................................................ 14,450 14,641
---------- ----------
Earnings (loss) before income taxes and extraordinary item................................ 3,588 (3,812)
Income tax expense (benefit):
Current................................................................................. (81) 949
Deferred................................................................................ (824) 646
---------- ----------
(905) 1,595
---------- ----------
Earnings (loss) before extraordinary item................................................. 4,493 (5,407)
Extraordinary item--gain on extinguishment of debt........................................ -- 6,196
---------- ----------
Net earnings.............................................................................. $ 4,493 789
---------- ----------
---------- ----------
Weighted average number of common shares outstanding...................................... 44,651 37,350
---------- ----------
---------- ----------
Basic and diluted earnings (loss) per common share:
Earnings (loss) attributable to common stock before extraordinary item.................. $ .10 (.14)
Extraordinary item--gain on extinguishment of debt...................................... -- .16
---------- ----------
Earnings attributable to common stock................................................... $ .10 .02
---------- ----------
---------- ----------
</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,
------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) before extraordinary item......................................... $ 4,493 (5,407)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and depletion.......................................................... 44,366 47,195
Translation (gain) loss on subordinated debt........................................ (6,517) 3,162
Amortization of deferred debt costs................................................. 610 420
Deferred income tax expense (benefit)............................................... (824) 646
Other, net.......................................................................... (3,210) 232
Decrease in accounts receivable..................................................... 3,087 9,593
Increase in other current assets.................................................... (2,093) (5,513)
Increase (decrease) in accounts payable............................................. (381) 1,370
Increase in accrued interest and other current liabilities.......................... 291 5,381
----------- -----------
Net cash provided by operating activities......................................... 39,822 57,079
Cash flows from investing activities:
Capital expenditures for property and equipment....................................... (48,656) (389,422)
Less stock issued for acquisition..................................................... -- 81,784
----------- -----------
(48,656) (307,638)
Proceeds from sales of assets......................................................... 14,781 4,411
Increase in other assets, net......................................................... (976) (1,554)
----------- -----------
Net cash used by investing activities............................................. (34,851) (304,781)
Cash flows from financing activities:
Proceeds from bank borrowings......................................................... 66,151 380,504
Repayments of bank borrowings......................................................... (168,780) (211,652)
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................... -- 74,620
Redemption of 11 1/2% senior subordinated notes....................................... (45) --
Increase (decrease) in other liabilities, net......................................... (2,081) (552)
----------- -----------
Net cash provided (used) by financing activities.................................. (5,930) 242,920
Effect of exchange rate changes on cash................................................. (43) 19
----------- -----------
Net decrease in cash and cash equivalents............................................... (1,002) (4,763)
Cash and cash equivalents at beginning of period........................................ 3,415 18,191
----------- -----------
Cash and cash equivalents at end of period.............................................. $ 2,413 13,428
----------- -----------
----------- -----------
Cash paid during the period for:
Interest.............................................................................. $ 23,286 12,051
----------- -----------
----------- -----------
Income taxes.......................................................................... $ 470 1,312
----------- -----------
----------- -----------
</TABLE>
F-4
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 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 June 30, 1999 and the results of operations
for the six month periods ended June 30, 1999 and 1998. Interim 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>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net earnings............................................................... $ 4,493 789
Other comprehensive loss................................................... (1,262) (1,003)
--------- ---------
Total comprehensive earnings (loss)........................................ $ 3,231 (214)
--------- ---------
--------- ---------
</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 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
acquisition also included certain of Anschutz's international oil and gas assets
comprised of 13 international projects encompassing approximately 18 million net
acres of undeveloped land.
F-5
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(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 was 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 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 have been recorded as treasury stock at
June 30, 1999.
In October 1998 ownership of Saxon was transferred from Forest to its wholly
owned subsidiary, Canadian Forest Oil Ltd. In June 1999 Saxon was liquidated
into Canadian Forest.
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 June 30, 1999 and December 31, 1998 and
for the six month periods ended June 30,
F-6
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(3) SUBSIDIARIES (CONTINUED)
________________________________________________________________________________
1999 and 1998. These amounts include the effects of the transfer of the
Company's investment in Saxon to Canadian Forest effective October 1998.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
CANADIAN FOREST OIL LTD. 1999 1998
- --------------------------------------------------------------------------------------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C>
SUMMARIZED CONSOLIDATED BALANCE SHEET INFORMATION:
ASSETS
Current assets................................................................... $ 21,622 22,240
Net property and equipment....................................................... 143,186 132,081
Goodwill and other intangible assets, net........................................ 22,617 22,689
Investment in affiliate.......................................................... 18,477 95
Note receivable from parent...................................................... 8,887 42,266
Other assets..................................................................... 3,315 3,384
---------- ------------
$ 218,104 222,755
---------- ------------
---------- ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities.............................................................. $ 27,767 27,646
Long-term debt................................................................... 30,181 35,398
8 3/4% Senior Subordinated Notes................................................. 199,977 199,976
Other liabilities................................................................ 329 345
Deferred income taxes............................................................ 8,979 9,656
Shareholder's equity (deficit)................................................... (49,129) (50,266)
---------- ------------
$ 218,104 222,755
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
---------------------
1999 1998
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
SUMMARIZED CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION:
Revenue............................................................................... $ 102,051 78,179
---------- ---------
---------- ---------
Income (loss) before income taxes..................................................... $ 1,919 (5,815)
---------- ---------
---------- ---------
Net income (loss)..................................................................... $ 3,063 (5,529)
---------- ---------
---------- ---------
</TABLE>
F-7
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(4) NET PROPERTY AND EQUIPMENT
________________________________________________________________________________
Components of net property and equipment are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Oil and gas properties......................................................... $ 2,078,925 2,029,352
Buildings, transportation and other equipment.................................. 13,271 12,356
------------ ------------
2,092,196 2,041,708
Less accumulated depreciation, depletion and valuation allowance............... 1,425,716 1,378,398
------------ ------------
$ 666,480 663,310
------------ ------------
------------ ------------
</TABLE>
(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>
JUNE 30, DECEMBER 31,
1999 1998
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill............................................................. $ 15,562 14,980
Gas marketing contracts.............................................. 13,578 13,070
--------- ------
29,140 28,050
Less accumulated amortization........................................ (6,523) (5,361)
--------- ------
$ 22,617 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.
F-8
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(6) LONG-TERM DEBT
________________________________________________________________________________
Components of long-term debt are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Global Credit Facility:
U.S. borrowings.................................................. $ 165,000 261,400
Canadian borrowings.............................................. 30,181 10,456
Saxon Credit Facility.............................................. -- 24,942
8 3/4% Senior Subordinated Notes................................... 199,977 199,976
10 1/2% Senior Subordinated Notes.................................. 98,882 --
11 1/4% Senior Subordinated Notes.................................. 8,631 8,676
---------- ------------
$ 502,671 505,450
---------- ------------
---------- ------------
</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 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 six months of 1999, the Company reported a
translation gain of approximately $6,517,000 compared to a translation loss of
$3,162,000 in the first six months of 1998.
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, at 98.811% of par, of
$100,000,000 principal amount of 10 1/2% Senior Subordinated Notes due 2006.
F-9
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(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 stock options. 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>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999(1) 1998(2)
--------- ---------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Income (loss) before extraordinary item.................................. $ 4,493 (5,407)
Weighted average common shares outstanding during the period............. 44,651 37,350
Add dilutive effects of employee stock options......................... 96 --
--------- ---------
Weighted average common shares outstanding including the effects of
dilutive securities.................................................... 44,747 37,350
--------- ---------
--------- ---------
Basic earnings (loss) per share before extraordinary item................ $ .10 (.14)
--------- ---------
--------- ---------
Diluted earnings (loss) per share before extraordinary item.............. $ .10 (.14)
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) At June 30, 1999, options to purchase 1,758,000 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 because the
exercise prices of these options were greater than the average market price
of the common stock during the periods. These options expire at various
dates from 2003 through 2008.
(2) At June 30, 1998, options to purchase 1,915,000 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 because the
effect of the assumed exercise of these stock options was antidilutive.
These options expire at various dates from 2003 through 2007.
F-10
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 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>
OIL AND GAS OPERATIONS
--------------------------------------------------------------------
MARKETING
GULF COAST REGION AND
--------------------- WESTERN TOTAL PROCESSING
SIX MONTHS ENDED JUNE 30, 1999 OFFSHORE ONSHORE REGION U.S. CANADA TOTAL CANADA
- ------------------------------------- ---------- --------- --------- --------- ------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.............................. $ 39,838 17,880 13,931 71,649 18,464 90,113 87,826
Marketing and processing expense..... -- -- -- -- -- -- 83,851
Oil and gas production expense....... 6,894 8,595 2,593 18,082 5,621 23,703 --
General and administrative expense... 2,361 1,705 1,196 5,262 1,414 6,676 1,305
Depreciation and depletion expense... 22,650 8,174 4,335 35,159 7,730 42,889 945
---------- --------- --------- --------- ------------ --------- -----------
Earnings (loss) from operations...... $ 7,933 (594) 5,807 13,146 3,699 16,845 1,725
---------- --------- --------- --------- ------------ --------- -----------
---------- --------- --------- --------- ------------ --------- -----------
Capital expenditures................. $ 7,813 15,092 2,386 25,291 17,289 42,580 --
---------- --------- --------- --------- ------------ --------- -----------
---------- --------- --------- --------- ------------ --------- -----------
Property and equipment, net.......... $ 112,300 266,985 100,053 479,338 161,355 640,693 --
---------- --------- --------- --------- ------------ --------- -----------
---------- --------- --------- --------- ------------ --------- -----------
<CAPTION>
TOTAL
SIX MONTHS ENDED JUNE 30, 1999 COMPANY
- ------------------------------------- -----------
<S> <C>
Revenue.............................. 177,939
Marketing and processing expense..... 83,851
Oil and gas production expense....... 23,703
General and administrative expense... 7,981
Depreciation and depletion expense... 43,834
-----------
Earnings (loss) from operations...... 18,570
-----------
-----------
Capital expenditures................. 42,580
-----------
-----------
Property and equipment, net.......... 640,693
-----------
-----------
</TABLE>
F-11
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(8) BUSINESS AND GEOGRAPHICAL SEGMENTS (CONTINUED)
________________________________________________________________________________
Information for Forest's reportable segments relates to the Company's
consolidated totals for the six months ended June 30, 1999 as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
EARNINGS BEFORE INCOME TAXES:
Earnings from operations for reportable segments.............................. $ 18,570
Administrative asset depreciation............................................. (532)
Other income, net............................................................. 97
Interest expense.............................................................. (21,064)
Translation gain on subordinated debt......................................... 6,517
--------------
Earnings before income taxes.................................................. $ 3,588
--------------
--------------
CAPITAL EXPENDITURES:
Reportable segments........................................................... $ 42,580
International interests....................................................... 4,771
Administrative assets and other............................................... 1,305
--------------
Total capital expenditures.................................................... $ 48,656
--------------
--------------
PROPERTY AND EQUIPMENT, NET:
Reportable segments........................................................... $ 640,693
International interests....................................................... 19,175
Administrative assets, net and other.......................................... 6,612
--------------
Total property and equipment, net............................................. $ 666,480
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
OIL AND GAS OPERATIONS
-----------------------------------------------------------------
MARKETING
GULF COAST REGION AND
--------------------- WESTERN TOTAL PROCESSING TOTAL
SIX MONTHS ENDED JUNE 30, 1998 OFFSHORE ONSHORE REGION U.S. CANADA TOTAL CANADA COMPANY
- --------------------------------------- ---------- --------- --------- --------- --------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................................ $ 34,778 20,069 6,353 61,200 20,904 82,104 68,565 150,669
Marketing and processing
expense.............................. -- -- -- -- -- -- 65,264 65,264
Oil and gas production expense......... 6,196 4,364 1,889 12,449 5,755 18,204 -- 18,204
General and administrative expense..... 2,217 2,172 689 5,078 2,658 7,736 1,441 9,177
Depreciation and depletion expense..... 23,128 9,279 1,334 33,741 11,831 45,572 975 46,547
---------- --------- --------- --------- --------- --------- ----------- -----------
Earnings from
operations........................... $ 3,237 4,254 2,441 9,932 660 10,592 885 11,477
---------- --------- --------- --------- --------- --------- ----------- -----------
---------- --------- --------- --------- --------- --------- ----------- -----------
Capital expenditures................... $ 37,022 251,621 72,692 361,335 27,403 388,738 (10) 388,728
---------- --------- --------- --------- --------- --------- ----------- -----------
---------- --------- --------- --------- --------- --------- ----------- -----------
Property and equipment, net............ $ 180,307 320,218 142,265 642,790 201,883 844,673 5,014 849,687
---------- --------- --------- --------- --------- --------- ----------- -----------
---------- --------- --------- --------- --------- --------- ----------- -----------
</TABLE>
F-12
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(8) BUSINESS AND GEOGRAPHICAL SEGMENTS (CONTINUED)
________________________________________________________________________________
Information for Forest's reportable segments relates to the Company's
consolidated totals for the six months ended June 30, 1998 as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
LOSS BEFORE INCOME TAXES:
Earnings from operations for reportable segments.............................. $ 11,477
Administrative asset depreciation............................................. (648)
Other income, net............................................................. 6,782
Interest expense.............................................................. (18,261)
Translation gain on subordinated debt......................................... (3,162)
--------------
Loss before income taxes...................................................... $ (3,812)
--------------
--------------
CAPITAL EXPENDITURES:
Reportable segments........................................................... $ 388,728
Administrative assets and other............................................... 694
--------------
Total capital expenditures.................................................... $ 389,422
--------------
--------------
PROPERTY AND EQUIPMENT, NET:
Reportable segments........................................................... $ 849,687
Administrative assets, net and other.......................................... 5,276
--------------
Total property and equipment, net............................................. $ 854,963
--------------
--------------
</TABLE>
F-13
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
February 8, 1999
F-14
<PAGE>
FOREST OIL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 3,415 18,191
Accounts receivable..................................................................... 55,587 65,720
Other current assets.................................................................... 2,374 4,649
---------- ----------
Total current assets................................................................ 61,376 88,560
Net property and equipment, at cost, full cost method (Notes 4 and 5)..................... 663,310 521,293
Goodwill and other intangible assets, net................................................. 22,689 26,243
Other assets.............................................................................. 12,361 11,686
---------- ----------
$ 759,736 647,782
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 49,389 59,719
Accrued interest........................................................................ 9,970 4,152
Other current liabilities............................................................... 1,669 2,627
---------- ----------
Total current liabilities........................................................... 61,028 66,498
Long-term debt (Notes 2, 3 and 4)......................................................... 505,450 254,760
Other liabilities......................................................................... 16,181 17,020
Deferred income taxes (Note 6)............................................................ 8,086 34,767
Minority interest (Note 2)................................................................ -- 12,910
Shareholders' equity (Notes 2, 3, 4, 7 and 8):
Common stock, 44,647,297 shares (36,320,236 shares in 1997)............................. 4,465 3,632
Capital surplus......................................................................... 589,972 488,908
Accumulated deficit..................................................................... (415,050) (223,460)
Accumulated other comprehensive loss.................................................... (9,948) (7,253)
Treasury stock, at cost, 9,922 shares................................................... (448) --
---------- ----------
Total shareholders' equity.......................................................... 168,991 261,827
---------- ----------
$ 759,736 647,782
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-15
<PAGE>
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUE:
Marketing and processing.......................................... $ 151,079 184,399 187,374
Oil and gas sales:
Gas............................................................. 121,615 100,993 80,111
Oil, condensate and natural gas liquids......................... 49,125 54,249 48,602
------------- ------------- -------------
Total oil and gas sales....................................... 170,740 155,242 128,713
------------- ------------- -------------
Total revenue................................................... 321,819 339,641 316,087
Operating expenses:
Marketing and processing.......................................... 144,758 175,847 178,706
Oil and gas production............................................ 41,983 36,284 32,199
General and administrative........................................ 19,849 16,864 13,623
Depreciation and depletion........................................ 100,105 79,991 63,068
Impairment of oil and gas properties.............................. 199,500 -- --
------------- ------------- -------------
Total operating expenses...................................... 506,195 308,986 287,596
------------- ------------- -------------
Earnings (loss) from operations..................................... (184,376) 30,655 28,491
Other income and expense:
Other income, net................................................. (7,561) (1,289) (1,387)
Interest expense.................................................. 38,986 21,403 23,307
Minority interest in earnings (loss) of subsidiary................ (517) 108 (19)
Translation loss on subordinated debt............................. 8,320 4,051 --
------------- ------------- -------------
Total other income and expense................................ 39,228 24,273 21,901
------------- ------------- -------------
Earnings (loss) before income taxes and extraordinary item.......... (223,604) 6,382 6,590
Income tax expense (benefit) (Note 6):
Current........................................................... 1,272 707 3,943
Deferred.......................................................... (27,090) 2,586 1,508
------------- ------------- -------------
(25,818) 3,293 5,451
------------- ------------- -------------
Earnings (loss) before extraordinary item........................... (197,786) 3,089 1,139
Extraordinary item--gain (loss) on extinguishment of debt
(Notes 3 and 4)................................................... 6,196 (12,359) 2,166
------------- ------------- -------------
Net earnings (loss)................................................. $ (191,590) (9,270) 3,305
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) attributable to common stock........................ $ (191,590) (9,459) 1,147
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common shares outstanding................ 40,910 33,669 25,062
------------- ------------- -------------
------------- ------------- -------------
Basic earnings (loss) per common share:
Earnings (loss) attributable to common stock before extraordinary
item............................................................ $ (4.83) .09 (.04)
Extraordinary item--gain (loss) on extinguishment of debt......... .15 (.37) .09
------------- ------------- -------------
Earnings (loss) attributable to common stock...................... $ (4.68) (.28) .05
------------- ------------- -------------
------------- ------------- -------------
Diluted earnings (loss) per common share:
Earnings (loss) attributable to common stock before extraordinary
item............................................................ $ (4.83) .08 (.04)
Extraordinary item--gain (loss) on extinguishment of debt......... .15 (.35) .09
------------- ------------- -------------
Earnings (loss) attributable to common stock...................... $ (4.68) (.27) .05
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-16
<PAGE>
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ACCUMULATED
SHARES TO BE ACCUMU- OTHER
PREFERRED COMMON CAPITAL ISSUED IN DEBT LATED COMPREHENSIVE
STOCK STOCK SURPLUS RESTRUCTURING DEFICIT INCOME LOSS
----------- ----------- ----------- --------------- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995.................. $ 24,359 1,066 245,545 6,073 (217,495) (5,711)
Net earnings............................. -- -- -- -- 3,305 --
Common Stock issued, net of offering
costs and minority interest effect of
$706,000 (Note 8)...................... -- 1,214 124,613 -- -- --
Common Stock issued in JEDI Exchange
(Note 3)............................... -- 168 5,905 (6,073) -- --
Anschutz Option exercised (Notes 3 and
8)..................................... -- 225 25,962 -- -- --
Anschutz A Warrant exercised (Notes 3 and
8)..................................... -- 39 4,044 -- -- --
Common Stock issued to JEDI (Note 3)..... -- 200 26,736 -- -- --
Public Warrants exercised (Note 8)....... -- 2 334 -- -- --
Conversion of Second Series Preferred
Stock to Common Stock (Note 7)......... (8,518) 124 8,394 -- -- --
Employee stock options exercised (Note
8)..................................... -- 3 398 -- -- --
Common Stock issued to the Retirement
Savings Plan and other (Note 9)........ -- 3 398 -- -- --
$.75 Convertible Preferred Stock
dividends paid in cash (Note 7)........ -- -- (1,619) -- -- --
$.75 Convertible Preferred Stock
dividends paid in Common Stock (Note
7)..................................... -- 9 (9) -- -- --
Conversion of $.75 Convertible Preferred
Stock to Common Stock (Note 7)......... (14) -- 14 -- -- --
Unfunded pension liability (Note 9)...... -- -- -- -- -- 2,145
Foreign currency translation............. -- -- -- -- -- 604
----------- ----- ----------- ------ ----------- ---------------
Balance December 31, 1996.................. 15,827 3,053 440,715 -- (214,190) (2,962)
Net loss................................. -- -- -- -- (9,270) --
Anschutz A Warrant exercised (Notes 3 and
8)..................................... -- 350 29,750 -- -- --
$.75 Convertible Preferred Stock
Redemption (Note 7).................... (15,827) 202 14,825 -- -- --
Common Stock issued to subsidiary (Note
8)..................................... -- 20 2,797 -- -- --
Common Stock sold by subsidiary (Note
8)..................................... -- -- -- -- -- --
Employee options exercised (Note 8)...... -- 5 607 -- -- --
Restricted stock bonus awards (Note 8)... -- 2 214 -- -- --
Unfunded pension liability (Note 9)...... -- -- -- -- -- (1,063)
Foreign currency translation............. -- -- -- -- -- (3,228)
----------- ----- ----------- ------ ----------- ---------------
Balance December 31, 1997.................. -- 3,632 488,908 -- (223,460) (7,253)
Net loss................................. -- -- -- -- (191,590) --
Common Stock issued in the Louisiana
Acquisition (Notes 2 and 8)............ -- 100 14,119 -- -- --
Common Stock issued in the Anschutz
Acquisition (Notes 2 and 8)............ -- 595 66,970 -- -- --
Common Stock issued to minority
shareholders of Saxon (Notes 2 and
8)..................................... -- 109 15,920 -- -- --
Common Stock issued for settlement of
production payment obligation (Notes 4
and 8)................................. -- 27 3,723 -- -- --
Common Stock issued for director
compensation........................... -- 1 107 -- -- --
Restricted stock bonus awards (Note 8)... -- 1 225 -- -- --
Unfunded pension liability (Note 9)...... -- -- -- -- -- (804)
Foreign currency translation............. -- -- -- -- -- (1,891)
----------- ----- ----------- ------ ----------- ---------------
Balance December 31, 1998.................. $ -- 4,465 589,972 -- (415,050) (9,948)
----------- ----- ----------- ------ ----------- ---------------
----------- ----- ----------- ------ ----------- ---------------
<CAPTION>
TREASURY
STOCK
-----------
<S> <C>
Balance December 31, 1995.................. (9,540)
Net earnings............................. --
Common Stock issued, net of offering
costs and minority interest effect of
$706,000 (Note 8)...................... 9,540
Common Stock issued in JEDI Exchange
(Note 3)............................... --
Anschutz Option exercised (Notes 3 and
8)..................................... --
Anschutz A Warrant exercised (Notes 3 and
8)..................................... --
Common Stock issued to JEDI (Note 3)..... --
Public Warrants exercised (Note 8)....... --
Conversion of Second Series Preferred
Stock to Common Stock (Note 7)......... --
Employee stock options exercised (Note
8)..................................... --
Common Stock issued to the Retirement
Savings Plan and other (Note 9)........ --
$.75 Convertible Preferred Stock
dividends paid in cash (Note 7)........ --
$.75 Convertible Preferred Stock
dividends paid in Common Stock (Note
7)..................................... --
Conversion of $.75 Convertible Preferred
Stock to Common Stock (Note 7)......... --
Unfunded pension liability (Note 9)...... --
Foreign currency translation............. --
-----------
Balance December 31, 1996.................. --
Net loss................................. --
Anschutz A Warrant exercised (Notes 3 and
8)..................................... --
$.75 Convertible Preferred Stock
Redemption (Note 7).................... --
Common Stock issued to subsidiary (Note
8)..................................... (2,817)
Common Stock sold by subsidiary (Note
8)..................................... 2,817
Employee options exercised (Note 8)...... --
Restricted stock bonus awards (Note 8)... --
Unfunded pension liability (Note 9)...... --
Foreign currency translation............. --
-----------
Balance December 31, 1997.................. --
Net loss................................. --
Common Stock issued in the Louisiana
Acquisition (Notes 2 and 8)............ --
Common Stock issued in the Anschutz
Acquisition (Notes 2 and 8)............ --
Common Stock issued to minority
shareholders of Saxon (Notes 2 and
8)..................................... (448)
Common Stock issued for settlement of
production payment obligation (Notes 4
and 8)................................. --
Common Stock issued for director
compensation........................... --
Restricted stock bonus awards (Note 8)... --
Unfunded pension liability (Note 9)...... --
Foreign currency translation............. --
-----------
Balance December 31, 1998.................. (448)
-----------
-----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-17
<PAGE>
FOREST OIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) before preferred dividends and extraordinary item......... $ (197,786) 3,089 1,139
Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities:
Depreciation and depletion.................................................. 100,105 79,991 63,068
Impairment of oil and gas properties........................................ 199,500 -- --
Amortization of deferred debt costs......................................... 902 942 1,253
Interest added to principal................................................. -- -- 3,059
Minority interest in earnings (loss) of subsidiary.......................... (517) 108 (19)
Translation loss on subordinated debt....................................... 8,320 4,051 --
Deferred income tax expense (benefit)....................................... (27,090) 2,586 1,508
Other, net.................................................................. (181) 619 792
(Increase) decrease in accounts receivable.................................. 8,539 (5,954) (17,441)
(Increase) decrease in other current assets................................. 1,663 (5,168) (921)
Increase (decrease) in accounts payable..................................... (13,809) (1,403) 22,044
Increase (decrease) in accrued interest and other current liabilities....... 9,798 (9,970) 3,506
Settlement of volumetric production payment obligation...................... -- (6,832) --
Amortization of deferred revenue............................................ -- (1,524) (7,546)
---------- ---------- ----------
Net cash provided by operating activities................................. 89,444 60,535 70,442
Cash flows from investing activities:
Acquisition of subsidiaries:
Capital expenditures for property and equipment............................. (471,754) (156,799) (108,332)
Less stock issued for acquisition........................................... 97,376 -- --
---------- ---------- ----------
(374,378) (156,799) (108,332)
Cash paid for acquisition of subsidiary..................................... -- -- (136,352)
Proceeds from sales of assets............................................... 10,302 9,669 17,875
Investment in subsidiaries.................................................. -- (3,489) --
Increase in other assets, net............................................... (1,218) (1,019) (61)
---------- ---------- ----------
Net cash used by investing activities..................................... (365,294) (151,638) (226,870)
Cash flows from financing activities:
Proceeds from bank borrowings............................................... 464,088 279,068 194,018
Repayments of bank borrowings............................................... (276,468) (226,009) (176,641)
Repayments of production payment obligation................................. (58) (2,592) (3,622)
Issuance of 8 1/4% senior subordinated notes, net of issuance costs......... 74,589 121,479 --
Redemption of 11 1/4% senior subordinated notes............................. -- (100,303) --
Repayments of nonrecourse secured loan...................................... -- -- (13,881)
Proceeds from capital stock and warrants issued, net........................ -- 2,817 136,073
Proceeds from exercise of options and warrants.............................. -- 32,461 31,945
Costs of preferred stock conversion......................................... -- (800) --
Payment of preferred stock dividends........................................ -- (540) (1,079)
Decrease in other liabilities, net.......................................... (1,197) (4,348) (4,937)
---------- ---------- ----------
Net cash provided by financing activities................................. 260,954 101,233 161,876
Effect of exchange rate changes on cash......................................... 120 (565) (109)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents............................ (14,776) 9,565 5,339
Cash and cash equivalents at beginning of year.................................. 18,191 8,626 3,287
---------- ---------- ----------
Cash and cash equivalents at end of year........................................ $ 3,415 18,191 8,626
---------- ---------- ----------
---------- ---------- ----------
Cash paid during the year for:
Interest...................................................................... $ 35,534 20,999 15,040
Income taxes.................................................................. $ 1,172 4,105 3,428
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-18
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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 1998, 1997 and 1996, the Company's oil
and gas operations were conducted in the United States and in Canada. 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, 1998, 1997 and 1996, there were undeveloped property costs of
$58,609,000, $41,226,000 and $30,046,000, respectively, which were not being
depleted in the United States and $26,443,000, $19,675,000 and $13,870,000,
respectively, which were not being depleted in Canada. Of the undeveloped costs
in the United States not being depleted at December 31, 1998, approximately 43%
were incurred in 1998, 20% in 1997, 14% in 1996, 1% in 1994, 21% in 1993 and 1%
in 1992. Of the undeveloped costs in Canada not being depleted at December 31,
1998, 22% were incurred in 1998, 36% in 1997 and 42% in 1996.
During 1998, the Company acquired interests in 13 international projects. Costs
of approximately $14,435,000 related to these international interests are not
being depleted pending determination of the existence of proved reserves.
F-19
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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>
1998..................................................... $ 1.20 .85
1997..................................................... 1.24 .93
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 using current prices and a discount
factor of 10%; 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
included a provision for impairment of oil and gas property costs in 1998 of
$139,500,000 in the United States and $35,500,000 ($60,000,000 pre-tax) in
Canada. There were no provisions for impairment of oil and gas properties in
1997 or 1996.
Gain or loss is not recognized on the sale of oil and gas properties unless the
sale significantly alters the relationship between capitalized costs and proved
oil and gas reserves attributable to a cost center.
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>
1998 1997
------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Oil and gas properties........................................ $ 2,029,352 1,594,443
Buildings, transportation and other equipment................. 12,356 11,157
------------- -----------
2,041,708 1,605,600
Less accumulated depreciation, depletion and valuation
allowance................................................... (1,378,398) (1,084,307)
------------- -----------
$ 663,310 521,293
------------- -----------
------------- -----------
</TABLE>
F-20
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
________________________________________________________________________________
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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.............................................................. $ 14,980 16,029
Gas marketing contracts............................................... 13,070 13,986
--------- ---------
28,050 30,015
Less accumulated amortization......................................... (5,361) (3,772)
--------- ---------
$ 22,689 26,243
--------- ---------
--------- ---------
</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.
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 accounts for oil and gas sales using the
entitlements method. 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. The Company records a
receivable or payable to the extent it receives less or more than its
proportionate share of the related revenue. As of December 31, 1998 the Company
had produced approximately 444,000 MMCF more than its entitled share of
production. The estimated value of this imbalance of approximately $1,229,000 is
included in the accompanying consolidated balance sheet as a long-term
liability.
No single customer accounted for more than 10% of total revenue in 1998, 1997 or
1996.
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. In the event
that an instrument does not meet the designation or effectiveness criteria, any
gain or loss on the instrument is recognized immediately in earnings. Otherwise,
gains and losses related to hedging transactions are recognized as adjustments
to the revenue recorded for the related production. If an instrument is settled
early, any gains or losses are deferred and recognized as adjustments to the
revenue recorded for the related production. Costs associated with the purchase
of certain hedging instruments are also deferred and amortized against revenue
related to the hedged production.
F-21
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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 in accumulated other comprehensive loss. Income statement
accounts are translated at the average rates during the period. The Company is
also required to recognize foreign currency translation gains or losses related
to its 8 3/4% Senior Subordinated Notes due 2007 (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 decline in the value of the
Canadian dollar relative to the U.S. dollar, the Company reported noncash
translation losses of approximately $8,320,000 and $4,051,000 for the years
ended December 31, 1998 and 1997, respectively.
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. Net earnings (loss) attributable to common stock represents net
earnings (loss) less preferred stock dividends of $189,000 in 1997 and
$2,158,000 in 1996.
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
for income before extraordinary items for the years ended December 31:
<TABLE>
<CAPTION>
1998(1) 1997(2) 1996(3)
------------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Income (loss) before extraordinary item............................. $ (197,786) 3,089 1,139
Less: Preferred stock dividends................................... -- (189) (2,158)
------------- ------ ------
Income (loss) before extraordinary item available to common
stockholders...................................................... $ (197,786) 2,900 (1,019)
------------- ------ ------
------------- ------ ------
Weighted average common shares outstanding during the period........ 40,910 33,669 25,062
Add dilutive effects of:
$.75 Convertible preferred stock................................ -- 326 --
Employee options................................................ -- 229 --
Anschutz warrants............................................... -- 737 --
------------- ------ ------
Weighted average common shares outstanding during the period
including the effects of dilutive securities...................... 40,910 34,961 25,062
------------- ------ ------
------------- ------ ------
Basic earnings (loss) per share before extraordinary item........... $ (4.83) 0.09 (0.04)
------------- ------ ------
------------- ------ ------
Diluted earnings (loss) per share before extraordinary item......... $ (4.83) 0.08 (0.04)
------------- ------ ------
------------- ------ ------
</TABLE>
F-22
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
________________________________________________________________________________
(1) At December 31, 1998, options to purchase 1,875,360 shares of common stock
at prices ranging from $8.38 to $25.00 per share were outstanding, but were
not included in the computation of diluted loss per share for the year ended
December 31, 1998. The effect of the assumed exercises of these options was
antidilutive. These options expire at various dates from 2002 to 2008.
(2) At December 31, 1997, options to purchase 473,000 shares of common stock at
prices ranging from $16.50 to $25.00 per share were outstanding, but were
not included in the computation of diluted loss per share for the year ended
December 31, 1997. 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 to 2007.
(3) At December 31, 1996, options to purchase 1,461,580 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 loss per share for the year ended
December 31, 1996. The effect of the assumed exercises of these options was
antidilutive. These options expire at various dates from 2002 to 2006.
COMPREHENSIVE INCOME (LOSS)--In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (Statement No. 130), effective for years beginning after
December 15, 1997. Statement No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company adopted Statement No. 130
effective January 1, 1998 and, accordingly, has reported accumulated other
comprehensive loss as a separate line item in the shareholders' equity section
of its consolidated balance sheets at December 31, 1998 and 1997. 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>
ACCUMULATED
FOREIGN UNFUNDED OTHER NET TOTAL
CURRENCY PENSION COMPREHENSIVE EARNINGS COMPREHENSIVE
TRANSLATION LIABILITY INCOME (LOSS) (LOSS) INCOME (LOSS)
----------- ----------- --------------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995................. $ (1,407) (4,304) (5,711) (217,495) (223,206)
1996 activity................................ 604 2,145 2,749 3,305 6,054
----------- ----------- ------ ---------- --------------
Balance at December 31, 1996................. (803) (2,159) (2,962) (214,190) (217,152)
1997 activity................................ (3,228) (1,063) (4,291) (9,270) (13,561)
----------- ----------- ------ ---------- --------------
Balance at December 31, 1997................. (4,031) (3,222) (7,253) (223,460) (230,713)
1998 activity................................ (1,891) (804) (2,695) (191,590) (194,285)
----------- ----------- ------ ---------- --------------
Balance at December 31, 1998................. $ (5,922) (4,026) (9,948) (415,050) (424,998)
----------- ----------- ------ ---------- --------------
----------- ----------- ------ ---------- --------------
</TABLE>
RECLASSIFICATIONS--Certain amounts in prior years' financial statements have
been reclassified to conform to the 1998 financial statement presentation.
F-23
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(2) ACQUISITIONS:
________________________________________________________________________________
SAXON PETROLEUM INC.:
During 1995, the Company acquired a 56% economic (49% voting) interest in Saxon
Petroleum Inc. (Saxon) for approximately $22,000,000. In the transaction, Forest
received from Saxon 40,800,000 voting common shares, 12,300,000 nonvoting common
shares which are convertible to voting 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 a Canadian investment valued at
$11,301,000, issued to Saxon 1,060,000 common shares of Forest and paid Saxon
$1,500,000 CDN. 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 had majority voting control over Saxon as a result of the voting
common shares that it owned and proxies that it held, it accounted for Saxon as
a consolidated subsidiary from the date of its acquisition.
In January 1996, Saxon sold its Forest common shares in a public offering of
Forest Common Stock. In September 1996, the Canadian investment transferred to
Saxon was redeemed for cash at its approximate carrying value.
On January 21, 1997 Forest converted its preferred shares of Saxon into
27,192,983 nonvoting common shares. Through December 31, 1997, pursuant to an
equity participation agreement, Forest also acquired 5,569,542 voting common
shares and 2,380,608 nonvoting common shares of Saxon in exchange for 196,856
common shares of Forest. Such shares were subsequently sold by Saxon. Also in
1997, Forest's wholly-owned subsidiary Canadian Forest acquired 993,600 voting
common shares of Saxon in exchange for approximately $497,000 CDN. These
transactions increased Forest's economic interest in Saxon to 65%.
In August 1998, the Company acquired all of the outstanding common shares of
Saxon Petroleum Inc. 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 December 31, 1998.
In October 1998, ownership of Saxon was transferred from Forest to its wholly
owned subsidiary Canadian Forest Oil Ltd.
CANADIAN FOREST OIL LTD.:
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). 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 4). 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 December 31, 1998 and 1997 and for the
years ended December 31, 1998, 1997 and
F-24
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(2) ACQUISITIONS: (CONTINUED)
________________________________________________________________________________
1996. These amounts include the effects of the transfer of the Company's
investment in Saxon to Canadian Forest effective in October 1998.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
SUMMARIZED CONSOLIDATED BALANCE SHEET INFORMATION:
ASSETS
Current assets................................................................... $ 22,240 35,630
Net property and equipment....................................................... 132,081 117,394
Goodwill and other intangible assets, net........................................ 22,689 26,243
Investment in affiliate.......................................................... 95 --
Note receivable from parent...................................................... 42,266 --
Other assets..................................................................... 3,384 3,320
------------ ------------
$ 222,755 182,587
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities.............................................................. $ 27,646 24,029
Long-term debt................................................................... 35,398 --
8 3/4% Senior Subordinated Notes................................................. 199,976 124,690
Other liabilities................................................................ 345 396
Deferred income taxes............................................................ 9,656 36,282
Shareholder's equity (deficit)................................................... (50,266) (2,810)
------------ ------------
$ 222,755 182,587
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
SUMMARIZED CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION:
Revenue....................................................................... $ 172,368 214,045 224,757
---------- --------- ---------
---------- --------- ---------
Income (loss) before income taxes............................................. $ (69,062) (3,321) 9,685
---------- --------- ---------
---------- --------- ---------
Net income (loss)............................................................. $ (47,840) (4,952) 4,739
---------- --------- ---------
---------- --------- ---------
</TABLE>
LOUISIANA ACQUISITION:
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 from the issuance of
$75,000,000 principal amount of 8 3/4% Notes and 1,000,000 shares of the
Company's Common Stock.
F-25
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(2) ACQUISITIONS: (CONTINUED)
________________________________________________________________________________
ANSCHUTZ ACQUISITION:
In June 1998, Forest issued 5,950,000 shares of common stock to Anschutz 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. The acquisition 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) ANSCHUTZ AND JEDI TRANSACTIONS:
________________________________________________________________________________
Beginning in 1995, the Company consummated certain 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, in 1995
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
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 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 Forest Common Stock for five years.
Also in 1995, in connection with a restructuring of a loan payable to JEDI, JEDI
received a warrant that entitled it to purchase 2,250,000 shares of the
Company's Common Stock for $10.00 per share. In addition, JEDI granted an option
to Anschutz, pursuant to which Anschutz was entitled to purchase from JEDI up to
2,250,000 shares of the Company's Common Stock for $10.00 per share plus
interest from the date of grant. The Company also agreed to use proceeds from
the exercise of the original Anschutz warrant to pay principal and interest on a
portion of the JEDI loan.
In December 1995, JEDI exchanged a portion of the loan and the warrant it held
for 1,680,000 shares of Common Stock. The Company also assumed JEDI's obligation
to sell 2,250,000 shares to Anschutz.
On August 1, 1996, The Anschutz Corporation exercised its 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 the remaining balance of the
nonrecourse secured debt then 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. 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
F-26
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(3) ANSCHUTZ AND JEDI TRANSACTIONS: (CONTINUED)
________________________________________________________________________________
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.
On August 28, 1997 Anschutz acquired 3,500,000 shares of Common Stock through
the exercise of its remaining warrants for $8.60 per share resulting in cash
proceeds to Forest of $30,100,000. The original exercise price was $10.50 per
share. The reduction in the exercise price offered to Anschutz reflected an
approximate 10% present value discount computed to the warrants' expiration date
of July 27, 1999.
(4) LONG-TERM DEBT:
________________________________________________________________________________
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Global Credit facility:
U.S. borrowings...................................................... $ 261,400 85,550
Canadian borrowings.................................................. 10,456 --
Saxon Credit Facility.................................................. 24,942 25,840
Production payment obligation.......................................... -- 10,004
11 1/4% Senior Subordinated Notes...................................... 8,676 8,676
8 3/4% Senior Subordinated Notes....................................... 199,976 124,690
---------- ---------
Long-term debt......................................................... $ 505,450 254,760
---------- ---------
---------- ---------
</TABLE>
U.S. AND CANADIAN FOREST CREDIT FACILITIES: At December 31, 1998 the Company,
Canadian Forest and ProMark had a $300,000,000 global credit facility (the
Global Credit Facility) which provided for a global borrowing base of
$300,000,000 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 were $275,000,000 and $25,000,000, respectively.
The borrowing base was reduced to $250,000,000 following the issuance of
$100,000,000 principal amount of 10 1/2% Senior Subordinated Notes due 2006 (the
10 1/2% Notes) in February 1999. 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,
the Company, 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, cash dividends
and reporting responsibilities.
The Global Credit Facility is secured by a lien on, and a security interest in,
a portion of the Company's 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.
At December 31, 1998 the outstanding U.S. balance under the Global Credit
Facility was $261,400,000 and $10,456,000 in Canada with a weighted average
interest rate of 7.1% per annum. The Company had also
F-27
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(4) LONG-TERM DEBT: (CONTINUED)
________________________________________________________________________________
used the Global Credit Facility for Letters of Credit in the amount of $233,000
in the U.S. and $3,830,000 CDN in Canada. Proceeds of the 10 1/2% Notes were
used to pay down a portion of the U.S. balance under the Global Credit Facility
in February 1999.
SAXON CREDIT FACILITY:
Saxon, a wholly owned subsidiary of Canadian Forest, had a credit facility with
a borrowing base of $38,100,000 CDN at December 31, 1998, of which $37,264,000
CDN was drawn as of that date.
PRODUCTION PAYMENT OBLIGATION:
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 at the time
of the settlement. 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 1998.
11 1/4% SENIOR SUBORDINATED NOTES:
The Company issued $100,000,000 aggregate principal amount of 11 1/4% Senior
Subordinated Notes due September 1, 2003 (the 11 1/4% Notes) in September 1993.
In September 1997, pursuant to a tender offer, $90,233,000 of the outstanding
aggregate principal amount was tendered by the holders. The purchase price for
each $1,000 principal amount of 11 1/4% Notes validly tendered and accepted was
$1,096.96. In October 1997, an additional $1,091,000 aggregate principal amount
of 11 1/4% Notes was tendered at a purchase price of $1,090.00 for each $1,000
principal amount. As a result of these purchases, Forest recorded an
extraordinary loss of approximately $12,359,000 relating to the excess of the
tender price over the carrying amount of the 11 1/4% Notes, net of related
unamortized debt issuance costs and original issue discount. The 11 1/4% Notes
are callable at decreasing premium amounts. The call price is currently 105.688%
of principal amount, decreasing in annual increments to 100% in September 2001.
8 3/4% SENIOR SUBORDINATED NOTES:
In September 1997 Canadian Forest completed an offering of $125,000,000 of
8 3/4% Senior Subordinated Notes due 2007 (the 8 3/4% Notes), which were sold at
99.745% of par and guaranteed on a senior subordinated basis by the Company. A
portion of the proceeds was used to fund the tender offer for the 11 1/4% Notes
described above.
In February 1998 Canadian Forest issued $75,000,000 principal amount of 8 3/4%
Notes, an add-on to the September 1997 offering.
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 decline in the value of the Canadian dollar relative to the
U.S. dollar during 1998 and 1997, the Company reported noncash translation
losses of approximately $8,320,000 and $4,051,000, respectively, in those years.
F-28
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(4) LONG-TERM DEBT: (CONTINUED)
________________________________________________________________________________
10 1/2% SENIOR SUBORDINATED NOTES:
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.
(5) DEFERRED REVENUE:
________________________________________________________________________________
From 1991 to 1994, the Company sold volumetric production payments to Enron to
fund capital expenditures and property acquisitions. In June 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 advances under the Company's Credit Facility.
Amounts received under the production payments were recorded as deferred
revenue. Volumes associated with amortization of deferred revenue for the years
ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
NET SALES VOLUMES
ATTRIBUTABLE TO
PRODUCTION
VOLUMES DELIVERED PAYMENT DELIVERIES
(1) (2)
-------------------- --------------------
NATURAL NATURAL
GAS OIL GAS OIL
(MMCF) (MBBLS) (MMCF) (MBBLS)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997.............................................. 951 -- 801 --
1996.............................................. 3,721 87 3,168 74
</TABLE>
(1) Amounts settled in cash in lieu of volumes were $700,000 and $2,433,000 for
the years ended December 31, 1997 and 1996, respectively.
(2) Represents volumes required to be delivered to Enron affiliates net of
estimated royalty volumes.
F-29
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) 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>
1998 1997 1996
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense (benefit) at 35% of income (loss) before income taxes and
extraordinary item.................................................. $ (78,261) 2,234 2,300
Change in the valuation allowance for deferred tax assets attributable
to income (loss) before income taxes and extraordinary item......... 51,620 (3,102) (367)
Tax expense (benefit) of higher effective rate on Canadian income
(loss).............................................................. (7,200) 85 1,068
Canadian branch income taxable in both Canada and U.S................. 1,733 1,283 --
Canadian Crown payments (net of Alberta Royalty Tax Credit) not
deductible for tax purposes......................................... 2,012 3,181 2,799
Canadian resource allowance........................................... (2,210) (3,995) (3,005)
Canadian non-deductible depletion and amortization.................... 3,960 1,934 1,694
Canadian large corporation tax........................................ 519 540 269
Expiration of tax carryforwards....................................... 450 1,041 643
Nondeductible foreign exchange losses and other....................... 1,559 92 50
----------- --------- ---------
Total income tax expense (benefit).................................... $ (25,818) 3,293 5,451
----------- --------- ---------
----------- --------- ---------
</TABLE>
Deferred income taxes generally result from recognizing income and expenses at
different times for financial and tax reporting. In the U.S., the largest
current difference is the tax effect of the 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-30
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) INCOME TAXES: (CONTINUED)
________________________________________________________________________________
The components of the net deferred tax liability by geographical segment at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
UNITED
STATES CANADA TOTAL
------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Accrual for retirement benefits................................. $ 466 154 620
Accrual for medical benefits.................................... 2,083 -- 2,083
Accrual for sales recorded on the entitlement method............ 452 -- 452
Unrealized foreign exchange losses.............................. -- 4,653 4,653
Property and equipment.......................................... 19,020 -- 19,020
Net operating loss carryforward................................. 39,126 4,186 43,312
Depletion carryforward.......................................... 6,958 -- 6,958
Investment tax credit carryforward.............................. 1,095 -- 1,095
Alternative minimum tax credit carryforward..................... 2,201 -- 2,201
Other........................................................... 828 -- 828
------------ --------- ---------
Total gross deferred tax assets............................... 72,229 8,993 81,222
Less valuation allowance...................................... (72,229) (5,189) (77,418)
------------ --------- ---------
Net deferred tax assets....................................... -- 3,804 3,804
Deferred tax liabilities:
Property and equipment.......................................... -- (7,175) (7,175)
Deferred income on long term contracts.......................... -- (4,424) (4,424)
Other........................................................... -- (291) (291)
------------ --------- ---------
Total gross deferred tax liabilities.......................... -- (11,890) (11,890)
------------ --------- ---------
Net deferred tax liability.................................... $ -- (8,086) (8,086)
------------ --------- ---------
------------ --------- ---------
</TABLE>
F-31
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) INCOME TAXES: (CONTINUED)
________________________________________________________________________________
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------
UNITED
STATES CANADA TOTAL
------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Accrual for retirement benefits................................... $ 687 178 865
Accrual for medical benefits...................................... 2,028 -- 2,028
Accrual for sales recorded on the entitlement method.............. 1,538 -- 1,538
Unrealized foreign exchange losses................................ -- 1,402 1,402
Accrual for interest rate swaps................................... -- 169 169
Investment in subsidiaries........................................ 4,971 -- 4,971
Deferred revenue.................................................. -- 938 938
Net operating loss carryforward................................... 39,016 2,313 41,329
Depletion carryforward............................................ 6,958 -- 6,958
Investment tax credit carryforward................................ 1,539 -- 1,539
Alternative minimum tax credit carryforward....................... 2,201 -- 2,201
Other............................................................. 261 127 388
------------ --------- ---------
Total gross deferred tax assets................................. 59,199 5,127 64,326
Less valuation allowance........................................ (41,727) (3,313) (45,040)
------------ --------- ---------
Net deferred tax assets......................................... 17,472 1,814 19,286
Deferred tax liabilities:
Property and equipment............................................ (15,752) (31,143) (46,895)
Deferred income on long term contracts............................ -- (5,243) (5,243)
Long term liabilities............................................. (1,720) -- (1,720)
Other............................................................. -- (195) (195)
------------ --------- ---------
Total gross deferred tax liabilities............................ (17,472) (36,581) (54,053)
------------ --------- ---------
Net deferred tax liability...................................... $ -- (34,767) (34,767)
------------ --------- ---------
------------ --------- ---------
</TABLE>
The net changes in the valuation allowance for the years ended December 31,
1998, 1997 and 1996 were increases of $32,378,000, $1,224,000 and $786,000,
respectively, which resulted from:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in the valuation allowance for deferred tax assets
attributable to income (loss) before income taxes and extraordinary
item................................................................... $ 51,620 (3,102) 1,544
Increase (decrease) in the valuation allowance attributable to the
difference between book basis and tax basis of acquisitions............ (17,073) -- --
Increase (decrease) in the valuation allowance attributable to the
extraordinary gain (loss).............................................. (2,169) 4,326 (758)
---------- --------- ---------
Net increase in the valuation allowance.................................. $ 32,378 1,224 786
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-32
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) INCOME TAXES: (CONTINUED)
________________________________________________________________________________
The Alternative Minimum Tax (AMT) credit carryforward available to reduce future
U.S. Federal regular taxes aggregated $2,201,000 at December 31, 1998. This
amount may be carried forward indefinitely. U.S. Federal regular and AMT net
operating loss carryforwards at December 31, 1998 were $111,790,000 and
$105,700,000, respectively, and will expire in the years indicated below:
<TABLE>
<CAPTION>
REGULAR AMT
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
2000......................................................... $3,590 3,987
2005......................................................... 8,307 --
2008......................................................... 28,999 31,799
2009......................................................... 22,817 22,964
2010......................................................... 45,737 46,059
2011......................................................... 268 --
2012......................................................... 206 580
2013......................................................... 1,866 311
---------- ---------
$111,790 105,700
---------- ---------
---------- ---------
</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 $1,095,000 at December 31, 1998 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,
1998. This amount may be carried forward indefinitely.
Canadian net operating losses available to reduce future Canadian Federal income
taxes were $9,360,000 ($14,280,000 CDN) at December 31, 1998 and will expire in
the years indicated below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999............................................................. $33
2000............................................................. 171
2001............................................................. 876
2002............................................................. 545
2003............................................................. 2,289
2004............................................................. 5,446
---------
$9,360
---------
---------
</TABLE>
Canadian tax pools relating to the exploration, development and production of
oil and natural gas which are available to reduce future Canadian Federal income
taxes aggregated approximately $119,772,000 ($182,829,000 CDN) at December 31,
1998. These tax pool balances are deductible on a declining balance basis
ranging from 10% to 100% of the balance annually. The amounts may be carried
forward indefinitely.
The availability of some of the U.S. tax attributes to reduce current and future
U.S. Federal 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
F-33
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) INCOME TAXES: (CONTINUED)
________________________________________________________________________________
change" within the meaning of Section 382 of the Internal Revenue Code.
"Ownership changes" occurred in 1995 following the Anschutz transaction, in 1996
following the public stock issuance, and in 1998 from the accumulated effect of
several stock issuances and exchanges in 1996, 1997 and 1998. Under the general
provisions of Section 382 of the Code, the Company's ability to utilize
substantially all of its net operating loss carryforwards will be subject to an
annual limitation of approximately $5,700,000. To the extent of any net
unrealized built-in gains at the time of an ownership change, the annual
limitation can be increased by (a) any gains recognized in the five years
following an ownership change on the disposition of certain assets, to the
extent that the value of the assets disposed of exceeded 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. The ability of the Company
to fully utilize its net operating loss carryforwards may be limited by these
provisions.
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.
(7) PREFERRED STOCK:
________________________________________________________________________________
$.75 CONVERTIBLE PREFERRED STOCK:
At December 31, 1996 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 with an aggregate liquidation preference of
$28,776,730.
In February 1997, the Company called for redemption all 2,877,673 shares of the
$.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, the
holders of the preferred shares had the right to convert each share into 0.7
share of Forest's Common Stock. As a result of the call for redemption,
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.
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. On November
5, 1996 all 620,000 shares of the Second Series Preferred Stock were converted
into 1,240,000 shares of Common Stock.
F-34
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(8) COMMON STOCK:
________________________________________________________________________________
COMMON STOCK:
The Company has 200,000,000 shares of Common Stock authorized, par value $.10
per share. In January 1996 a 5-to-1 reverse stock split was approved by the
Company's shareholders. Unless otherwise indicated, all share amounts have been
adjusted to give effect to the 5-to-1 reverse stock split.
During 1998, the Company issued 8,302,470 shares of Common Stock in connection
with the Louisiana Acquisition, the Anschutz Acquisition, the purchase of the
minority interest in Saxon Petroleum and the settlement of a production payment
obligation, as described in Notes 2 and 4.
In March 1997 and May 1997, pursuant to its Equity Participation Agreement with
Saxon, Forest exercised its right to purchase from the treasury of Saxon
7,950,150 shares (2,380,608 non-voting) of common stock. In consideration,
Forest issued 196,856 shares of Forest Common Stock to Saxon valued at $14.31
per share. The shares issued by Forest to Saxon were classified as treasury
shares prior to their sale by Saxon in October 1997.
In January 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.
RIGHTS AGREEMENT:
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 connection
with the transactions described in Note 3.
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 of a 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 an option granted
to Anschutz. In August 1996, Anschutz exercised the option for $26,200,000 or
approximately $11.64 per share and received 2,250,000 shares of Common Stock.
In connection with the transaction with Anschutz in 1995, Anschutz received a
warrant entitling it to purchase 3,500,000 shares of Common Stock at a price of
$10.50 per share. The warrant was scheduled to
F-35
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(8) COMMON STOCK: (CONTINUED)
________________________________________________________________________________
expire on July 27, 1999. In November 1996, Anschutz exercised a portion of the
warrant and purchased 388,888 shares of Common Stock at $10.50 per share. In
August 1997, Anschutz acquired 3,500,000 shares of Common Stock through the
exercise of the remainder of the warrant for $8.60 per share resulting in cash
proceeds to Forest of $30,100,000. The reduction in the exercise price offered
to Anschutz reflects an approximate 10% present value discount computed to the
warrants' expiration date of July 27, 1999.
At December 31, 1998 the Company had no outstanding warrants.
STOCK INCENTIVE PLAN:
In November 1997, three executive officers of the Company received conditional
restricted stock awards in lieu of stock option grants. The restricted stock
awarded was subject to certain conditions and to a two-year restriction on
transfer. If prior to January 1, 1999 the closing price of the Company's Common
Stock during any twenty-consecutive-trading-day period as reported on the New
York Stock Exchange was at least $22.00 per share, a total of 230,000 shares
would have been earned under the conditions of the restricted stock awards.
Additional shares would have been earned for each $1.00 increase in such average
price to a maximum of 850,000 shares if the average price was $30.00 or higher.
No shares of restricted stock were earned pursuant to these awards and the
awards expired on January 1, 1999.
During 1998 and 1997, the Company issued 15,927 and 17,617 shares, respectively,
of restricted Common Stock to officers and employees as a portion of the bonuses
earned for years ended December 31, 1997 and 1996. The shares vested immediately
upon issuance, but are subject to a two-year restriction on transfer.
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
F-36
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(8) COMMON STOCK: (CONTINUED)
________________________________________________________________________________
date thereafter. The following table summarizes the activity in the Company's
stock-based compensation plan for the years ended December 31, 1996, 1997 and
1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER OF
NUMBER OF EXERCISE SHARES
SHARES PRICE EXERCISABLE
---------- ----------- -----------
<S> <C> <C> <C>
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
Granted at fair value................................... 480,000 17.04
Exercised............................................... (43,720) 12.09
Cancelled............................................... (61,500) 12.79
---------- -----------
Outstanding at December 31, 1997.......................... 1,836,360 $ 14.38 679,020
Granted at fair value................................... 192,500 14.67
Cancelled............................................... (153,500) 14.22
---------- -----------
Outstanding at December 31, 1998.......................... 1,875,360 $ 14.42 998,300
---------- -----------
---------- -----------
</TABLE>
The following table summarizes information about options outstanding at December
31, 1998:
<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>
$8.38-10.38 57,500 9.79 $ 9.80 11,500 $ 9.80
$11.25 436,660 7.10 11.25 252,500 11.25
$11.65-13.94 134,000 7.96 12.61 69,000 12.63
$14.00 586,200 7.84 14.00 351,400 14.00
$14.25-17.75 603,000 8.28 16.95 255,900 16.63
$25.00 58,000 3.75 25.00 58,000 25.00
- --------------- ---------- --- ----------- ----------- -----------
$8.38-25.00 1,875,360 7.75 $ 14.42 998,300 $ 14.48
- --------------- ---------- --- ----------- ----------- -----------
- --------------- ---------- --- ----------- ----------- -----------
</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 loss for the
years ended December 31, 1998, 1997 and 1996 would have been $195,187,000,
$11,864,000 and 2,230,000, respectively, and the basic loss per share would have
been $4.77, $.36 and less than $.01 per share, respectively.
F-37
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(8) COMMON STOCK: (CONTINUED)
________________________________________________________________________________
The fair value of each option granted in 1998 and 1997 was estimated using the
Black-Scholes option pricing model. The following assumptions were used in 1998:
expected option life of 5 years; risk free interest rates ranging from 4.193% to
5.565%; estimated volatility of 57.22%; and dividend yield of zero percent. The
weighted average fair market value of options granted during 1998 was estimated
to be $7.97 per share based on these assumptions. The following assumptions were
used in 1997: expected option life of 5 years; risk free interest rates ranging
from 5.771% to 6.839%; estimated volatility of 55.74%; and dividend yield of
zero percent. The weighted average fair market value of options granted during
1997 was estimated to be $9.23 per share based on these assumptions. The
following assumptions were used in 1996: 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.
(9) EMPLOYEE BENEFITS:
________________________________________________________________________________
The Company has adopted Statement of Financial Accounting Standards No. 132,
Employers' Disclosures about Pension and Other Postretirement Benefits
(Statement No. 132). Statement No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those 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 Company also has a
non-qualified unfunded supplementary retirement plan (the Supplemental Executive
Retirement Plan) that provides certain officers with defined retirement benefits
in excess of qualified plan limits imposed by Federal tax law. Benefit accruals
were suspended effective May 31, 1991 in connection with suspension of benefit
accruals under the Pension Plan. Amounts for both the Pension Plan and the
Supplemental Executive Retirement Plan are combined in the "Pension Benefits"
column below.
In addition to the defined benefit pension plans described above, the Company
also 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 Pension," (Statement No. 106). These amounts,
which consist primarily of medical benefits, are presented in the
"Postretirement Benefits" column below.
F-38
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(9) EMPLOYEE BENEFITS: (CONTINUED)
________________________________________________________________________________
The following tables set forth the plans' benefit obligations, fair value of
plan assets and funded status at December 31, 1998 and 1997:
BENEFIT OBLIGATIONS:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------- ------------------------
1998 1997 1998 1997
---------- --------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Projected benefit obligation at the beginning of the year...... $ 27,318 26,641 6,561 5,879
Service cost................................................... -- -- 190 148
Interest cost.................................................. 1,924 1,976 486 454
Actuarial gain................................................. 1,543 1,237 897 597
Benefits paid.................................................. (2,385) (2,536) (622) (605)
Retiree contributions.......................................... -- -- 75 88
---------- --------- ----------- -----------
Projected benefit obligation at the end of the year............ $ 28,400 27,318 7,587 6,561
---------- --------- ----------- -----------
---------- --------- ----------- -----------
</TABLE>
FAIR VALUE OF PLAN ASSETS:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------- ------------------------
1998 1997 1998 1997
---------- --------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Fair value of plan assets at beginning of the year............. $ 24,808 24,889 -- --
Actual return on plan assets................................... 2,807 2,394 -- --
Employer contribution.......................................... 57 61 -- --
Benefits paid.................................................. (2,385) (2,536) -- --
---------- --------- ----------- -----------
Fair value of plan assets at the end of the year............... $ 25,287 24,808 -- --
---------- --------- ----------- -----------
---------- --------- ----------- -----------
</TABLE>
FUNDED STATUS:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------- ------------------------
1998 1997 1998 1997
---------- --------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Excess of projected benefit obligation over plan assets........ $ (3,113) (2,510) (7,587) (6,561)
Unrecognized actuarial gain.................................... 4,025 3,222 1,635 764
---------- --------- ----------- -----------
Net amount recognized.......................................... $ 912 712 (5,952) (5,797)
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Amounts recognized in the balance sheet consist of:
Prepaid pension cost........................................... $ 1,355 1,159 -- --
Accrued benefit liability...................................... (3,113) (2,510) (5,952) (5,797)
Accumulated other comprehensive income......................... 2,670 2,063 -- --
---------- --------- ----------- -----------
Net amount recognized.......................................... $ 912 712 (5,952) (5,797)
---------- --------- ----------- -----------
---------- --------- ----------- -----------
</TABLE>
F-39
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(9) EMPLOYEE BENEFITS: (CONTINUED)
________________________________________________________________________________
The following tables set forth the components of the net periodic cost of the
plans and the underlying weighted average actuarial assumptions for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest cost.......................................... $ 1,924 1,976 1,971 $ 191 147 131
Expected return on plan assets......................... (2,130) (2,139) (1,958) 486 454 418
Recognized actuarial loss.............................. 62 16 5 25 -- --
--------- --------- --------- --------- --------- ---------
Total net periodic cost................................ $ (144) (147) 18 $ 702 601 549
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Discount rate.......................................... 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Expected return on plan assets......................... 9.00% 9.00% 9.00% n/a n/a n/a
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for 1998:
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
------------------------------
1% INCREASE 1% DECREASE
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Effect on service and interest cost components.................. $ 102 (88)
Effect on postretirement benefit obligation..................... 919 (820)
</TABLE>
For measurement purposes, an 8.7% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1999. The rate was assumed to
decrease .8% per year until it reaches 5.5% in 2003 and remain at that level
thereafter.
As a result of suspension of benefit accruals under the Pension Plan and the
supplementary retirement plan, the Company records as a liability the unfunded
pension liabilities attributable to these plans. The following changes in the
minimum unfunded pension liability were recorded as adjustments to other
comprehensive income:
<TABLE>
<S> <C>
1998............................................... $ (804)
1997............................................... $ (1,063)
1996............................................... $ 2,145
</TABLE>
F-40
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(9) EMPLOYEE BENEFITS: (CONTINUED)
________________________________________________________________________________
Canadian Forest's employees are members of a non-contributory defined benefit
pension plan (the Canadian Pension Plan). 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.
The following tables set forth the benefit obligations, fair value of plan
assets and funded status at December 31, 1998 and 1997:
BENEFIT OBLIGATIONS:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
(IN THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C>
Projected benefit obligation at the beginning of the
year.................................................. $ 6,239 5,787
Service cost............................................ 261 249
Interest cost........................................... 446 416
Benefits paid........................................... (258) (213)
------- ------
Projected benefit obligation at the end of the year..... $ 6,688 6,239
------- ------
------- ------
</TABLE>
FAIR VALUE OF PLAN ASSETS:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
(IN THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C>
Fair value of plan assets at beginning of the year...... $ 8,171 7,256
Actual return on plan assets............................ 636 1,099
Employer contributions.................................. 31 30
Benefits paid........................................... (258) (214)
------- ------
Fair value of plan assets at the end of the year........ $ 8,580 8,171
------- ------
------- ------
</TABLE>
FUNDED STATUS:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
(IN THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C>
Excess of assets over projected benefit obligation...... $ 1,892 1,933
Unrecognized prior service cost......................... -- 72
Unrecognized actuarial loss............................. (1,858) (1,850)
Unrecognized asset at transition........................ (336) (405)
------- ------
Pension accrual......................................... $ (302) (250)
------- ------
------- ------
</TABLE>
F-41
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(9) EMPLOYEE BENEFITS: (CONTINUED)
________________________________________________________________________________
The following tables set forth the components of net periodic pension cost and
the underlying weighted average actuarial assumptions for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------- --------------- ---------------
(IN THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C>
Service cost................................... $ 260 250 235
Interest cost.................................. 446 415 390
Expected return on plan assets................. (510) (466) (425)
Amortization of unrecognized transition
asset........................................ (114) (74) (95)
----- --- ---
Total net periodic pension cost................ $ 82 125 105
----- --- ---
----- --- ---
Discount rate.................................. 7.00% 7.00% 7.00%
----- --- ---
----- --- ---
Expected return on plan assets................. 7.00% 7.00% 7.00%
----- --- ---
----- --- ---
</TABLE>
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 15% of their compensation, subject to
certain limitations. The Company matches the employee contributions up to 5% of
employee compensation. Certain limitations are in effect with respect to
withdrawals from the plan. In 1998, 1997 and the last three months of 1996,
Company contributions were made in cash. In the first nine months of 1996,
Company contributions were made by issuing authorized but unissued shares of
Common Stock. The expense associated with the Company's contributions was
$551,000 in 1998, $482,000 in 1997 and $399,000 in 1996.
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. The
expense associated with Canadian Forest's contribution to the plan was $201,000
in 1998, and $117,000 in 1997 and $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 or their estates 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 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 was
payable in Common Stock or cash, at the Company's option, in May of each year
from 1993 through 1996 at approximately
F-42
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(9) EMPLOYEE BENEFITS: (CONTINUED)
________________________________________________________________________________
$190,000 per year with the balance of $149,000 paid in May 1997. The Agreements
for the other six Retirees provide for supplemental retirement payments totaling
approximately $770,000 per year in 1999 and 2000.
The $1,351,000 present value of the remaining 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 in each of the years 1998, 1997 and 1996, of
which $831,000 is 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.
(10) COMMITMENTS AND CONTINGENCIES:
________________________________________________________________________________
Future rental payments for office facilities and equipment under the remaining
terms of noncancelable operating leases are $1,960,000, $1,793,000, $1,408,000,
$1,253,000 and $1,299,000 for the years ending December 31, 1999 through 2003,
respectively.
Net rental payments applicable to exploration and development activities and
capitalized in the oil and gas property accounts aggregated $2,137,000 in 1998,
$1,538,000 in 1997 and $1,050,000 in 1996. Net rental payments charged to
expense amounted to $3,948,000 in 1998, $4,149,000 in 1997 and $3,336,000 in
1996. Rental payments include the short-term lease of vehicles. There are no
leases which 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, 1998 the ProMark Netback Pool
had entered into fixed price contracts to sell approximately 2.2 BCF of natural
gas in 1999 at an average price of $2.80 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.
As part of ProMark's gas marketing activities, ProMark has entered into fixed
price contracts to purchase and to resell natural gas through 2000. ProMark has
commitments to purchase and commitments to resell approximately 50,700 MCF per
day through October 31, 1999 and approximately 1,400 MCF per day thereafter
through October 31, 2000. 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.
F-43
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(11) FINANCIAL INSTRUMENTS:
________________________________________________________________________________
ENERGY SWAPS AND COLLARS:
In order to hedge against the effects of declines in oil and natural gas prices
on the Company's future oil and gas production, 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 years ended
December 31, 1998, 1997 and 1996, the Company's gains (losses) under its swap
agreements were $6,305,000, $(7,439,000), and $(10,422,000), 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 summarizes outstanding natural gas swaps at December 31,
1998:
<TABLE>
<CAPTION>
1999 2000 2001
--------- --------- ---------
<S> <C> <C> <C>
United States (1)
Contract volumes (BBTU)...................................................... 25,262 738 605
Weighted average price (per MMBTU)........................................... $ 2.28 2.12 2.14
Canada (2)
Contract volumes (BBTU)...................................................... 3,321 -- --
Weighted average price (per MMBTU)........................................... $ 1.55 -- --
</TABLE>
(1) Settled on the basis of New York Mercantile Exchange prices.
(2) Settled on the basis of Alberta Energy Company "C" U.S. dollar prices.
The Company had no oil swaps in place at December 31, 1998. Subsequent to
December 31, 1998 the Company entered into oil swaps for 3,000 barrels of oil
per day from March 1999 to December 1999 at a weighted average fixed price of
$14.17 per barrel (NYMEX basis).
The Company also uses basis swaps in connection with natural gas swaps to fix
the differential price between the NYMEX price and the index price at which the
hedged gas is sold. At December 31, 1998 there were four basis swaps in place
for the following weighted average volumes:
<TABLE>
<CAPTION>
1999 2000 2001
--------- --------- ---------
<S> <C> <C> <C>
MMBTU/Day............... 24,719 2,017 1,658
</TABLE>
The Company is exposed to off-balance-sheet risks associated with swap
agreements arising from movements in the prices of oil and natural gas and from
the unlikely event of non-performance by the counterparties to the swap
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, 1998:
F-44
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(11) FINANCIAL INSTRUMENTS: (CONTINUED)
________________________________________________________________________________
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE:
The carrying amount of these instruments approximates fair value due to their
short maturity.
SENIOR SUBORDINATED NOTES:
The fair value of the Company's 8 3/4% Senior Subordinated Notes was
approximately $178,000,000, based upon quoted market prices of the notes.
The fair value of the Company's 11 1/4% Senior Subordinated Notes was
approximately $8,763,000, based upon quoted market prices of the notes.
ENERGY SWAP AGREEMENTS:
The fair value of the Company's natural gas swap agreements was a gain of
approximately $7,212,000, based upon the estimated net amount the Company would
receive to terminate the agreements.
BASIS SWAP AGREEMENTS:
The fair value of the Company's basis swap agreements was a loss of
approximately $140,000, based upon the estimated net amount the Company would
pay to terminate the agreements.
F-45
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
________________________________________________________________________________
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- ----------- ---------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Revenue............................................................... $ 75,496 75,173 78,015 93,135
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Earnings (loss) from operations....................................... $ 5,898 4,931 (140,999) (54,206)
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Loss before extraordinary item........................................ $ (1,003) (4,404) (138,092) (54,287)
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Net earnings (loss)................................................... $ (1,003) 1,792 (138,092) (54,287)
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Net earnings (loss) attributable to common stock...................... $ (1,003) 1,792 (138,092) (54,287)
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Basic loss per share before extraordinary item........................ $ (.03) (.11) (3.13) (1.22)
Basic earnings (loss) per share....................................... $ (.03) .05 (3.13) (1.22)
Diluted loss per share before extraordinary item...................... $ (.03) (.11) (3.13) (1.22)
Diluted earnings (loss) per share..................................... $ (.03) .05 (3.13) (1.22)
1997
Revenue............................................................... $ 93,063 77,655 81,977 86,946
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Earnings from operations.............................................. $ 10,607 2,231 6,738 11,079
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Earnings (loss) before extraordinary item............................. $ 4,522 (3,196) 583 1,180
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Net earnings (loss)................................................... $ 4,522 (3,196) (11,776) 1,180
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Net earnings (loss) attributable to common stock...................... $ 4,333 (3,196) (11,776) 1,180
--------- ----------- ---------- ---------
--------- ----------- ---------- ---------
Basic earnings (loss) per share before extraordinary item............. $ 0.14 (0.10) 0.02 0.03
Basic earnings (loss) per share....................................... $ 0.14 (0.10) (0.35) 0.03
Diluted earnings (loss) per share before extraordinary item........... $ 0.13 (0.10) 0.02 0.03
Diluted earnings (loss) per share..................................... $ 0.13 (0.10) (0.34) 0.03
</TABLE>
F-46
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(13) 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 the consolidated Forest
financial statements.
<TABLE>
<CAPTION>
OIL AND GAS OPERATIONS
------------------------------------------------------------------------
MARKETING
GULF COAST REGION AND
------------------------ WESTERN TOTAL PROCESSING
YEAR ENDED DECEMBER 31, 1998 OFFSHORE ONSHORE REGION U.S. CANADA TOTAL CANADA
- ------------------------------------------ ----------- ----------- ----------- --------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................................... $ 69,547 41,727 20,411 131,685 39,489 171,174 150,645
Marketing and processing expense.......... -- -- -- -- -- -- 144,758
Oil and gas production expense............ 11,827 12,521 5,543 29,891 12,092 41,983 --
General and administrative expense........ 4,625 4,346 1,965 10,936 7,496 18,432 1,417
Depreciation and depletion expense........ 47,005 20,558 6,919 74,482 22,226 96,708 2,252
Impairment of oil and gas properties...... 51,500 59,500 28,500 139,500 60,000 199,500 --
----------- ----------- ----------- --------- ----------- --------- -----------
Earnings (loss) from operations........... $ (45,410) (55,198) (22,516) (123,124) (62,325) (185,449) 2,218
----------- ----------- ----------- --------- ----------- --------- -----------
----------- ----------- ----------- --------- ----------- --------- -----------
Capital expenditures...................... $ 61,483 263,479 85,169 410,131 44,222 454,353 (10)
----------- ----------- ----------- --------- ----------- --------- -----------
----------- ----------- ----------- --------- ----------- --------- -----------
Property and equipment, net............... $ 127,542 260,940 103,752 492,234 146,105 638,339 4,766
----------- ----------- ----------- --------- ----------- --------- -----------
----------- ----------- ----------- --------- ----------- --------- -----------
<CAPTION>
TOTAL
YEAR ENDED DECEMBER 31, 1998 COMPANY
- ------------------------------------------ -----------
<S> <C>
Revenue................................... 321,819
Marketing and processing expense.......... 144,758
Oil and gas production expense............ 41,983
General and administrative expense........ 19,849
Depreciation and depletion expense........ 98,960
Impairment of oil and gas properties...... 199,500
-----------
Earnings (loss) from operations........... (183,231)
-----------
-----------
Capital expenditures...................... 454,343
-----------
-----------
Property and equipment, net............... 643,105
-----------
-----------
</TABLE>
F-47
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(13) BUSINESS AND GEOGRAPHICAL SEGMENTS: (CONTINUED)
________________________________________________________________________________
Information for Forest's reportable segments relates to the Company's 1998
consolidated totals as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM:
Loss from operations for reportable segments........................ $ (183,231)
Administrative asset depreciation................................... (1,145)
Other income, net................................................... 7,561
Interest expense.................................................... (38,986)
Minority interest in loss of subsidiary............................. 517
Translation loss on subordinated debt............................... (8,320)
--------------
Loss before income taxes and extraordinary item..................... $ (223,604)
--------------
--------------
CAPITAL EXPENDITURES:
Reportable segments................................................. $ 454,343
International interests............................................. 14,435
Administrative assets and other..................................... 2,976
--------------
Total capital expenditures.......................................... $ 471,754
--------------
--------------
PROPERTY AND EQUIPMENT, NET:
Reportable segments................................................. $ 643,105
International interests............................................. 14,435
Administrative assets, net and other................................ 5,770
--------------
Total property and equipment, net................................... $ 663,310
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
OIL AND GAS OPERATIONS
------------------------
MARKETING
GULF COAST REGION AND
------------------------ WESTERN TOTAL PROCESSING TOTAL
YEAR ENDED DECEMBER 31, 1997 OFFSHORE ONSHORE REGION U.S. CANADA TOTAL CANADA COMPANY
- ------------------------------- ----------- ----------- ----------- --------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........................ $ 78,398 14,980 8,380 101,758 54,347 156,105 183,536 339,641
Marketing and processing
expense...................... -- -- -- -- -- -- 175,847 175,847
Oil and gas production
expense...................... 13,566 3,896 3,400 20,862 15,422 36,284 -- 36,284
General and administrative
expense...................... 6,652 1,894 1,088 9,634 5,946 15,580 1,284 16,864
Depreciation and depletion
expense...................... 46,319 4,384 1,038 51,741 24,708 76,449 2,412 78,861
----------- ----------- ----------- --------- ----------- --------- ----------- -----------
Earnings from operations....... $ 11,861 4,806 2,854 19,521 8,271 27,792 3,993 31,785
----------- ----------- ----------- --------- ----------- --------- ----------- -----------
----------- ----------- ----------- --------- ----------- --------- ----------- -----------
Capital expenditures........... $ 76,521 8,676 13,171 98,368 57,617 155,985 28 156,013
----------- ----------- ----------- --------- ----------- --------- ----------- -----------
----------- ----------- ----------- --------- ----------- --------- ----------- -----------
Property and equipment, net.... $ 167,449 77,867 71,393 316,709 193,859 510,568 5,510 516,078
----------- ----------- ----------- --------- ----------- --------- ----------- -----------
----------- ----------- ----------- --------- ----------- --------- ----------- -----------
</TABLE>
F-48
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(13) BUSINESS AND GEOGRAPHICAL SEGMENTS: (CONTINUED)
________________________________________________________________________________
Information for Forest's reportable segments relates to the Company's 1997
consolidated totals as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM:
Earnings from operations for reportable segments.................... $ 31,785
Administrative asset depreciation................................... (1,130)
Other income, net................................................... 1,289
Interest expense.................................................... (21,403)
Minority interest in earnings of subsidiary......................... (108)
Translation loss on subordinated debt............................... (4,051)
--------------
Earnings before income taxes and extraordinary item................. $ 6,382
--------------
--------------
CAPITAL EXPENDITURES:
Reportable segments................................................. $ 156,013
Administrative assets and other..................................... 786
--------------
Total capital expenditures.......................................... $ 156,799
--------------
--------------
PROPERTY AND EQUIPMENT, NET:
Reportable segments................................................. $ 516,078
Administrative assets, net and other................................ 5,215
--------------
Total property and equipment, net................................... $ 521,293
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
OIL AND GAS OPERATIONS MARKETING
-------------------------------- AND
TOTAL PROCESSING TOTAL
YEAR ENDED DECEMBER 31, 1996 U.S.(1) CANADA TOTAL CANADA COMPANY
- -------------------------------------------------------- ---------- --------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue................................................. $ 81,738 47,902 129,640 186,447 316,087
Marketing and processing expense........................ -- -- -- 178,706 178,706
Oil and gas production expense.......................... 19,789 12,410 32,199 -- 32,199
General and administrative expense...................... 7,430 5,181 12,611 1,012 13,623
Depreciation and depletion expense...................... 39,331 20,297 59,628 2,232 61,860
---------- --------- --------- ----------- -----------
Earnings from operations................................ $ 15,188 10,014 25,202 4,497 29,699
---------- --------- --------- ----------- -----------
---------- --------- --------- ----------- -----------
Capital expenditures.................................... $ 211,325 32,732 244,057 61 244,118
---------- --------- --------- ----------- -----------
---------- --------- --------- ----------- -----------
Property and equipment, net............................. $ 281,140 166,835 447,975 5,974 453,949
---------- --------- --------- ----------- -----------
---------- --------- --------- ----------- -----------
</TABLE>
(1) Information for Forest's reportable segments in the United States for 1996
is not available.
F-49
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(13) BUSINESS AND GEOGRAPHICAL SEGMENTS: (CONTINUED)
________________________________________________________________________________
Information for Forest's reportable segments relates to the Company's 1996
consolidated totals as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM:
Earnings from operations for reportable segments.................... $ 29,699
Administrative asset depreciation................................... (1,208)
Other income, net................................................... 1,387
Interest expense.................................................... (23,307)
Minority interest in loss of subsidiary............................. 19
--------------
Earnings before income taxes and extraordinary item................. $ 6,590
--------------
--------------
CAPITAL EXPENDITURES:
Reportable segments................................................. $ 244,118
Administrative assets and other..................................... 566
--------------
Total capital expenditures.......................................... $ 244,684
--------------
--------------
PROPERTY AND EQUIPMENT, NET:
Reportable segments................................................. $ 453,949
Administrative assets, net and other................................ 4,293
--------------
Total property and equipment, net................................... $ 458,242
--------------
--------------
</TABLE>
F-50
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) 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," (Statement 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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
UNITED
STATES CANADA INTERNATIONAL TOTAL
---------- --------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
Property acquisition costs (undeveloped leases and proved
properties).................................................. $ 310,536 17,628 11,000 339,164
Exploration costs.............................................. 39,532 17,447 3,435 60,414
Development costs.............................................. 61,436 9,137 -- 70,573
---------- --------- ------ ---------
Total........................................................ $ 411,504 44,212 14,435 470,151
---------- --------- ------ ---------
---------- --------- ------ ---------
1997
Property acquisition costs (undeveloped leases and proved
properties).................................................. $ 1,704 6,675 -- 8,379
Exploration costs.............................................. 50,686 14,752 -- 65,438
Development costs.............................................. 46,160 36,218 -- 82,378
---------- --------- ------ ---------
Total........................................................ $ 98,550 57,645 -- 156,195
---------- --------- ------ ---------
---------- --------- ------ ---------
1996
Property acquisition costs (undeveloped leases and proved
properties).................................................. $ 16,122 142,833 -- 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
---------- --------- ------ ---------
---------- --------- ------ ---------
</TABLE>
F-51
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) SUPPLEMENTAL FINANCIAL DATA--OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
________________________________________________________________________________
(B) AGGREGATE CAPITALIZED COSTS--The aggregate capitalized costs relating to
oil and gas activities at the end of each of the years indicated were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Costs related to proved properties...................................... $ 1,923,521 1,521,325 1,381,289
Costs related to unproved properties:
Costs subject to depletion............................................ 6,344 12,217 32,007
Costs not subject to depletion........................................ 99,487 60,901 43,916
------------ ----------- -----------
2,029,352 1,594,443 1,457,212
Less accumulated depletion and valuation allowance...................... (1,367,086) (1,075,940) (1,001,604)
------------ ----------- -----------
$ 662,266 518,503 455,608
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
(C) RESULTS OF OPERATIONS FROM PRODUCING ACTIVITIES--Results of operations from
producing activities for the years ended December 31, 1998, 1997 and 1996 are
presented below. Income taxes are different from
F-52
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) SUPPLEMENTAL FINANCIAL DATA--OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
________________________________________________________________________________
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
----------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
1998
Oil and gas sales........................................................... $ 131,251 39,489 170,740
Production expense.......................................................... 29,891 12,092 41,983
Depletion expense........................................................... 74,482 22,226 96,708
Provision for impairment of oil and gas properties.......................... 139,500 60,000 199,500
Income tax benefit.......................................................... -- (23,418) (23,418)
----------- --------- ----------
243,873 70,900 314,773
----------- --------- ----------
Results of operations from producing activities............................. $ (112,622) (31,411) (144,033)
----------- --------- ----------
----------- --------- ----------
1997
Oil and gas sales........................................................... $ 100,895 54,347 155,242
Production expense.......................................................... 20,863 15,421 36,284
Depletion expense........................................................... 51,741 24,708 76,449
Income tax expense.......................................................... -- 7,191 7,191
----------- --------- ----------
72,604 47,320 119,924
----------- --------- ----------
Results of operations from producing activities............................. $ 28,291 7,027 35,318
----------- --------- ----------
----------- --------- ----------
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
----------- --------- ----------
----------- --------- ----------
</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
1996, 1997 and 1998 follows. The Canadian reserves at December 31, 1998 and 1997
and 1996 include 100% of the reserves owned by Saxon, a consolidated subsidiary
in which the Company held a majority interest in 1997 and 1996 but which is a
wholly-owned subsidiary as of December 31, 1998.
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 11), but not on escalations based on
F-53
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) SUPPLEMENTAL FINANCIAL DATA--OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
________________________________________________________________________________
future conditions. Purchases of reserves in place represent volumes recorded on
the closing dates of the acquisitions for financial accounting purposes.
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.
Proved undeveloped oil and gas reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.
<TABLE>
<CAPTION>
LIQUIDS GAS
------------------------------- -------------------------------
(MBBLS) (MMCF)
<S> <C> <C> <C> <C> <C> <C>
UNITED UNITED
STATES CANADA TOTAL STATES CANADA TOTAL
--------- --------- --------- --------- --------- ---------
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
Revisions of previous estimates.................. 965 247 1,212 23,173 12,779 35,952
Extensions and discoveries....................... 876 1,688 2,564 37,759 12,005 49,764
Production....................................... (1,267) (1,940) (3,207) (34,018) (15,017) (49,035)
Sales of reserves in place....................... (268) 11 (257) (4,349) 217 (4,132)
Purchases of reserves in place................... 22 288 310 1,033 7,483 8,516
Settlement of volumetric production payment...... -- -- -- 3,070 -- 3,070
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997....................... 6,126 18,510 24,636 257,923 120,392 378,315
Revisions of previous estimates.................. 347 (3,095) (2,748) 17,158 (9,231) 7,927
Extensions and discoveries....................... 559 336 895 37,708 31,576 69,284
Production....................................... (2,405) (1,864) (4,269) (47,394) (14,916) (62,310)
Sales of reserves in place....................... (2,008) (432) (2,440) (1,964) (4,215) (6,179)
Purchases of reserves in place................... 18,965 30 18,995 161,089 16,138 177,227
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1998....................... 21,584 13,485 35,069 424,520 139,744 564,264
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
F-54
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) SUPPLEMENTAL FINANCIAL DATA--OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
________________________________________________________________________________
<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, 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
December 31, 1997................................ 5,493 14,291 19,784 179,986 109,849 289,835
December 31, 1998................................ 16,697 13,485 30,182 332,575 135,174 467,749
</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. All cash flow amounts, including
income taxes, are discounted at 10%. At December 31, 1998, 1997 and 1996, the
Canadian amounts include 100% of amounts attributable to the reserves owned by
Saxon, a consolidated subsidiary in which the Company held a majority interest
in 1997 and 1996, but which is a wholly owned subsidiary as of December 31,
1998. 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 11.
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 expense
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 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------
UNITED
STATES CANADA TOTAL
------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future oil and gas sales......................................... $ 1,081,183 334,242 1,415,425
Future production and development costs.......................... (396,423) (137,711) (534,134)
------------ ---------- ----------
Future net revenue............................................... 684,760 196,531 881,291
10% annual discount for estimated timing of cash flows........... (251,205) (82,610) (333,815)
------------ ---------- ----------
Present value of future net cash flows before income taxes....... 433,555 113,921 547,476
Present value of future income tax expense....................... (7,193) (17,452) (24,645)
------------ ---------- ----------
Standardized measure of discounted future net cash flows......... $ 426,362 96,469 522,831
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
Undiscounted future income tax expense was $18,327,000 in the United States and
$38,910,000 in Canada at December 31, 1998.
F-55
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) SUPPLEMENTAL FINANCIAL DATA--OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
________________________________________________________________________________
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
UNITED
STATES CANADA TOTAL
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future oil and gas sales.......................................... $ 759,556 470,121 1,229,677
Future production and development costs........................... (273,850) (193,733) (467,583)
----------- ---------- ----------
Future net revenue................................................ 485,706 276,388 762,094
10% annual discount for estimated timing of cash flows............ (176,507) (99,081) (275,588)
----------- ---------- ----------
Present value of future net cash flows before income taxes........ 309,199 177,307 486,506
Present value of future income tax expense........................ (19,899) (27,037) (46,936)
----------- ---------- ----------
Standardized measure of discounted future net cash flows.......... $ 289,300 150,270 439,570
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
Undiscounted future income tax expense was $45,911,000 in the United States and
$57,981,000 in Canada at December 31, 1997.
<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
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
Undiscounted future income tax expense was $134,835,000 in the United States and
$127,833,000 in Canada at December 31, 1996.
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 cash flows during each of the last three years
is as follows. At December 31, 1998, 1997 and 1996, the Canadian
F-56
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) SUPPLEMENTAL FINANCIAL DATA--OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
________________________________________________________________________________
amounts include 100% of the reserves owned by Saxon, a consolidated subsidiary
in which the Company held a majority interest in 1997 and 1996, but is a wholly
owned subsidiary as of December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
UNITED
STATES CANADA TOTAL
----------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure of discounted future net cash flows relating
to proved oil and gas reserves, at beginning of year........................ $ 289,300 150,270 439,570
Changes resulting from:
Sales of oil and gas, net of production costs............................... (101,360) (27,397) (128,757)
Net changes in prices and future production costs........................... (236,581) (73,799) (310,380)
Net changes in future development costs..................................... (15,191) (737) (15,928)
Extensions, discoveries and improved recovery............................... 46,269 23,140 69,409
Previously estimated development costs incurred during the period........... 57,285 8,436 65,721
Revisions of previous quantity estimates.................................... 18,629 (10,909) 7,720
Sales of reserves in place.................................................. (6,592) (3,788) (10,380)
Purchases of reserves in place.............................................. 330,977 3,937 334,914
Accretion of discount on reserves at beginning of year before
income taxes.............................................................. 30,920 17,731 48,651
Net change in income taxes.................................................. 12,706 9,585 22,291
----------- --------- ----------
Standardized measure of discounted future net cash flows relating
to proved oil and gas reserves, at end of year.............................. $ 426,362 96,469 522,831
----------- --------- ----------
----------- --------- ----------
</TABLE>
The computation of the standardized measure of discounted future net cash flows
relating to proved oil and gas reserves at December 31, 1998 was based on
average natural gas prices of approximately $2.03 per MCF in the U.S. and
approximately $1.38 per MCF in Canada and on average liquids prices of
approximately $9.56 per barrel in the U.S. and approximately $8.91 per barrel in
Canada. Subsequent to December 31, 1998 the price of natural gas decreased
significantly. At March 1, 1999, the Company was receiving average natural gas
prices of approximately $1.67 per MCF in the U.S. and approximately $1.20 per
MCF in Canada. The NYMEX price for crude oil increased from $12.06 per barrel at
December 31, 1998 to $12.24 per barrel at March 1, 1999. Had the March prices
been used, the Company's standardized
F-57
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) SUPPLEMENTAL FINANCIAL DATA--OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
________________________________________________________________________________
measure of discounted future net cash flows relating to proved oil and gas
reserves at December 31, 1998 would have been reduced.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
UNITED
STATES CANADA TOTAL
----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure of discounted future net cash flows relating
to proved oil and gas reserves, at beginning of year....................... $ 384,211 175,658 559,869
Changes resulting from:
Sales of oil and gas, net of production costs.............................. (80,895) (38,926) (119,821)
Net changes in prices and future production costs.......................... (218,986) (110,526) (329,512)
Net changes in future development costs.................................... (22,830) (19,905) (42,735)
Extensions, discoveries and improved recovery.............................. 48,090 19,022 67,112
Previously estimated development costs incurred during the period.......... 42,507 35,329 77,836
Revisions of previous quantity estimates................................... 38,055 13,445 51,500
Sales of reserves in place................................................. (5,066) 301 (4,765)
Purchases of reserves in place............................................. 3,142 7,264 10,406
Settlement of volumetric production payment................................ 3,126 -- 3,126
Accretion of discount on reserves at beginning of year before
income taxes............................................................. 45,926 24,664 70,590
Net change in income taxes................................................. 52,020 43,944 95,964
----------- ---------- ----------
Standardized measure of discounted future net cash flows relating
to proved oil and gas reserves, at end of year............................. $ 289,300 150,270 439,570
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The computation of the standardized measure of discounted future net cash flows
relating to proved oil and gas reserves at December 31, 1997 was based on
average natural gas prices of approximately $2.55 per
F-58
<PAGE>
FOREST OIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(14) SUPPLEMENTAL FINANCIAL DATA--OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED): (CONTINUED)
________________________________________________________________________________
MCF in the U.S. and approximately $1.30 per MCF in Canada and on average liquids
prices of approximately $16.73 per barrel in the U.S. and approximately $13.71
per barrel in Canada.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
UNITED
STATES CANADA TOTAL
---------- --------- ----------
(IN THOUSANDS)
<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
---------- --------- ----------
---------- --------- ----------
</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.
F-59
<PAGE>
PROSPECTUS
FOREST OIL CORPORATION
$250,000,000
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
We will provide specific terms of these securities in supplements to this
prospectus. You should read this prospectus and any supplement carefully before
you invest.
THE SECURITIES HAVE NOT BEEN APPROVED BY THE SEC OR ANY STATE SECURITIES
COMMISSION, NOR HAVE THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This prospectus is dated November 9, 1998
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC utilizing a "shelf" registration process. Under this shelf process, we may
sell any combination of the securities described in this prospectus in one or
more offerings up to a total dollar amount of $250,000,000. This prospectus
provides you with a general description of the securities we may offer. Each
time we sell securities, we will provide a prospectus supplement that will
contain specific information about the terms of that offering. The prospectus
supplement may also add, update or change information contained in this
prospectus. You should read both this prospectus and any prospectus supplement
together with additional information described under the heading --WHERE YOU CAN
FIND MORE INFORMATION.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http:// www.sec.gov. You may also read and
copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
until we sell all of the securities.
- Annual Report on Form 10-K for the year ended December 31, 1997;
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998, June
30, 1998;
- Current Reports on Form 8-K dated January 7, 1998, January 12, 1998,
January 28, 1998, February 3, 1998, April 8, 1998, June 25, 1998; and on
Form 8-KA dated February 3, 1998; and
- The description of the Company's common stock contained in Form 8-A dated
October 20, 1997.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Daniel L. McNamara
Corporate Counsel and Secretary
Forest Oil Corporation
1600 Broadway
Suite 2200
Denver, Colorado 80202
(303) 812-1400
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. We are not making an
offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any prospectus
supplement is accurate as of any date other than the date on the front of those
documents.
2
<PAGE>
THE COMPANY
Forest Oil Corporation and its subsidiaries are engaged in the acquisition,
exploration, development, production and marketing of natural gas and crude oil
in North America. Forest was incorporated in New York in 1924, the successor to
a company formed in 1916, and has been a publicly held company since 1969. We
are active in several of the major exploration and producing areas in and
offshore the United States and in Canada. Forest's principal reserves and
producing properties are located in the United States in the Gulf of Mexico,
Louisiana, Texas and Oklahoma, and in Canada in Alberta and the Northwest
Territories. We operate from production offices located in Lafayette, Louisiana,
Denver, Colorado, and Calgary, Alberta, Canada. Our corporate headquarters are
located in Denver, Colorado, where our address is 1600 Broadway, Suite 2200,
Denver, Colorado 80202 (telephone: (303) 812-1400).
USE OF PROCEEDS
The net proceeds from the sale of the offered 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.
RATIO OF EARNINGS TO FIXED CHARGES
A description of Forest's ratio of earnings to fixed charges or earnings to
combined fixed charges and preferred stock dividends, as applicable, on a
consolidated basis, will appear in an applicable Prospectus Supplement.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will be our direct unsecured general obligations. The
Debt Securities will be either Senior Debt Securities or Subordinated Debt
Securities.
The Debt Securities will be issued under one or more separate indentures
between us and a Trustee. The Trustee for each series of Debt Securities will be
identified in the applicable Prospectus Supplement. Senior Debt Securities will
be issued under a "Senior Indenture" and Subordinated Debt Securities will be
issued under a "Subordinated Indenture". Together the Senior Indentures and the
Subordinated Indentures are called "Indentures."
We have summarized selected provisions of the Indentures below. The summary
is not complete. The forms of the Indentures have been filed as exhibits to the
registration statement and you should read the Indentures for provisions that
may be important to you. In the summary below, we have included references to
section numbers of the applicable Indentures so that you can easily locate these
provisions. Capitalized terms used in the summary have the meanings specified in
the Indentures.
GENERAL
The Debt Securities will be our direct, unsecured obligations. The Senior
Debt Securities will rank equally with all of our other senior and
unsubordinated debt. The Subordinated Debt Securities will have a junior
position to all of our Senior Debt.
A prospectus supplement and a supplemental indenture relating to any series
of Debt Securities being offered will include specific terms relating to the
offering. These terms will include some or all of the following:
- The title and type of the Debt Securities;
- The total principal amount of the Debt Securities;
3
<PAGE>
- The percentage of the principal amount at which the Debt Securities will
be issued and any payments due if the maturity of the Debt Securities is
accelerated;
- If convertible into common stock, the terms on which such Debt Securities
are convertible.
- The dates on which the principal of the Debt Securities will be payable;
- The interest rate which the Debt Securities will bear and the interest
payment dates for the Debt Securities;
- Any optional redemption periods;
- Any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the Debt Securities;
- Any provisions granting special rights to holders when a specified event
occurs;
- Any changes to or additional Events of Defaults or covenants;
- Any special tax implications of the Debt Securities, including provisions
for Original Issue Discount Securities, if offered; and
- Any other terms of the Debt Securities.
None of the Indentures limits the amount of Debt Securities that may be
issued. Each Indenture allows Debt Securities to be issued up to the principal
amount that may be authorized by us and may be in any currency or currency unit
designated by us.
If so provided in the applicable Prospectus Supplement, we may issue the
Debt Securities at a discount below their principal amount and you would pay
less than the entire principal amount of the Debt Securities upon declaration of
acceleration of their maturity ("Original Issue Discount Securities"). The
applicable Prospectus Supplement will describe all material U.S. Federal income
tax, accounting and other considerations applicable to the Original Issue
Discount Securities.
Debt Securities of a series may be issued in registered, bearer, coupon or
global form. (Sections 2.01 & 2.02.)
DENOMINATIONS
The prospectus supplement for each issuance of Debt Securities will state
whether the securities will be issued in registered form of $1,000 each or
multiples thereof or bearer form of $1,000 each.
SENIOR DEBT SECURITIES
The Senior Debt Securities will be unsecured senior obligations and will
rank equally with all other Senior Indebtedness (as defined below). However, the
Senior Debt Securities will be subordinated in right of payment to all our
secured Indebtedness to the extent of the value of the assets securing such
Indebtedness and will be effectively subordinated to all our Subsidiaries'
indebtedness and all our Subsidiaries' mandatory redemption preferred stock.
Except as provided in the applicable Senior Indenture or specified in any
Authorizing Resolution and/or supplemental indenture relating to a Series of
Senior Debt Securities to be issued, no Senior Indenture will limit the amount
of additional Indebtedness which may rank equally with the Senior Debt
Securities or the amount of Indebtedness, secured or otherwise, which may be
incurred or preferred stock which may be issued by any of the Company's
Subsidiaries.
"Senior Indebtedness" is defined to include all notes or other unsecured
evidences of indebtedness, including guarantees of Forest for money borrowed,
that are not expressed to be subordinate or junior in right of payment to any
other indebtedness of Forest.
4
<PAGE>
SUBORDINATED DEBT SECURITIES
Under the Subordinated Indenture, payment of the principal, interest and any
premium on the Subordinated Indebtedness Securities will generally be
subordinated and junior in right of payment to the prior payment in full of all
Senior Indebtedness. The Subordinated Indenture provides that no payment of
principal, interest and any premium on the Subordinated Debt Securities may be
made in the event:
- of any insolvency, bankruptcy or similar proceeding involving Forest or
any of its significant properties, or
- we fail to pay the principal, interest, any premium or any other amounts
on any Senior Indebtedness when due.
The Subordinated Indenture will not limit the amount of Senior Indebtedness
that we may incur.
CONSOLIDATION, MERGER OR SALE
Each Indenture generally permits a consolidation or merger between us and
another corporation. They also permit the sale by us of all or substantially all
of our property and assets. If this happens, the remaining or acquiring
corporation shall assume all of our responsibilities and liabilities under the
Indentures including the payment of all amounts due on the Debt Securities and
performance of the covenants in the Indentures.
We are only permitted to consolidate or merge with or into any other
corporation or sell all or substantially all of our assets according to the
terms and conditions of the Indentures. The remaining or acquiring corporation
will be substituted for us in the Indentures with the same effect as if it had
been an original party to the Indenture. Thereafter, the successor corporation
may exercise our rights and powers under any Indenture, in our name or in its
own name. Any act or proceeding required or permitted to be done by our Board of
Directors or any of our officers may be done by the board or officers of the
successor corporation. (Sections 6.01 & 6.02.)
MODIFICATION OF INDENTURES
Under each Indenture our rights and obligations and the rights of the
holders may be modified with the consent of the holders of a majority in
aggregate principal amount of the outstanding Debt Securities of each series
affected by the modification. No modification of the principal or interest
payment terms, and no modification reducing the percentage required for
modifications, is effective against any holder without its consent. (Sections
10.01 & 10.02.)
EVENTS OF DEFAULT
"Event of Default" when used in an Indenture, will mean any of the
following:
- failure to pay the principal or any premium on any Debt Security when due;
- failure to deposit any sinking fund payment when due;
- failure to pay interest on any Debt Security for 30 days;
- failure to perform any other covenant in the Indenture that continues for
60 days after being given written notice;
- certain events in bankruptcy, insolvency or reorganization of the Company;
or
- any other Event of Default included in any Indenture or supplemental
indenture. (Section 7.01.)
An Event of Default for a particular series of Debt Securities does not
necessarily constitute an Event of Default for any other series of Debt
Securities issued under the Indentures. (Section 8.05.)
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If an Event of Default for any series of Debt Securities occurs and
continues, the Trustee or the holders of at least 25% in aggregate principal
amount of the Debt Securities of the series may declare the entire principal of
all the Debt Securities of that series to be due and payable immediately. If
this happens, subject to certain conditions, the holders of a majority of the
aggregate principal amount of the Debt Securities of that series can void the
declaration. (Section 7.02.)
Other than its duties in case of a default, a Trustee is not obligated to
exercise any of its rights or powers under any Indenture at the request, order
or direction of any holders, unless the holders offer the Trustee reasonable
indemnity. (Section 8.02.) If they provide this reasonable indemnification, the
holders of a majority in principal amount of any series of Debt Securities may
direct the time, method and place of conducting any proceeding or any remedy
available to the Trustee, or exercising any power conferred upon the Trustee,
for any series of Debt Securities. (Section 7.05.)
COVENANTS
Under the Indentures, we will:
- pay the principal, interest and any premium on the Debt Securities when
due;
- maintain a place of payment;
- deliver a report to the Trustee at the end of each fiscal year reviewing
the Company's obligations under the Indentures; and
- deposit sufficient funds with any paying agent on or before the due date
for any principal, interest or any premium.
Any additional covenants will be described in a Prospectus Supplement.
PAYMENT AND TRANSFER
Principal, interest and any premium on fully registered securities will be
paid at designated places. Payment will be made by check mailed to the persons
in whose names the Debt Securities are registered on days specified in the
Indentures or any Prospectus Supplement. Debt Securities payments in other forms
will be paid at a place designated by us and specified in a Prospectus
Supplement. (Sections 5.01 and 5.02)
Fully registered securities may be transferred or exchanged at the corporate
trust office of the Trustee or at any other office or agency maintained by us
for such purposes, without the payment of any service charge except for any tax
or governmental charge.
CONVERSION RIGHTS
The Debt Securities may be convertible into common stock, according to the
terms and conditions of the Prospectus Supplement. Such terms will include the
conversion price, the conversion period, provisions as to whether conversion
will be at the option of the holders of such series of Debt Securities or at our
option, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such series of
Debt Securities.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global certificates that will be deposited with a depositary
identified in a Prospectus Supplement. Unless it is exchanged in whole or in
part for Debt Securities in definitive form, a global certificate may generally
be transferred only as a whole unless it is being transferred to certain
nominees of the depositary.
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Unless otherwise stated in any prospectus supplement, The Depository Trust
Company, New York, New York ("DTC") will act as depositary. Beneficial interests
in global certificates will be shown on, and transfers of global certificates
will be effected only through, records maintained by DTC and its participants.
DEFEASANCE
We will be discharged from our obligations on the Debt Securities of any
series at any time if we deposit with the Trustee sufficient cash or government
securities to pay the principal, interest, any premium and any other sums due to
the stated maturity date or a redemption date of the Debt Securities of the
series. If this happens, the holders of the Debt Securities of the series will
not be entitled to the benefits of the Indenture except for registration of
transfer and exchange of Debt Securities and replacement of lost, stolen or
mutilated Debt Securities. (Section 9.01.)
Under Federal income tax law as of the date of this Prospectus, a discharge
may be treated as an exchange of the related Debt Securities. Each holder might
be required to recognize gain or loss equal to the difference between the
holder's cost or other tax basis for the Debt Securities and his allocable share
of amounts deposited with the Trustee pursuant to the preceding paragraph.
Holders might be required to include as income a different amount than would be
includable without the discharge. Prospective investors are urged to consult
their own tax advisers as to the consequences of a discharge, including the
applicability and effect of tax laws other than the Federal income tax law.
DESCRIPTION OF CAPITAL STOCK
As of September 30, 1998, our authorized capital stock was 210,000,000
shares. Those shares consisted of: (a) 10,000,000 shares of preferred stock,
none of which were outstanding; and (b) 200,000,000 shares of common stock, of
which 44,646,542 shares were outstanding.
COMMON STOCK
LISTING. Our outstanding shares of common stock are listed on the New York
Stock Exchange under the symbol "FST". Any additional common stock we issue will
also be listed on the NYSE.
DIVIDENDS. Common shareholders may receive dividends when declared by the
Board of Directors. Dividends may be paid in cash, stock or other form. In
certain cases, common shareholders may not receive dividends until we have
satisfied our obligations to any preferred shareholders.
FULLY PAID. All outstanding shares of common stock are fully paid and
non-assessable. Any additional common stock we issue will also be fully paid and
non-assessable.
VOTING RIGHTS. Each share of common stock is entitled to one vote in the
election of directors and other matters. Common shareholders are not entitled to
preemptive or cumulative voting rights.
OTHER RIGHTS. We will notify common shareholders of any shareholders'
meetings according to applicable law. If we liquidate, dissolve or wind-up our
business, either voluntarily or not, common shareholders will share equally in
the assets remaining after we pay our creditors and preferred shareholders.
PREFERRED STOCK
The following description of the terms of the preferred stock sets forth
certain general terms and provisions of our authorized preferred stock. If we
offer preferred stock, the specific designations and rights will be described in
the Prospectus Supplement and a description will be filed with the SEC.
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Our Board of Directors can, without approval of shareholders, issue one or
more series of preferred stock. The Board can also determine the number of
shares of each series and the rights, preferences and limitations of each series
including the dividend rights, voting rights, conversion rights, redemption
rights and any liquidation preferences of any wholly unissued series of
preferred stock, the number of shares constituting each series and the terms and
conditions of issue. In some cases, the issuance of preferred stock could delay
a change in control of the Company and make it harder to remove present
management. Under certain circumstances, preferred stock could also restrict
dividend payments to holders of our common stock.
The preferred stock will, when issued, be fully paid and non-assessable.
ANTI-TAKEOVER PROVISIONS
Certain provisions in the our Restated Certificate of Incorporation and
By-laws and our shareholders' rights plan, may have the effect of encouraging
persons considering unsolicited tender offers or other unilateral takeover
proposals to negotiate with the Board of Directors rather than pursue non-
negotiated takeover attempts.
CLASSIFIED BOARD OF DIRECTORS.
Our By-laws provide that the Board of Directors is divided into four classes
as nearly equal in number as possible, with each class having not less than
three members, whose four year terms of office expire at different times in
annual succession. A staggered board makes it more difficult for shareholders to
change the majority of the directors and instead promotes a continuity of
existing management.
BLANK CHECK PREFERRED STOCK.
Our Restated Certificate of Incorporation authorizes the issuance of blank
check preferred stock. The Board of Directors can set the voting rights,
redemption rights, conversion rights and other rights relating to such preferred
stock and could issue such stock in either private or public transactions. In
some circumstances, the blank check preferred stock could be issued and have the
effect of preventing a merger, tender offer or other takeover attempt which the
Board of Directors opposes.
SHAREHOLDERS' RIGHTS PLAN.
Our Board of Directors has adopted a shareholders' rights plan, pursuant to
which each share of common stock includes a preferred stock purchase right (the
"Rights"). After the Rights become exercisable, each holder may purchase
1/100th of a share of a newly issued series of the preferred stock at a purchase
price of $30 per 1/100th of a preferred share, subject to adjustment. The Rights
expire on October 29, 2003 unless extended or redeemed earlier. The Rights will
become exercisable (unless previously redeemed or the expiration date of the
rights has occurred) following a public announcement that a person or group (an
"Acquiring Person") has acquired 20% or more of the common stock or has
commenced (or announced an intention to make) a tender offer or exchange offer
for 20% or more of the common stock. In certain circumstances each holder of
Rights (other than an Acquiring Person) would have the right to receive, upon
exercise (i) shares of common stock having a value significantly in excess of
the exercise price of the Rights, or (ii) shares of common stock of an acquiring
company having a value significantly in excess of the exercise price of the
Rights.
PLAN OF DISTRIBUTION
We may sell the offered securities (a) through agents; (b) through
underwriters or dealers; or (c) directly to one or more purchasers, including
existing shareholders in a rights offering.
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BY AGENTS
Offered securities may be sold through agents designated by us. The agents
agree to use their reasonable best efforts to solicit purchases for the period
of their appointment.
BY UNDERWRITERS
If underwriters are used in the sale, the offered securities will be
acquired by the underwriters for their own account. The underwriters may resell
the securities in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices determined at the time of
sale. The obligations of the underwriters to purchase the securities will be
subject to certain conditions. The underwriters will be obligated to purchase
all the securities of the series offered if any of the securities are purchased.
Any initial public offering price and any discounts or concessions allowed or
re-allowed or paid to dealers may be changed from time to time.
DIRECT SALES; RIGHTS OFFERINGS
Offered securities may also be sold directly by us. In this case, no
underwriters or agents would be involved. We may sell offered securities upon
the exercise of rights which may be issued to our securityholders.
GENERAL INFORMATION
Underwriters, dealers and agents that participate in the distribution of the
offered securities may be underwriters as defined in the Securities Act of 1933
(the "Act"), and any discounts or commissions received by them from us and any
profit on the resale of the offered securities by them may be treated as
underwriting discounts and commissions under the Act. Any underwriters or agents
will be identified and their compensation described in a prospectus supplement.
We may have agreements with the underwriters, dealers and agents to
indemnify them against certain civil liabilities, including liabilities under
the Act, or to contribute with respect to payments which the underwriters,
dealers or agents may be required to make.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, us or our subsidiaries in the ordinary course of their businesses.
LEGAL MATTERS
Our legal counsel, Vinson & Elkins L.L.P., Houston, Texas, will pass upon
certain legal matters in connection with the offered securities. Any
underwriters will be advised about other issues relating to any offering by
their own legal counsel.
EXPERTS
KPMG Peat Marwick LLP, independent certified accountants, have audited our
financial statements incorporated by reference in this prospectus. These
financial statements are incorporated by reference herein in reliance upon their
report and upon their authority as experts in accounting and auditing.
The audited statement of oil and gas revenue and direct operating and
production expenses of Forest Oil Corporation's interest in certain oil and gas
producing properties for the year ended December 31, 1997, which appears in Form
8-K/A of Forest Oil Corporation dated February 3, 1998, incorporated by
reference in this Prospectus, has been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and is incorporated by reference herein in reliance upon the authority
of said firm as experts in accounting and auditing in giving said reports.
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8,000,000 Shares
Forest Oil Corporation
Common Stock
[LOGO]
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P R O S P E C T U S S U P P L E M E N T
, 1999
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Salomon Smith Barney
Credit Suisse First Boston
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Banc of America Securities LLC
Petrie Parkman & Co.
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